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Meta Universe is spending a lot of money, and needs Facebook advertising business to "subsidize the family"

youki676
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Mark Zuckerberg really has to pray that growth in Facebook's advertising business doesn't slow down again.

The co-founder and CEO of Meta Platforms (META) took the stage at the company's Silicon Valley headquarters on Wednesday to promote its latest efforts in mixed reality. Mixed reality is a technology that fuses virtual reality with images of the real world. There weren't many surprises at the event, especially considering Zuckerberg revealed the company's new Quest 3 headset in June to give himself a head start ahead of Apple's (AAPL) launch of its first mixed reality device a week later. Zuckerberg also used Wednesday's event to hitch a ride on generative AI, announcing a new personal assistant chatbot called Meta AI.

Meta is far from the only big tech company besides Apple still dabbling in hardware. Microsoft (MSFT) and Amazon.com (AMZN) held events last week to show off new lines of devices that will launch in the fall. Google plans to unveil its latest Pixel smartphone at an event in New York next week.

For the most part, such businesses are barely a hobby for these big companies. Devices accounted for just under 3% of Microsoft's total revenue in the fiscal year that ended in June, according to Visible Alpha, and analysts estimate they contributed a similar percentage to Google parent Alphabet Inc. 's (GOOG) revenue over the same time frame. Amazon's hardware business is so small relative to the company's annual revenue of more than $500 billion that analysts don't bother to give an estimate of its revenue.

Meta, the parent company of Facebook and Instagram, continues to shine on the hardware side. Reality Labs, Meta's business unit that develops virtual reality (VR) and augmented reality (AR) technology, accounted for just 1.5% of the company's total revenue in the 12 months to June. The business unit also generated an operating loss of $15.7 billion during the period. Over the past four quarters, this loss in the division has actually reduced operating profit at Meta's Family of Apps by about 35%; The app family consists primarily of the Facebook and Instagram advertising businesses. In contrast, Alphabet's Other Bets reduced operating profit in Google's core business by about 7 per cent over the same period.

For Meta, the situation isn't going to get better anytime soon. Meta warned on its fiscal second quarter conference call in July that Reality Labs' losses would "increase substantially" next year. While there was always the possibility that the newly launched Quest 3 headset would be a hit, the VR/AR market to date has proven to be more of an area prone to quickly stalling. According to International Data Corporation (IDC), shipments of Meta headsets fell 72% in the first half of this year compared with the same period a year ago, which was helped by the short-lived popularity of the Quest 2. IDC also expects total shipments of head-mounted devices across the industry to decline 3% this year.

That may explain why Zuckerberg himself seems eager to change the subject. After announcing that the Quest 3 would begin shipping in October, he quickly turned to AI, the hottest topic in the tech industry right now. In addition to the Meta AI chatbot, he also announced other, more professional chatbots featuring celebrities like Snoop Dogg, Tom Brady, and Kendall Jenner. Meta will also start selling new smart glasses with built-in Meta AI, built in partnership with Ray-Ban, in October.

But AI also comes at a cost. And unlike other big tech companies like Microsoft and Google, which have already put prices on their new services based on generative AI, Zuckerberg said nothing about the business model involved in the new AI tools announced on Wednesday.

As a result, the company, which is still in its "year of efficiency," faces rising costs, even after cutting nearly 16,000 jobs. Meta's stock has soared 147% this year, making it the second-best performer in the S&P 500, largely on the belief that recent growth in Facebook and Instagram advertising will continue to boost.
If the advertising business slows, Zuckerberg's meta-universe won't be able to withstand it.
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