By Colin O’Donnell
M&A Director
o.216-573-6000 x 8100
When Mark Zuckerberg changed the name of Facebook’s parent company to Meta—a move that was supposed to reflect its expansion into virtual reality and the “metaverse”—he promised a transformation of the online experience. That hasn’t quite worked out. Today, one year into the firm’s rebranding, Meta can claim only about 200,000 monthly users for its flagship Metaverse app—which analysts are calling a “rounding error” compared to the 3.7 billion people who log on to Facebook each month. The company has lost $9.4 billion on development so far, and its stock has plummeted from a $1 trillion market capitalization to just half of that.
Any company considering an expansion should look to Meta’s disappointing arc for real-world lessons on what not to do. What’s at stake? As the Meta tale shows, getting expansion wrong doesn’t mean the company doesn’t grow. A botched expansion can even cause it to shrink.
Build On What You Already Have
Meta’s first error was its failure to build on its existing products. For the metaverse to be successful, Meta would need to spend a fortune building an entirely new product and market. If and when it does so, the company will likely find it’s created a product that competes with rather than complements what it already has, given that there’s no guarantee its existing customers will ever adopt the metaverse. In the meantime, these efforts bring no value to Meta’s existing customers—either the users or its advertisers.
The better expansion strategy is to provide new services and products that meet your existing customers where they are.
In Meta’s case, this might have meant acquiring Netflix or another streaming services provider. Meta already knows how to host content on existing platforms, and its solid customer base on Facebook is likely to understand and appreciate content streaming.
Key Lessons:
- Make sure your expansion will add value to your existing company rather than act as a drain.
- Don’t use acquisitions to divide your market.
- Bring new goods and services to existing customers and existing ones to new customers.
What’s the Real Business?
Facebook’s expansion may have failed because the company forgot that it’s a software company whose core business is communication services. Past Facebook expansions such as Facebook Messenger, WhatsApp, and Instagram were in line with this identity because these were also communications-related software companies.
To get its Metaverse apps off the ground, Meta has to become a hardware company, selling new equipment to millions (ideally billions) of mostly new users. The trillion-dollar software company now faces the daunting task of manufacturing and distributing virtual reality goggles and related products, overcoming global regulatory issues, and more.
To grasp the enormity of this challenge, consider that Apple’s been selling hardware since 1976, including computers, accessories (this is what a VR set is—a computer accessory), and content. But despite having its own manufacturing facilities and sales outlets—not to mention an avid customer base—it still hasn’t rolled out its VR gear.
Key Lessons:
- Understand the real purpose of your business. Build on its strengths.
- Make sure expansions don’t fundamentally change the company.
The Further the Reach, the Closer the Connection
If Zuckerberg was determined to get into the hardware business, he should have started with something closely related to his existing company. In its new incarnation, the company could have become a producer of cell phones or a cell phone service provider, for instance, and turned the social network into an actual network.
This would have still been a significant transformation, but it would have taken the company in a logical direction. Users who rely on Facebook for communication technology would have seen it as an extension of the company’s existing services. Facebook might have immediately become the one to beat in the cellular space.
Key Lessons:
- The more dramatic an expansion you want to make, the more it needs to connect back to your core business.
- Your expansion should make intuitive sense. It should feel inevitable.
Understand the Market Realities
Another key to expansion success: Be realistic about your timeframe.
When it comes to virtual reality, the tech industry is littered with failed efforts. Google has failed—repeatedly—to launch its Google Glasses. Nintendo canceled its “Wii.” Second Life peaked at 60 million users in 2003, but now just half a million still log on.
Even when new technologies are successful, it usually takes time—up to 9 or 10 years—before they’re widely adopted. Knowing this, Meta should have tempered expectations by advocating a long view and setting out incremental steps to create user awareness and, gradually, widespread adoption.
Key Lessons:
- Money alone isn’t enough to overcome market realities.
- Research and understand the market.
- Come up with realistic timelines for implementation and growth.
Be Prepared
If you’re thinking of expanding your company, make sure you’re prepared by starting these processes early:
- Bring in experienced mergers and acquisition advisors who can help you identify the right targets for your existing business.
- Have mergers and acquisition counsel review industry norms, regulatory requirements, production contracts, and other concerns.
Gertsburg Licata understands business expansion inside and out. Call us at (216) 573-6000 or complete our contact form to schedule a consultation with one of our M&A professionals.
Colin O’Donnell is Director of Mergers & Acquisitions for Gertsburg Licata Acquisitions. He can be reached at [email protected] or (216) 573-6000 x 8100.
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