Facebook Suffers a Big Setback

The ambitions of the social network in the metaverse are shaken up.

ROB LENIHAN
APR 9, 2022 8:07 PM EDT

In 1992 novel "Snow Crash", author Neal Stephenson coined a term to describe a place where human avatars interact with each other.

That term was "metaverse" and since that time the word has become part of the lexicon as the concept moves away from the realm of science fiction and into daily life.

A Costly Conversion

The company formerly known as Facebook (FB) - Get Meta Platforms Inc. Class A Report went so far as to change its name in October to Meta as Chief Executive Mark Zuckerberg described the metaverse as "the next frontier."

The metaverse has been defined as a network of 3D virtual worlds focused on social connection, but Meta has been running into some significant obstacles on the road to that next frontier.

The company was rocked after Frances Haugen, a former product manager, accused the social media giant of of putting profits over the impact of hate speech.

The conversion has also been costly, with Meta Platforms posting weaker-than-expected fourth-quarter earnings in February.

The results hit Zuckerberg right in the wallet, as he lost $29.7 billion from his net worth, while his company dropped almost $237 billion in market capitalization a day after the results came out.

The company said its Reality Labs division lost $10.2 billion in 2021, more than double the operating losses recorded in 2020 - $4.62 billion. In 2019, the operating loss was $4.5 billion.

And now comes the Security and Exchange Commission.

The agency recently ruled that Meta must give investors an opportunity to consider and vote on a shareholder proposal that questions the ”social license to operate an emerging technology like the metaverse” without fully understanding the potential risks and negative impacts.

Natasha Lamb, managing partner of Arjuna Capital, one of the parties who filed the proposal in December, said the "SEC’s decision is a victory for investors that seriously question Zuckerberg’s leadership and pivot into the metaverse."
'We Value the Views of Our Investors'

"This ruling clears the way for investors to further understand the potential psychological and human rights risks of the metaverse and weigh in on whether Meta should be pumping $10 billion a year into an emerging technology, especially when they are so clearly failing to manage the risks on their core platforms," Lamb told TheStreet.

She added that it is important to keep in mind how material Meta’s pivot to the metaverse is to investors.

"Meta stock suffered the largest decline in stock market history when it reported negative earnings growth last quarter, driven by this $10 billion investment," she said.

In response, a Meta spokesperson said “we value the views of our investors and regularly engage with them to get their perspective. We look forward to continuing the dialogue, including at our Annual Shareholder Meeting in May."

Meta came out against the proposal in its proxy statement, saying "we believe that we have the right approach in place for our metaverse efforts."

"Given that we are already working with numerous researchers, experts, and advocates around the globe to better understand potential risks and mitigations, which is informing how we design the products and experiences that are just being built, our board of directors believes this proposal is unnecessary," the proxy statement said.

The proposal it is unlikely to pass since Zuckerberg controls the voting shares. However, this does not mean the controversy will disappear.

"There are a confluence of pressures that Meta is facing, from anti-trust litigation, to whistleblower testimony, to congressional hearings," Lamb said. "It’s important for investors to speak up, which is what we are doing through this proposal, but there are other factors at work that Meta needs to respond to. We have been advocating for better governance at Meta for 6 years and we will continue to do so."

Kenny Ching, assistant professor at the WPI Business School, said that, in general, "we do not have great evidence for the benefits or drawbacks of the metaverse, as the phenomenon is not only nascent but extremely complex."

'Pump The Brakes'

"While there is some early research suggesting that the metaverse environment may promote toxic antisocial behavior," he said, "this view has to be tempered by the positive impact such as potential productivity boosts through gamification and obviation of physical distance."

Ching said that it will be interesting to see the findings from the third party evaluation, and the subsequent legal development.

"While we should regard the findings with a healthy dose of skepticism," he said, "the case itself will be a test for how society will eventually come to accept--or reject--the metaverse."

In a way, Ching said, "the reactions to the case are probably more important than the eventual findings."

"My overall prediction though, is that momentum for the metaverse's growth will not be adversely impacted," he said. "It is unlikely findings from the evaluation will be definitive given how complex and nascent the phenomenon is."

Justin Lacche, Commissioner of the Omniverse Sports League, which features four minor league sports teams competing physically and in the metaverse, said there is a long-established history where regulatory commissions "pump the brakes" when technology or new paradigms evolve very fast.

"It's very important for businesses to partner with regulatory agencies to demystify the metaverse to avoid unnecessary blocking purely on awareness issue," he said.

For his own part, Lacche said he has been impressed many municipalities and regulatory agencies as the world evolved during the Covid-19 pandemic.

"It is in all of our interests as business people, technologists those of us in social science, who want to democratize opportunity to calmly get on the same playing field of understanding because then we all can move fast together," he said.