Meta has a problem with its AI product

In the midst of an unprecedented AI buildout, Meta is spending more than most. The company is building two massive data centers, and reports indicate there will be up to $600 billion in US infrastructure spending over the next three years.

These numbers may not raise eyebrows in Silicon Valley, but they are starting to worry Wall Street.

The problem came to a head this week when Meta reported quarterly earnings, which showed the company’s operating expenses rose $7 billion year over year and about $20 billion in capital expenditures. This was a result of heavy spending on AI talent and infrastructure, which has yet to generate significant revenue for the company. When analysts pressed for more details, Mark Zuckerberg explained that the spending had only just begun.

“The right thing to do is to try to accelerate this to make sure that we have the compute that we need, whether for AI research or new things that we do, and try to get to a different state about our compute stance in the core business,” Zuckerberg told analysts during the call. “Our view is that when we get the new models that we’re building at MSL there and we get really frontier models with new capabilities that you don’t have in other places, I think that’s just a huge potential opportunity.”

If his goal was to reassure investors, he did not succeed. By the end of the call, Meta’s stock price had fallen in value. Two days later, the defeat worsened. Meta stock was down 12% at the closing bell on Friday, representing more than $200 billion in lost market value.

It’s dangerous to read too much into stock prices, and in strict financial terms, Meta’s quarterly earnings weren’t that bad. ($20 billion in quarterly profits is nothing to complain about.) But this was the first quarter in which Meta’s aggressive AI spending on both talent and infrastructure had a clear impact on the company’s bottom line. Even more troubling is that, aside from a lot of massive data centers and well-compensated AI researchers, it wasn’t clear what the money actually bought.

Analysts pressed Zuckerberg on why he is spending so much on AI, and when they can expect to see revenue from the increased spending. But the call came at a strange point in meta-planning, with no clear budget for expected spending and no product available that could anchor revenue projections. As a result, Zuckerberg is left with only general claims about the promise of AI.

“There’s going to be all kinds of new products around different content formats, and we’re starting to see that,” he said during the call. “And then there are business versions of all of these as well, like Business A… The other piece is how will smarter models improve the core business, improve the recommendations we provide across the suite of apps, and improve the recommendations in ads.”

Meta isn’t the only company spending billions of dollars on AI infrastructure, so it’s worth asking why this spending doesn’t scare away investors in Google or Nvidia, both of which had a great quarter. OpenAI is the biggest offender, spending the same amount with much less financial support than Meta.

There are already concerns that we are creating a bubble, and if that happens, Meta’s underlying business will allow it to weather things better than most.

But if you ask Sam Altman why he spends hundreds of billions of dollars on computing, he’ll tell you that he runs one of the fastest-growing consumer services in human history — generating $20 billion in revenue a year. We can argue about how sustainable the growth rate is (that’s a separate blog post), but there’s already a fast-growing product at the bottom of all the OpenAI hype. The fast-growing ARR number goes a long way to answering the questions.

Meta doesn’t have a product like this, and it’s not clear where it would come from.

The company’s most powerful AI product is its Meta AI assistant, which Zuckerberg noted on the call has more than 1 billion active users. But those numbers have certainly been crunched by the three billion active users on Facebook and Instagram, and it’s hard to see the current version of Meta AI as a competitor to ChatGPT. There’s also the Vibes video builder, which has already boosted its daily active users, but has limited commercial impact beyond that.

The most ambitious project is the Vanguard smart glasses released earlier this month. However, the glasses seem more like an extension of Meta’s Reality Labs work than a true attempt to harness the power of LLMs.

Simply put, these are promising experiments, not fully formed products.

It is worth noting that when pressed about infrastructure spending, Zuckerberg’s response was not to point to recent launches, but to focus on the next generation.

Zuckerberg, although emphasizing the expected impact of the new models of the superintelligence laboratory, stressed that he is very excited about the new products.

“It’s not just Meta AI as an assistant,” he said. “We expect to build new models and products, and I’m excited to share more when we get them.”

But this was an earnings call, not a product launch, so all he could say was that there would be more to share “in the coming months.”

As the market response has shown, the answer is starting to diminish.

To be fair, it’s only been four months since Zuckerberg restructured his company’s AI team, and the new AI team hasn’t had enough time to launch its amazing AI product yet. But as the company spends billions of dollars to remain competitive in the AI ​​space, there is still no clear indication of what role Zuckerberg wants to play in the new industry.

Will Meta AI use the company’s detailed store of personal data to grow into a competitor to ChatGPT? Is Vibes the first step in a consumer entertainment play that builds on Meta’s targeted advertising system? Or perhaps Zuckerberg’s references to “commercial AI” are hints at a more elaborate enterprise play?

So far, this is anyone’s guess. Whatever the answer, the pressure is on Meta to find it – and soon.