Meta keeps betting big on Reality Labs despite heavy losses

The news: Meta reduced spending on apps for its Quest mixed-reality (MR) headsets, leading to layoffs for some outside developers that relied on Meta’s funding.

• Gaming studios that create content for Meta have laid off as much as half their staff after losing funding from Meta, per The Information.
• In July, Meta asked its Reality Labs hardware team, which includes Quest products and Ray-Ban Meta Smart Glasses, to cut spending by about 20% by 2026.

Zooming out: Reality Labs hasn’t paid off for Meta yet, but the company is still dominating the virtual reality (VR) market with a 60.5% share in Q2, per IDC.

• The division cost Meta about $16.12 billion last year, and its Q3 losses reached $686 million, up 18% YoY.
• The department’s Q3 revenues were $270 million, a 28.6% increase YoY.

Cutting back investments: Slimming down the apps on Quest headsets could affect sales but could also help bring down operating costs.

• The company is looking to refine the genre of games it adds to the Quest catalog and focus on lifestyle apps, such as those that teach cooking skills or how to play an instrument.
• 21% of US adults said a wide range of available apps and games are the most important feature in a VR headset, per YouGov.

What’s the plan? Despite its Reality Labs losses, Meta is imagining a long-term roadmap for it and plans to keep investing “significantly” in the division.

• “As we think about the 2025 budgeting process for Reality Labs … we want to make sure that we are investing appropriately behind the consumer momentum that we see,” Meta CFO Susan Li said on the Q3 earnings call.
• Meta’s Q3 filing also stated that the division’s 2024 operating losses are expected to grow “meaningfully” YoY.

Our take: Investors who want clear profitability could grow frustrated with Reality Labs, which could create a catch-22 for Meta.

• If the division can’t show investors more immediate returns, it could be forced to pull back on spending.
• However, reducing spending might lead to losses in innovation and consumer interest—and a drop in revenues.

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