Talking Facebook and the Metaverse with Jay Welles, Lead Tech Analyst

Nov. 4, 2021

Facebook can’t seem to stay out of the news, and its latest foray is one of its wildest bets yet. Late last week, Mark Zuckerberg, chief executive of Meta, the company formerly known as Facebook, announced a firmwide rebrand as the digital media giant seeks to refocus on the next frontier of digital technology, called the metaverse.

Although Facebook, the app, will retain its existing brand and name, the decision for the company to step away from one of the most recognizable brands in the world is sure to raise eyebrows.

At Manning & Napier, we have the luxury of reaching out to our own internal technology sector team for their perspective. In the below, you’ll see a brief excerpt of an interview with Jay Welles, Managing Director of the Technology sector group, for his views on Facebook, the Metaverse, privacy concerns, regulation, and why we still see value in the name.

MN: Jay, let’s get right into it. What is a metaverse?

Jay Welles: It’s hard to characterize, but a metaverse is essentially a virtual reality world that people can explore. For younger readers, it is well covered in the movie Ready Player One, and for older readers, think of it like a digital Truman Show except bigger and more fun.

Rather than interacting through a computer or smartphone screen, virtual or augmented reality headwear – imagine much more sophisticated versions of 3D glasses – that will allow people to be more fully immersed in work, play and social experiences. Instead of sitting on video calls, put on your glasses and sit at a digital table in a conference room with all your peers. As opposed to passively playing games on your couch, plug into the metaverse to explore and interact with people there. Mark and his team believe that this is the next frontier of technology, going so far as to call it the replacement for the internet.

MN: Okay, so it sounds a little bit like they are trying to build a full-blown digital world. Maybe it works, maybe it doesn’t, but why is this so significant to warrant a name change?

Jay Welles: Well first I’ll add that it’s important to remember that Facebook is more than just the namesake social media app. Over the years, they’ve launched or acquired Oculus, an industry leader in 3D technology, along with Instagram, WhatsApp and a few other various properties.

More than anything, I’m positive on the decision. With the expansion, it makes sense to delink the entity from the original product. I suspect that many will look at the announcement and be suspicious of the technology, choosing to focus instead on the negative publicity around Facebook as a key driver. I’d say that these other businesses are massive and growing, and it doesn’t necessarily make sense to have these linked with the Facebook brand and product, particularly as the company tries to move beyond social media with its metaverse project.

Lastly, I’ll also add that there was likely a consumer usability aspect to this as well. Per Zuckerberg, “…if you’re signing into Oculus Quest or WhatsApp or Instagram with a Facebook account, I think that there was a confusion about, ‘is my data somehow going to be shared over here in a way that I didn’t want?’” This of course, ties into privacy and regulatory considerations, something that Facebook has become closely familiar with in recent years.

MN: Let’s dive into some of those issues. Critics will point to this name change as being a distraction from greater concerns, including that they are hiding the ill societal effects of its platform. Do you believe that Facebook has been doing enough to make its platform safe?

Jay Welles: There’s no debating that Facebook has had a poor run of PR lately. The Facebook Files article series in the WSJ, a whistleblower on 60 minutes, to name just a few. But from my perspective, it’s hard for me to find any material financial ramifications. We think investors are well aware of the issues, and none of these are a ‘smoking gun’.

Big picture, I don’t see Facebook as being as culpable of hiding the negative effects of its platforms as some in the public and media have portrayed. The company employs over 40,000 people in safety and security, has aggressively developed and deployed artificial intelligence moderation, and are spending billions of dollars annually on the issue. It’s also impossible to moderate every piece of content posted online. Users control their activity on the platform, with the best and worst of humanity on display.

I’ll also add that the tenor of much of the commentary I see feels like grandstanding, and it glosses over the inherent complex tradeoffs here. One person’s moderation is another person’s censorship. These are not black or white issues. Moreover, the criticisms this company faces are similar to that of other forms of media, such as the polarization from cable TV news, the effects of TV, magazines, and advertising on body image issues, whether video games promote violence, etc. How they tackle these issues is always going to upset someone.

Long story short, we fully expect Facebook to remain a political punching bag for the foreseeable future. No doubt that how it balances content and engagement, privacy and openness, will all be key risks to monitor. We are on guard for negative regulatory outcomes, but it doesn’t pay to over-react to the noise and sell on regulation fears that may never come to pass.

MN: Can you elaborate a little bit more on those potential business impacts? Do you expect regulators to crack down on Facebook?

Jay Welles: Sure. We’ve done a ton of work on this topic, studying tech companies dating back over 100 years, across dozens of regulatory reviews and cases. In general, people tend to only remember the most impactful cases, and forget all the others that go by without any big changes. The vast majority of cases are non-events, and in only a few cases was the regulatory outcome significant to the business.

For example, the Microsoft-Internet Explorer anti-trust trials are commonly cited as being a significantly negative impact on the business during the 2000s, but it was actually that the company missed the shift from desktop to mobile that weighed on the business.

This isn’t to say that serious regulatory outcomes aren’t possible, but it is to point out that they are not automatic reasons to sell out of companies that we like and are strong strategy fits. In fact, our work has shown that companies under regulatory review outperformed over time. I know this is a little counterintuitive, but if the business is under regulatory review, it is probably an indication that the core business is very strong.

MN: Going back to the privacy topic, a lot has been made this quarter for all the social media companies on the impact of Apple’s anti-tracking iOS updates. Do you believe we’re about to see a spending shift away from Facebook and its peers as a result of this change?

Jay Welles: First I’ll just say that this change has been well telegraphed for several quarters now and investors have been, more or less, expecting a negative impact. It’s fair to say that the revenue hit was incrementally more significant than Wall Street expected, but not at all out of line with our expectations or company guidance. And going forward, we view this as a one-time reset of growth rates, and the company is already working on multiple offsets to mitigate the impact, and improve measurement and targeting.

More importantly, we believe this will improve the Profile long-term, which I view as underappreciated in all of this. Facebook sees the privacy writing on the wall, and they are taking steps to build their own sort of advertising connective tissue behind the scenes. This means that instead of going through other platforms to connect their data from third parties to Facebook, advertisers and companies can go right to Facebook directly. This further enhances their already enormous quantities of first party data, whether from user profiles, time and activity on Facebook, and more. It makes their appeal to advertisers as a one-stop-shop even greater, and it raises the barriers to entry for competitors even more.

MN: We covered a lot of ground today, but I’d like to end on a final question on the attractiveness of the business itself. In short, what makes Facebook compelling from your perspective?

Jay Welles: Look, I’ll put it as plainly as this. Facebook is no doubt facing its challenges, they are going to remain in the spotlight, and I believe they will continue pouring money and resources into tackling those challenges head on. But building a social network with scale is very difficult. In the past five years, we’ve really only seen one competing platform reach critical mass, and they are only partially challenging a piece of Facebook’s dominance of several billion-users, plus apps including Instagram, Messenger and WhatsApp that makes its business more durable. The core business is continuing to grow rapidly, with revenues growing 35% year-over-year at 35% plus operating margins.

Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, then subscribe to our insights.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product. The reader should not assume that investments in the securities identified and discussed were or will be profitable.

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