Meta vs. Reality

It’s been about four months since we published our uber-report on the spatial gaming ecosystem (The Road Ahead for Spatial Gaming) and already there have been a number of newsworthy developments.

To set the stage, we wanted to first include this chart from Matthew Ball’s “The State of Video Gaming in 2025” report (covered in detail in the last edition of this newsletter), in large part because it so succinctly captures the shifting sands of sentiment around spatial gaming.1

Hardware continues to underperform, though this should come as no surprise to readers of our report. The Apple Vision Pro has not materialized as a revolutionary new computing device, nor has the latest refresh of Meta’s Quest line, the 3S, driven any material increase in hardware adoption.

The biggest winner (relatively speaking) has been Meta’s Ray-Ban smart glasses, which reportedly sold over a million units in 2024.2 These can’t really be considered a gaming device, though, unless you count the ability to play voice-enabled games with Meta’s built-in AI.

We’re certainly optimistic about the potential for AI and voice input to incubate interesting new interactive entertainment experiences, but the Meta Ray-Bans really ain’t it (at least, not in their current form).

We only mention the product here as an interesting checkpoint along the path to true mixed reality smart glasses, which we know that Meta, Apple, Samsung, and likely other major players are all working on.

“If all we get is all the people in the world who already have glasses upgrading to glasses that have AI in them, then this is already going to be one of the most successful products in the history of the world, and I think it's going to go a lot further than that.”

— Mark Zuckerberg, Founder & CEO, Meta

Source: Acquired

Meta expects to potentially increase sales of its smart glasses by ~2x-5x in the coming years, with even more bullish numbers coming from its primary supplier, EssilorLuxottica.

Certainly a space worth watching moving forward.

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The title of VR market leader has not come cheaply for Meta. Despite recording it’s highest quarterly revenue ever in Q4 ’24, the company continues to rack up huge expenses. There have also been reports that Meta planned to terminate as many as 3,600 employees3 in its ongoing efforts to get costs under control.

The aforementioned Mr. Ball charted out the mounting losses for the company’s Reality Labs group and it’s not a pretty picture:

Adding insult to injury for the tech giant was a dismal report from UploadVR highlighting the many challenges faced by Meta’s VR ecosystem. The publication spoke to several developers building games for Meta’s headsets, revealing a number of concerning complaints. Chief among these were poor curation, difficulties with discovery, concerns that Meta was too focused on its Horizon Worlds platform, and backlash over the decision to merge the “App Lab” section with the main store.

While discovery and curation are challenging problems for nearly every major games marketplace, the developers that UploadVR spoke with indicated that Meta was exacerbating this problem by prioritizing free-to-play (F2P) experiences for its own Horizon Worlds — even those that were blatant knockoffs of existing releases — over third party games.

This approach is seemingly at odds with Meta’s public stance of openness. While its hardware’s operating system may be more open than, say, Apple’s, it would appear that Meta’s storefront is no less of a walled garden.

One could certainly argue that Meta has earned the right to give its Horizon Worlds preferential treatment; after all, the company has essentially subsidized the vast majority of the VR market (such as it is). However, this stance seems blatantly antithetical to growth at a time when the segment desperately needs it.

“Meta is not interested in being a gaming platform anymore — they just want to be a metaverse, and they just happen to have a legacy store.”

— Anonymous Meta Quest developer

Source: UploadVR

Perhaps Meta’s leadership sees Horizon Worlds as a spatial-native Roblox competitor (sort of like Rec Room)? They (or an enterprising consulting firm on retainer) see VR’s popularity among younger demographics, take note of the massive mindshare that Roblox has among that audience, and assume that these will synergize well with Meta’s vast existing advertising apparatus (thereby offering a potential mitigation to the historically low ARPU of kids).

This is purely conjecture, of course, but we would not be surprised if similar arguments were being made internally. Roblox is already among the most popular VR experiences and is itself no stranger to challenges of knockoff titles and IP infringement.

As it turns out, Meta was already preparing its own salvo of messaging. Shortly after the UploadVR piece was published, the company posted an update to it’s Meta Horizon Developer’s Blog.

In a post titled “The Evolution of Our Ecosystem,” Meta’s VP of Metaverse Content Samantha Ryan4 laid out the company’s plans for the future. She promised greater support for developers (including improved access to dashboards and other forms of business intelligence), “ongoing UI/UX experiments in the store to improve discovery,” and, somewhat perplexingly, a greater emphasis on free-to-play titles.

At first glance, free-to-play might seem like a good idea. Spatial gaming seems to have found a stronger foothold among younger audiences, many of whom lack the ability to purchase games on their own and have grown up with F2P titles like Roblox and Fortnite.

Perhaps Meta is less interested in monetizing apps and more keen on driving headset sales with popular F2P flagship games, but that feels rather myopic; after all, the long-tail success of platforms like Apple’s App Store has come from deep monetization within F2P apps and not from selling more iPhones. There’s also just not a huge population of headset owners to begin with, thus limiting the total addressable market for a given F2P title.

Success with the free-to-play business model in gaming is predicated on a right-skewed distribution of player LTVs,5 where the players that derive the most value from a game subsidize the overwhelming majority of players (95%+) that contribute nothing to it economically.

Achieving this requires a very large platform install base: the population of users on the platform must be substantial enough to support the varied and stratified preferences and abilities to monetize for any given game.

— Eric Seufert, Founder, Heracles Capital

Source: LinkedIn

Perhaps Meta is aware of the mismatch presented by the F2P business model and simply does not care. Remember, the company is building for the Metaverse, thus it’s strategic preference is (one assumes) to develop and nurture Metaverse-like experiences.

Crucially, this strategy is not being executed in a vacuum; it is playing out alongside unprecedented investment in artificial intelligence throughout the organization.

In the very long run this points to a metaverse vision that is much less deterministic than your typical video game, yet much richer than what is generated on social media. Imagine environments that are not drawn by artists but rather created by AI: this not only increases the possibilities, but crucially, decreases the costs.

Here once again Meta’s advantages come to the fore: not only are they leading the way in VR with the Quest line of headsets, but they are also justified in building out the infrastructure necessary to generate metaverses — advertising included — because every part of their business benefits from AI.

— Ben Thompson, Founder, Stratechery

Source: Meta’s AI Abundance

Meta will continue to eat the costs required to stand up the idealized version of its platform regardless of the short term irrationality.

Unfortunately, that leaves premium game developers in a tough spot. Do they forgo releases on the largest VR platform in the face of declining support?

Did mobile game developers leave Apple when it, too, faced a torrent of complaints? Of course not.

Meta may not have the same sort of bargaining power with spatial games developers just yet, but it is seemingly playing its cards as if it does.