Facebook Inc. is copying Google’s playbook with its latest diversionary tactics, so why doesn’t it skip to the point and tell us Instagram’s finances right now?
In a bizarre disconnect from reality Monday, Facebook FB, +1.26% said that it will begin to break out the financial results for its virtual-reality business, which was born from its 2014 acquisition of Oculus. The news came with its disappointing third-quarter sales and fourth-quarter forecast, and on the heels of more negative scrutiny and a damning corporate portrait by the latest Facebook Papers leaks.
There are plenty of questions around Facebook right now, especially after all the revelations detailed in research exposed by a whistleblower, added to years of questionable practices by the social-media powerhouse. But how much Facebook is making from virtual reality would be at the very bottom of the list for most investors — if it even made the list at all.
In fact, Wall Street investors would much rather get detailed financial information about a completely different business: Instagram, which is believed to provide the most growth for Facebook. The most damaging information from a financial perspective in the recently leaked documents was Facebook’s own research showing that teenagers were spending less time on Instagram, preferring Snap Inc.’s SNAP, -1.16% Snapchat and TikTok.
Facebook could repair some of the damage from those reports by disclosing detailed financial and user information for Instagram. Instead, it is taking the Google tactic, doing exactly what Alphabet GOOGL, -0.09% GOOG, +0.11% and Google did with YouTube — delay, delay, delay until the Securities and Exchange Commission steps in.
Google initially handed investors a breakdown of its “other bets” businesses — younger efforts with low to no revenue and massive operating losses — when it changed its name to Alphabet Inc. in 2015, the sort of change Facebook is also reportedly planning. Yet Alphabet continued to avoid reporting results for its fast-growing YouTube business for years, telling the SEC in 2018 that it was not required to disclose the numbers because its then-CEO Larry Page, Alphabet’s top decision-maker, did not see them, a key requirement for segment reporting.
Eventually, after a change at the top, Google began providing the information, as it should have for years before. It’s unlikely that co-founder and Chief Executive Mark Zuckerberg, who has his imprint on everything at Facebook, will launch the Larry Page Exit Plan anytime soon, though.
Instead, he is using a misdirection tactic — instead of trying to fix the company’s problems, he is hoping that a look into the metaverse future he envisions will sate curious investors and onlookers for a while.
That is likely to be of little interest to investors right now, though. Facebook plans to invest billions this year in virtual and augmented reality, an investment that will take a $10 billion chunk out of its operating profit in 2021, but doesn’t expect much to show for it in the near-term. Even Zuckerberg admitted on the company’s conference call Monday that its “Reality Labs” business will not be much to look at until much later in the decade.
“This is not going to be profitable anytime in the near future,” Zuckerberg said. “I think you’ll see all of those pieces start to build out and start to mature a bit over the next few years and then, if we do a good job on this — and I would say later in this decade — is when we would sort of expect this to be more of a real business story.”
Instagram, though, is already mature and an important part of the investment thesis for Facebook, in part because of its younger audience. It is surprising that the SEC has not already pressured Facebook into providing breakout financial information on Instagram, and it should begin one of its letter-writing campaigns demanding information and explanations after it receives this year’s annual report with segment information on a much less valuable business.
Instead of giving investors segment reporting on an actual business within a business, Facebook will divulge the (likely) relatively paltry revenue from its Oculus virtual-reality headsets, and the exorbitant investment it will be making in this business that it deems as the future. Investors remember when the big bet on the future was Instagram, and still deserve to know more details about its financials. We should not have to wait for SEC pressure to get them.