How Facebook Innovates: An insider’s guide to their metaverse transformation

Written By Amer Iqbal

Disclaimer: I resigned from my position at Meta in June 2022. All opinions expressed are my own and not endorsed by Meta. All sources are publicly available.


February 3rd 2022. That was the date I lost $100k in a single day. But don’t feel bad for me, it could have been a lot worse. My boss actually lost a lot more than I did - he lost $30m on that same day!

Sorry - did I say $30 million? I meant $30 BILLION!

You see it was the day Facebook, now known as Meta, announced their quarterly earnings and had reported a decline in user numbers for the first time in over a decade. To make things worse, the company had also spent $10b building their new metaverse business - and so far they had nothing to show for it but a new name and logo.

The market responded swiftly, and the share price plummeted, knocking an eyewatering $232 billion off their market cap. And my former boss Mark Zuckerberg personally lost $30b that same day. The decline in user numbers showed us a clear sign - after 15 years, the core business had finally reached its peak and begun its transition into a legacy business.

No problem, we're one of the most innovative companies in the world, right? Surely our fearless leaders have a plan for what comes next. But here's the thing, the earnings call also stated that the company’s big bet on the future would be the metaverse, and that this business could take a decade to build. The reason I lost $100k is because the market saw something very clearly: There was a solid multi-billion dollar legacy or "yesterday" business in social media advertising, and there’s a bullish belief in the company's ability to build tomorrow's metaverse business… but where does that leave us today?

If Hollywood ever decides to make a sequel to The Social Network, this would be a pretty good jumping off point. I can see the dramatic trailer now:

Having scaled from a humble dorm room to one of the most dominant companies on the planet, they now find themselves at a crossroads. The business model that got them here is on its last legs and they now must decide their destiny. Will they succumb to the forces of evil that threaten to take them down? Or will they successfully choose the path to glory and bathe in the spoils of ultimate victory?

The headlines can easily lead us to assume that some cosmic forces of good and evil led us here, but the truth is it’s been a deliberate sequence of moves on Meta’s part - we didn’t get here by accident. This period of time represents Meta’s reinvention to build the business of tomorrow. And much like when Apple launched the iPhone, I believe this reinvention will lead to Meta’s rebirth as a whole different type of company.

So in this article, we’re going to answer three questions:

  1. How does Facebook innovate?

  2. What lessons can we learn from one of the most innovative companies on the planet?

  3. And most importantly, what is the one thing that everyone seems to have overlooked that makes this Meta’s iPhone moment?

Setting the scene

OK so to help us make sense of Meta’s innovation strategy, let’s spin the wheel of random innovation frameworks. And today’s framework is: Everyone’s perennial favourite, the Innovation Ambition Matrix.

Innovation Ambition Matrix

Innovation Ambition Matrix. SOURCE: HBR

Popularised by Harvard Business Review, the matrix gives us a map to plot out a variety of initiatives into three horizons:

  1. The core business: this is straightforward, delivering existing offerings to existing customers

  2. The second horizon is called the adjacency: focused on new offerings, or new customers, or both

  3. And finally we have the transformational business which is future focused and consists of net new offerings to new markets

So let’s dive into each of these three horizons, starting with the core.

Core Business

Of course we all know that Meta’s core business is…

Senator, we run ads

“Senator, we run ads” SOURCE: Future Sharks

In fact, my very first post on the company intranet when I joined Facebook was a pie graph that showed how we make money vs. other similar tech companies. It turns out that at 98%, Facebook was the most reliant on their ads business model, while Google, Microsoft, Apple and Amazon all had much more diversified revenue sources.

How Facebook makes its billions

Meta make 98% of their revenue from ads. SOURCE: Visual Capitalist


What this meant was that Meta was massively over optimised for today’s business, which is not necessarily a good thing for the purposes of innovation.

Sheryl Sandberg joined the company in 2008 and quickly brought her expertise from Google to build out Facebook’s advertising model. And it turned out, Facebook was really good at selling ads. But then around 2018, the core business started to come under increasing attack in the form of public backlash. Beginning with Cambridge Analytica, they ran into a string of scandals that played out in the media. Accusations of election hacking and revelations by whistleblowers led to legal woes. Despite the huge amounts of revenue it generated, the ad model had started to become a liability that was costing ever increasing amounts to retain.

For a long time, the strategy had been to play defence. Defend the core at all cost, throwing money at technology, people, PR, and other resources to protect the ads business from these headwinds.

One example of a defensive play was when Apple introduced restrictions in iOS14 (known as IDFA) that made it more difficult for brands to track and target users using cookies. This threw a spanner in the works for Facebook’s ads business, so they responded by pushing a server-to-server solution called Conversions API (affectionately known as “CAPI” internally) that bypassed the need for cookies.

For the most part, this focus on playing D worked: at least the market didn’t seem to care too much. Investor confidence showed surprising resilience through all these issues, prioritising financial returns over any perceived societal issues. The share price continued to climb steadily.

Until that fateful day in February 2022. For the first time in a decade, the platform’s user base shrunk - which meant fewer ads. And this time, the market was merciless. In innovation terms, what this event signalled was clear: Meta’s ads business had begun the inevitable transition from core to legacy business. Don’t believe me? Amongst an exodus of high profile executives, there were three individuals who stood out. Ads chief Carolyn Everson, Chief Revenue Officer David Fischer and Chief Operating Officer Sheryl Sandberg, the pivotal chain of command that had built the ads business all exited the building within the space of a year. It wasn’t a coincidence - their job was done, the ads business was in transition, and it was now time for them to move on.

Takeaways

So with their core business in flux, a series of key executives out the door, and with the shareholders up in arms - how did Meta respond?

  • The first thing they did was consolidate and streamline the core. They promoted Patrick Harris to Head of Channels, which grouped together the four key business units that drove the ads business under a single umbrella. This allowed these teams to more efficiently pull in the same direction. It also helps that Patrick is one of the nicest and most capable people I’ve ever had the pleasure of working with, so in him they had the perfect person to steady the ship.

  • It pays to see the signals of legacy on the horizon - Meta didn’t wait for the share price drop to come before scrambling to respond. They had a strategy in the can ready and waiting for exactly this eventuality. Invest in innovation before you absolutely need to.

  • The other key takeaway is the focus on efficiency. Efficiency in the portfolio is a massively undervalued part of the innovation process. Streamlining the core when it begins to shift into legacy is important. Every good poker player knows when to hold ‘em and when to fold ‘em, and knowing when to stop playing defence is equally important in business. When the time is right, stop treating it like the core and treat it more like an ATM that can fund tomorrow’s business while it still has value that can be extracted.


Adjacent Business

So the ads business is dying, but Meta are still spending $10bn a year on something with no ROI, how is that possible? This brings us to the Adjacent horizon.

Let’s take a quick look at some of Meta’s adjacent offerings:

Some examples of Meta’s adjacent offerings

Some illustrative examples of businesses that serve existing solutions to adjacent customers include

  • Audience Network - Meta’s way of serving ads on websites and apps outside of their own platforms; and

  • Meta Business Partners - an ecosystem of marketing service providers who are badged and extend sales of Meta’s ad solutions

Conversely, a rash of incremental products began to spring up that were served to the same marketing customers, including:

Possibly the most interesting adjacencies are those that serve incremental products to adjacent customers, including:

  • Workplace, Meta’s enterprise collaboration platform;

  • And a number of Fintech plays


Towards the end of 2021, the battle lines were drawn. A reorg was launched and the adjacent businesses all fell into one of two camps. Some of them were put to work in providing air cover for the struggling core business. The various commerce offerings provided some much needed upsell opportunities to marketers looking to shift their retail operations online. Business messaging ad solutions were also launched with Click-to-Messenger and Click-to-Whatsapp ads providing new sources of revenue.

At the same time, some of these adjacencies found themselves acting as the bridge to the future. Workplace created a foothold in the coveted enterprise space for work collaboration in the metaverse. NFTs and payment solutions meanwhile have been positioned to act as the backbone of the future metaverse's multi-billion dollar commerce engine.

However, launching an adjacent offering has proven to come with its own set of challenges. Let’s take a quick look at the timeline of Meta’s fintech journey:

  • In June 2019, Facebook announced the launch of Libra, a proposed global cryptocurrency. It would be supported by a coalition of companies called the Libra Association to ensure they were able to navigate global regulatory restrictions. Just four months later in October 2019, a series of high profile Libra Association members began to exit the alliance including PayPal, eBay, Stripe, and Mastercard. Libra was eventually renamed to Diem, which was wound down in January 2022 and sold off for its assets

  • Meta’s head of financial services, David Marcus, established a division which went through a series of rebrands from Facebook Financial, or F2, to Novi and most recently Meta Financial Technologies. Marcus abruptly left the division he’d established just weeks after the name change in early 2022.

  • Meanwhile they had been attempting to launch payments on WhatsApp for some time, with a triumphant launch in Brazil being hampered by the central bank blocking the service just days after its launch. It has struggled to regain traction since then.

  • Meta’s latest forays into the fintech space include a more traditional wallet based payment offering, affectionately codenamed ZuckBucks by insiders, and an early stab at offering NFTs on Instagram

It’s a good illustration that even a company with the global might of Meta can simply walk into a new business without growing pains - it’s a humbling example that illustrates the need for the necessary capabilities to be in place in order to win.

Takeaways

OK so what are the key lessons we can take from Meta’s adjacent innovation plays?

  • At first glance, it might seem like a random collection of acquisitions and experiments. But don’t let the diversity of the portfolio fool you, they all ladder up to a set of very specific business pillars that form the future business: Commerce, Business Messaging, Measurement and a handful of others.

  • Secondly, they haven’t forced any of these investments to rush to ROI. Meta knows that if you build an indispensable product, it acts as a magnet to customers. One you have a billion users, it’s pretty easy to plug in any number of business models.

  • And finally, they’ve done a pretty good job of playing in the “Goldilocks” zone. Too many companies end up placing their innovation bets too close to the core and up with “same but better”; just minor improvements on existing products. At the same time, Meta has ensured that their adjacencies don’t step so far away that they have no capability to win. Sure, the fintech journey illustrates they sometimes push the limits, but acquisitions like Instagram and Whatsapp are great examples of spotting goldilocks opportunities before others could capitalise.


Transformational Business

Finally, we come to Meta’s transformational innovation play. Welcome to the Metaverse.

In 2021, Facebook rebranded to Meta, announcing the company’s future bet on the Metaverse and in doing so pushing the entire tech industry to finally embrace and invest in the Metaverse at rates previously unheard of. Their vision of the future has been one of a virtual world where people will live, play, shop and work, all experienced through AR and VR interfaces like their quest headsets (formerly known as Oculus), and Stories glasses in partnership with Ray Ban.

How are they approaching this transformation? For the time being, it’s a vision of what the future could be with a number of business units organised under the newly established Reality Labs division. As part of the corresponding reorg, a number of adjacent businesses were grouped under Reality Labs, as well as housing new metaverse initiatives. The purpose of the division is to create a distinct structure where it's OK to invest in an undefined opportunity space with evolving KPIs. Not surprisingly, working under the assumption that it's an evolving space, it’s completely ok for these teams to have strategies that still contain a number of question marks. There’s an understanding that the answers in many cases simply don’t exist yet. In this sense, Reality Labs represents truly explorative innovation: they are willing to experiment in spaces no one has gone yet, which makes it an advantage to be playing at the bleeding edge rather than copying others at the leading edge.

Historically, new technologies have been driven by two industries: the enterprise and… well… porn

While it’s probably unlikely that Meta will enter the world of adult entertainment, one of the increasingly hot battlegrounds will no doubt be the enterprise. This is interesting from an innovation point of view because for the first time, Meta will no longer be competing in their comfort zone of selling to marketers. Their customers will begin to look more like CTO’s, COO’s and even CHRO’s.

The intersection of the metaverse and the future of work has already become a hotly contested space. Microsoft have spent the better part of the last decade moving into this arena so there’s no doubt that they and Meta are on a collision course to see who can win the battle to enable the world’s workforce to virtually go global. Only time will tell who will prevail, but in the meantime grab your popcorn because it’s going to be a long battle played out over many years.

Microsoft Mesh

Microsoft Mesh poses Meta’s greatest competition to date in the battle for the enterprise metaverse. SOURCE: Microsoft

It goes without saying that Meta is not imposing Reality Labs with traditional KPIs or expectations on returns. They have publicly stated that it will likely be years before they have it figured out. This sends a clear message: don’t bog down your transformational innovation with the metrics of today’s business.

Takeaways

The most actionable lesson we can take away from Meta’s transformational innovation approach is to look at how they are investing. For a company that makes $120bn per year in global revenue, to be spending around 10% of this in the purely transformational space is pretty unheard of in most corporates. However, it should be stated for the record that this is what it takes to be one of the most innovative companies on the planet.

For those companies who don’t quite have the stomach for this level of investment, we’d typically recommend a total allocation of innovation investment to be determined and then about 10% of that budget to be put towards transformational plays. For incumbents it shouldn’t exceed 15% of your total innovation budget as this pulls away from adjacent innovation which is likely to create mid-term ROI, typically a more digestible investment as far as most boards are concerned.



Summary

If we’re setting out to analyse how Facebook innovates, it’s important to note that I haven’t mentioned any of the tropes that are all too common in today’s corporate innovation landscape. They didn’t just tell their people to be more innovative or offer innovation bonuses. They didn’t hold an away day where executives tried to invent tomorrow’s business in a single shot. And they didn’t retract back to the core and slash innovation investments when times got tough.

If there are only three key principles I could give you to take away from Meta’s innovation approach, I would suggest these:

  1. Firstly, they know when to let go - the minute their defensive plays on the core business began to deliver diminishing returns, they refocused to the future and began to streamline the core. Too many businesses try to hang on to the defensive plays well into the journey to legacy which can be a critical mistake.

  2. Second, Meta has also been smart about not encumbering innovation plays with today’s business metrics. They understand that if they invest early enough, they have time to scale newer plays, and that gives them a much stronger foothold when it comes time to apply commercial constraints. It’s a lot easier to monetise a product if you let it grow to a billion users first!

  3. And finally, they’ve managed their innovation like a portfolio. Innovation at Meta is not seen as a discrete project, but a series of new features, offerings and businesses all being organised to align with top-down business pillars. As opposed to random experimentation, it looks more like solid infrastructure to support growth and scale.

So there you go - a fairly comprehensive overview of how Meta innovates.



But wait… remember at the start of this article I promised I’d point out one thing that everyone has overlooked that makes this Meta’s iPhone moment?

For context, Apple recently announced that it was finally discontinuing its line of iPod music players. The iPod had been Apple’s hero product since its iconic launch way back in 2001. Six years later when Steve Jobs announced the first iPhone, he explicitly called out that it had an in-built widescreen iPod with touch controls. They knew from day one that the iPhone would eventually be an iPod killer, and sales of the music player almost immediately began their downward trend to reflect this changing of the guard.

Steve Jobs 2007 iPhone launch

The iPhone was designed to swallow up the iPod business from day one. SOURCE: Above Avalon

When Facebook announced that they were rebranding to Meta and refocusing the business on the metaverse, many jumped to accusations that this was just a PR stunt designed to distract us from the company’s current media woes. Sure, the timing of the name change may have been questionable, but there is one big thing that everyone seems to be missing.

As we know, the first big problem with innovation is that it can be hard to see. Time and again, industry experts have failed to see game changing innovation even as it happens right in front of them. So with their social media empire beginning to show early signs of strain, Facebook’s decision to rebrand and put the metaverse in their sights is their big play at reinvention. Brands and consumers will increasingly be pushed to engage with these newer virtual platforms, which will eventually negate the need for the very social platforms that made them famous in the first place.

What everyone seems to have missed is that Meta is sacrificing their core in order to build tomorrow’s business, something most companies don’t have the courage to do until it’s too late. For the very first time, Meta’s future bet is not simply an evolution aimed at scaling their existing business. In fact the metaverse play is an attempt at building an entirely new business, one that will swallow the core. The core simply becomes the ATM that funds the development of its replacement. And that’s what makes this Meta’s iPhone moment.



For the first time in a long time, Facebook’s evolution to Meta has brought them to the brink of the unknown. They haven’t had to undergo such a radical transformation since they were a relatively small startup operating out of a tiny office above a Chinese restaurant. Pulling off this level of transformation as an 80,000 employee strong corporate comes with its own set of challenges - but with well entrenched principles of innovation baked into their DNA, Meta is well positioned to make this next chapter their most exciting one yet. Whether meta succeeds in winning the metaverse or not remains to be seen, but if they do the story will be taught a decade from now in business schools as one of the greatest reinventions of all time.

References for specific claims in the video

Intro

Core Business

Future Business

Takeaways

Transformation

Wrap-up


Detailed Sources

Intro

Focusing question

Setup

Core business

Adjacent business

Transformational business

Wrap up


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