Why Reality Labs will keep losing billions even as Meta makes big cuts

For tech investors hoping Meta Platforms finds religion on cost cuts as they relate to heavy spending on virtual reality, now is not the time to bet on it. The company is cutting costs, including mass layoffs, and much of the market has been focused on the billions that Mark Zuckerberg is pouring into Reality Labs and his vision of a future internet and social connections transformed by the metaverse concept. Right now, that means more than $10 billion a year in losses from Reality Labs, but a top Meta VR executive told CNBC this week that the spending will continue.

Investors want to see Big Tech rein in spending in what’s been a tough stock market and a slowing economy. Alphabet is under pressure to cut costs. Amazon is doing layoffs, many in corporate divisions where risky bets haven’t paid off big enough. Meta shares have declined by 65% in value this year, and an October letter from Altimeter Capital to its leaders which said Mark Zuckerberg’s company has “drifted into the land of excess,” summed up the view from investors.

“Last week was really hard,” Ash Jhaveri, vice president of Reality Labs partnerships, said about the layoffs during an interview with CNBC’s Steve Kovach at the CNBC Technology Executive Council Summit in New York on Tuesday. “But the investments we are making in the core business, and the future business, are the right ones,” he said.

He stressed that the spending level is a direct byproduct of the level of change the company is chasing.

“If you’re trying to build a brand new computing platform with people at the middle of it, and inventing new technology that actually allows you to feel like you are in the same room with someone else, this is sort of [the] first inning of what we are doing … it’s an ambitious long-term vision,” said Jhaveri, who estimated that he spends one to two hours each week in team meetings conducted via his virtual reality headset. 

“It’s really about the next version of the internet, what can the technology do to connect us, to make us feel more present versus what we can do today, and with an app or a website you can only get so connected,” he said. “That’s why we’re so invested in the space.”

The message from the top Meta VR executive reinforced the position staked out by Zuckerberg on the company’s last earnings call. At the time, Reality Labs’ losses were at $9.4 billion for the year and the CEO said that operating losses would grow significantly in 2023.

But some investors are skeptical Meta will stick with this message. Zuckerberg has said it will take up to a decade for the concept to go mainstream — though he expects spending will level off in the years ahead.

“He’s gotta say ‘we are so committed to this … this can be ten years … this can be so many billions of dollars. But you get to a point where the elastic snaps,” said Karen Firestone, CEO of Aureus Asset Management,  on CNBC’s “Fast Money Halftime Report.”

She pointed to the Meta layoffs and recent shedding of real estate after years of growth as evidence that Reality Labs’ may yet experience spending restraint the company won’t admit to today.

“You see it over and over again with tech companies committed to a spend, and then suddenly, they get religion on the cost side,” Firestone said. “Nobody likes when your stock options becomes worth less and less and less.” 

Jhaveri pushed back against the recent market narrative, which has viewed Meta as a business on the decline, citing more people on Facebook than ever before, and strong profit levels still being generated by the core business. But Wall Street did not like the latest set of quarterly numbers, even as active users were higher. Revenue fell while Meta’s costs and expenses rose. Income declined by roughly half from the previous year, and Meta’s operating margin sank. The stock has rebounded recently from its post-October earnings lows alongside a bounce in the beaten-down tech sector.

“We need focus, and in many ways, it doesn’t change our efforts, it just helps focus them even further,” Jhaveri said of the scrutiny from the market.

Meta will face more competition from deep-pocketed rivals in a market where it has the early lead with Apple expected to soon release its mixed-reality headset.

One cost Jhaveri said would come down is the $1,500 price tag on the Meta Quest Pro VR headset model, though that may not be soon either. Jhaveri said there is good reason for the current Pro model — which a CNBC reviewer called a “huge upgrade” but a technology still in search of an audience fit — to be expensive.

“If you look at this pound for pound, atom for atom, it has the most tech packaged into a headset … it’s almost like its own computer,” he said.

But he also drew a comparison to flat-screen TVs which once cost too much for most consumers. “For those who remember when flat screens came out, 1999 or 2000, and it was $10,000 for a 40-inch plasma TV that wasn’t even 720, maybe even 480 [resolution], we were clamoring for that, and now it’s a 70-inch for $1,800,” Jhaveri said.

He said the advanced technology on the Pro line is there for enterprises to adopt and to assist developers building on the platform, and a lot will ultimately flow down to consumer models, the next being the Quest 3 expected to launch next year.

“We very much believe in these cost curves coming down, what is state of the art today becomes mainstream tomorrow,” Jhaveri said.