Zuckerberg Plans to Cut Metaverse Group's Budget Up to 30%

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1:20Bloomberg Audio Studios. Podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. And one of the bigger, I think, stock news stories today, Kurt Wagner, Bloomberg News, breaking the story that the folks at Meta are cutting back some of their spending on the metaverse in particular by as much as 30 percent, which is a big number. Because remember, folks, this company pivoted, pivoted hard to the metaverse several years ago to the point where they changed their name from Facebook to metaverse.

2:05This was a big, big pivot for Mark Zuckerberg and now kind of dialing it back a little bit. So we want to get some more reporting on that. We turn to Caroline Hyde. She joins us here in Sudi, Bloomberg Tech co-anchor. So this is a kind of a big move, I think, for Mr. Zuckerberg, don't you, Caroline? It's a signal. And what's interesting about it is, as usual, as they think about the budget, for 2026, they're going to make layoffs. They're going to cut about 10 % across the entire business. That tends to be what happens at this time of year. But he gathered his top executives in his house in Hawaii to discuss, okay, where should most of the resources be coming from?

2:37Because remember, they're spending a ton on AI and people have been worried about that. How can he offset that? Well, 30%, more cuts, therefore, going to this particular part of Reality Labs. Now, Reality Labs are still going to be making your Ray-Ban Meta glasses, they've seen real interest in the AI use in augmented reality. But virtual reality, we're not living in it yet. He really thought we'd all be doing our workouts there. We'll be working there. And it just hasn't caught on in the way that was expected. So, of course, pull out resources from there, reallocate them. And I do think that it's interesting, of course, they rebranded under this name.

3:10For now, it's becoming sort of a metaverse of AI and augmented reality rather than virtual reality right here, right now. So was Meta just too early? Are we not ready yet for a virtual reality? I don't think we are. Okay. I mean, are you using it? I'm not. I mean, my husband loved getting, he got the, one of the original sort of Oculus versions of the headset and yeah, he was doing workouts and, and then he sold it in a garage sale because I think, and it got to a point where it's like, what are the applications of this? I love the idea of when I'm in working abroad and I need to not have, I need access to lots of screens, but I can't have just lots of screens.

3:44It was great to see how that could have been used, but I wasn't going to spend that many thousands on the piece of hardware. They've really got to understand the integration here. That's kind of why it's so interesting. It comes at that time where we also understand Alan Dye from Apple, one of the key interface design team leads, the person who's been behind the iPhone X and behind the operating system, behind the applications of Apple. He's jumping ship to meta. This is a huge coup. He's going to be thinking about the design of these things in the future. You bring that up about the Apple thing.

4:13I see that's not the first person we've seen leave the Apple AI story. What is going on there? Yeah, they've really been shedding people. In many ways, this is tied more back to Johnny Ives' departure back in 2019, and they lost a lot of their design prowess people then. This is also turning of the guard. A lot of these people have been at Apple for a very long time. And we're thinking about Tim Cook himself coming to an age where he might be retiring. Many are wondering how executives shift. But you're right, The real deluge, the real loss has been in the AI area, particularly in the large language model department, where they've just taken so many hits in terms of morale.

4:45Because, look, they might even be turning to Google for its large language model rather than building in-house. And they've been recently losing out or sort of waving goodbye to Gianandrea. That's the main lead of the AI part. So is that the assumption that they're going to farm this, their AI, out to Google, perhaps? That's the perhaps. And I think we'll talk to Anwar Gran in just a moment. He'll say from a stock perspective, that's what investors kind of want. Yeah. I mean, it's, well, why spend a gajillion dollars to be just, you know, do a search. And it's been self-limiting for Apple in many ways because they're all about safety on the phone.

5:22This is all about edge AI. It's not about, therefore, sending all your data into the cloud and doing enormous amounts of data analysis and, therefore, feeding it through large language models there. They want to be secure. that means you have to only be able to really do the compute on your own phone. That's very limiting at the moment. So you're just not getting the parameters that you need to have a really effective large language model. So therefore, maybe they do have to shift to a third party, at least while they get their ducks in a row. So how are we thinking about how Meta is scaling against a lot of its competitors right now as we think about this AI race?

5:55Well, isn't it interesting? All dovetails together in the same way. For many, Meta is showing that it's putting AI first. and we understand the impact because everyone loves these Ray-Ban Meta Glasses. They've been selling very well. We've seen that people have really seen the revenue streams galvanize the advertising offering, the marketeers loving how they've used generative AI within the product. We're all getting fed better content, more specific to us. That's going to be the help of generative AI. But are we really downloading Meta AI's own individual AI app? I haven't. I'm using it more in WhatsApp.

6:28But then we've also got the EU worrying about how they're fending off competition in WhatsApp because they're saying, look, ChatGPT, even though you can put your ChatGPT within your meta WhatsApp at the moment, they're making it too difficult. They don't want that in their own APIs. Yeah, they don't want to be basically marketing OpenAI's ChatGPT. They're not only marketing a co-pilot for Microsoft. They want you to use meta AI. So I think they've still got to show that they're the place you're going to use large language models. They're the place you're going to come for a chatbot. And I think more broadly, they're the place that all of this ends up working from a capital expenditure perspective.

7:00So I think for many over at BI, They love the idea that they're going to maybe use Google's TPUs because that's a cost saving. Yep, absolutely. Caroline Hyde, thank you so much for joining us. Caroline Hyde, BTEC co-anchor along with Ed Ludlow, Bloomberg News. They are on top of everything happening out there in the world of technology in Silicon Valley. We appreciate getting a few minutes of Caroline's time here. Stay with us. More from Bloomberg Intelligence coming up after this. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute.

7:30Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

8:06That's vanguard.com slash audio. All investing is subject to risk, Vanguard Marketing Corporation Distributor.

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9:14You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10am Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. Piece of news coming out of the tech space is Meta, you know, stepping back a little bit from their investments in the metaverse. And as Lisa Mateo was just reporting, that's pushing the stock up four percent today, which is a pretty big move here. The stock's only about 13 percent year to date. Let's check in with Anurag Rana. We'll talk about a lot of tech issues out there.

9:46Anurag Rana is the senior technology analyst for Bloomberg Intelligence out there in Chicago. Anra, what do you make of this announcement or this report from Bloomberg News? Kurt Wagner is reporting that Meta may cut back investments on its metaverse by as much as 30 percent. What do you make of that? See, when you have to invest billions in the AI side of it, you've got to find that money somewhere. I know they have good cash flow, but, you know, right now everything is going towards building your AI infrastructure. So I think it makes sense for them to cut in other regions or areas to fund this particular project.

10:19It seems as though investors are clearly celebrating this. I mean, we're seeing it up more than 3.8 percent right now and earlier a lot higher. What do you think about next steps from here? I mean, clearly they're trying to redistribute their funds into AI development. What are investors looking for from that? So the same way they were looking at, you know, metaverse a few years ago, they want to see an ROI. They will ask, you know, the management team as to you're investing all these billions to create new data center, super intelligence team. What do I have to see in the terms of the return on the core business?

10:53And I think that those questions are not just for Meta, but the entire ecosystem as to what is the net effect addition to your revenue or reduction to your expenses down the road. And I think that is not going to end anytime soon. All right. So I don't know. I'm just I think most shareholders are like, I don't really get the whole metaverse thing. So to the extent you can scale back investment there, put it anywhere else, that's probably a good thing. Anwar, we also had Salesforce reporting results. Talk to us about that name, because that name's been under pressure. I think maybe potential threats from AI in general.

11:27Yeah, the results did come in, I mean, almost in line with how we were looking at it in terms of that the core business is still struggling. But when it comes to some of their AI products that are starting to do well, they've gained momentum. But when you look at somebody like a Salesforce, when you have a revenue base of$41 billion, it takes a lot to move the needle. So even though these products are very small and growing triple digits, but they are not right there in order to take down what is happening on the core business, which is a decline in seed growth or the less addition of seeds because of macro IT spending.

12:05And that is probably going to be the story, at least for the near term. So it seems as though analysts are still generally positive on in terms of AI adoption trends when we think about this company, though. Yes, absolutely. And that's, you know, one of the things we saw really good numbers on both the data cloud side of Fed and also the agent force. But when you look at the stock reaction last night, you know, it was up five, six percent. And finally, people have when you really scrape the numbers and see that their commercial remaining performance obligations, which is the order book for next quarter, which they expect to grow about 13 % in constant currency, full percentage of point of that is Informatica.

12:43So when you strip that out, you will see that that particular backlog number goes from 11 % this quarter to, let's say, 9 % or 10%. So the core is still declining or the core is still under pressure. So the stock down 27 % year to date, Anurag, does that reflect the fact that it's just IT budgets are tight or that AI poses this is an existential threat to certain providers like a Salesforce? I don't think that's the case because it's going to be very difficult for an established Fortune 2000 company to get rid of their core system of record, you know, whether that's an HR, sales, customer service, and just deploy a model in there.

13:23At least we are not there yet. Maybe, you know, five years down the road, we may see a scenario like this, but that's not really why Salesforce is struggling. It is basically we are the largest provider of sales automation tool and customer service tool to Fortune 2000 companies. It's those companies that are not hiring at that same rate that they used to, because outside of AI and AI infrastructure, everything else is still weak at this point. All right, Anurag, good stuff. As always, Anurag Rana, he is our senior technology analyst, Bloomberg Intelligence from the burgeoning tech hub of Chicago, Illinois.

13:58We appreciate getting a few minutes of your time. Stay with us. More from Bloomberg Intelligence coming up after this. This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation, and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defense, AI to entertainment, and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets.

14:34We do this all every weekday, then bring you the most important conversations and analysis in our podcast. Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts.

15:22But what do I know about this stuff? Lindsay Dutch, consumer hardline senior analyst. She's the expert and she's a Bloomberg intelligence. She joins us here. Lindsay, talk to us about Dick's Sporting Goods. What did you learn with their earnings release? Positive. I think that there's, you know, continued strength in the legacy business. And sometimes that's being overshadowed by their Foot Locker acquisition, which closed in early September. But there's certainly pressure on this retailer to execute a very quick turnaround at Foot Locker. And they are already planning to aggressively offload some stale inventory and close some stores.

15:56And we even saw some of that changes already over the Black Friday and Cyber Monday shopping weekend. What's really been the focus there with Foot Locker? What have been the issues at play? So Foot Locker is a little bit of a different animal for Dick's. They have a lifestyle focus. They also have to be more on trend with their assortment. and they really have to carry sort of the top of the line items, you know, across a variety of brands. Running shoes have been in lately. Dick's does have expertise sort of in that more sports-focused arena. And so, you know, Dick's is looking to bring its strong partnerships with Nike, for example, and other brands like that to elevate the assortment, which should help.

16:42They're also looking to bring in more apparel to the stores. And I saw that when I was out on Black Friday. You know, my footlocker had a lot more apparel this year. They also had lots of other brands that were being highlighted, Crocs, Timberland. So doing a lot more than just Nike. Dix calls the World Cup, quote, the biggest sports moment the U.S. has ever had. What are they telling us about the World Cup and maybe how it might impact their company? Yeah, so they mentioned that at the Morgan Stanley Conference yesterday. All of these sports moments have been really big for their legacy business.

17:20People are really leaning into sport. They saw over the shopping weekend interest in their products that were marketed for the World Cup. And that could be a key event to dry sales going forward. But they touch lots of aspects of sport. Their golf business is doing excellent this year. They also do very well in just team sports when you think about getting your NFL gear for your favorite teams and things like that. They're really seeing success across the board, but those big events just give them an opportunity to advertise and bring people into their store. Who are their main competitors right now?

17:56Who do you see within this landscape? Yeah, so that's a very difficult question, given that I think that they've done a really good job sort of breaking out of lifestyle and really focused on athletes. And that's what makes them different than a Foot Locker, than a JD Sport. I think one of their closer competitors could be Academy Sports and Outdoors. They're much smaller in size, but that retailer, Academy, does compete with Dix and is looking to more focus on athlete and bringing sort of that athletic assortment to their customer as well. Lindsay, what is Dix telling you? What are some of the other consumer hardlines companies telling you about the consumer right now?

18:42So Dix is also unique in that they typically cater to a higher income consumer. So they have seen resilient demand. They have seen both ticket and transactions continue to rise, which is rather unique. A lot of other retailers are only seeing the transaction front rather than the ticket front. So it tells me that the demand from that higher income consumer, you know, is steady to strong. We do also see that demand for new product that's being rolled out, people are willing to pay a high price point for that. We also see that in footwear, right? Like On has a very high price point. They haven't discounted.

19:23Dix is also not discounting on those premium products. And so that consumer is willing to splurge on those items. There is a little bit more pressure on the lower income consumer this year. I think that affects Foot Locker a little bit more. But the way Dix is approaching sort of the turnaround and offering greater discounts, it might be an opportunity to continue to cater to that customer this holiday season. How are you thinking about the discretionary space? I mean, I know Ulta is reporting after the bell today. I assume maybe the beauty space can we call it discretionary? Some people might call it essential.

20:00Yeah, I would agree. I think, you know, Ulta is there are a lot of connections I can draw between Ulta and and Dix. You know, both of them had, you know, very conservative outlooks for the back half of the year, you know, baking in a lot of uncertainty about, you know, where demand would go. So Ulta, you know, better than expected results in the first half, very similar to Dix. We get third quarter results later today. But that outlook, again, is very low. So there's a low bar for them to hit, at least on the top line. They're coming off a two-year best same-store sales comp of almost 7 % growth in the second quarter.

20:38So I'm optimistic for some strong top line numbers there. But I do think the number to watch for Ulta today is going to be on the profit line. They already have some pressure on profit with reinvesting in the business. And we've seen some of the retailer stocks, even if the quarter was good, If that profit line is missing, you know, investors aren't really liking that. Lindsay, we're not hearing a whole lot about tariffs this quarter. What are your companies saying? So most of my companies have low direct exposure, meaning they weren't directly importing a lot of goods. So the direct impact on them is low.

21:17They're working with suppliers and raising prices where they need to to manage that. You know, the biggest company in my space that's most exposed would be Elf Beauty. So also in the beauty space, 75 percent of their product, at least their namesake product, is made in China. So highly exposed there to the China tariffs. But we'll have to wait and see because, you know, there are some legal action out there, you know, looking to get those costs back on the retailer side. But you're right, earnings calls have sort of left that topic mostly out of the third quarter commentary. What are the top major trends that you're keeping an eye on as we head into the next year?

21:59So I do think costs in general, you know, still are facing some upward pressure going into next year. And discretionary as a whole, you know, demand has been quite soft since the back half of 22. So, you know, we're looking to see, you know, when is that going to turn? When are we going to see stronger discretionary demand across the board? And that will help a lot of these, you know, more secondary retailers in the space. Someone like an academy who's sort of struggling to see growth. We can see a lot stronger of a year, you know, with a pickup in that discretionary spend. All right, Lindsay.

22:32Thanks so much. Appreciate it. Lindsay Dutch, consumer hard lines. She's a senior analyst at Bloomberg Intelligence down there in our Princeton office talking to us about Dick's Sporting Goods. Had some pretty decent numbers. Stay with us. More from Bloomberg Intelligence coming up after this. This is Special Agent Regal, Special Agent Bradley Hall. The time is approximately 11.15 a.m. About to start consensual telephone call with Dr. Daiwa Zhang. China's Ministry of State Security is one of the most mysterious and powerful spy agencies in the world. But in 2017, the FBI got inside.

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