Meta has begun unwinding its long bet on virtual reality

Last week, the company reportedly laid off around 1,500 employees from Reality Labs, roughly 10% of the division, and shut down several VR game studios, according to The Wall Street Journal. The decision marks a clear reversal for a company that rebuilt its identity around the metaverse just four years ago.

In 2021, Facebook rebranded as Meta and positioned virtual reality as the next major computing platform. The move aimed to capture younger users who socialised inside games like Fortnite and Roblox, while distancing the company from years of reputational damage linked to privacy scandals, misinformation and regulatory pressure.

Meta envisioned the metaverse as a new social layer of the internet. Users would meet in Horizon Worlds, work together, play games and build businesses using VR headsets. That future never materialised.

The focus has now shifted decisively to AI.

According to CNBC, internal VR studios affected by cuts include Armature Studio (“Resident Evil 4 VR“), Twisted Pixel (“Marvel’s Deadpool VR“), and Sanzaru (“Asgard’s Wrath).” The VR fitness app Supernatural, acquired for $400 million in 2023, will stop producing new content and move into maintenance mode. GeekWire also reported layoffs at Camouflaj, the studio behind “Batman: Arkham Shadow.”

The Verge reported that Meta is also shutting down Workrooms, its VR collaboration product for businesses.

These moves followed a December Bloomberg report that Meta planned to cut Reality Labs’ budget by up to 30%. Around the same time, the company paused efforts to license its Horizon operating system to third-party headset makers.

The retreat should not surprise investors. Reality Labs never turned a profit and consumed vast resources. Meta spent roughly $73 billion on the division. That level of investment would require spending $1 million every day for 200 years.

Weak products met weak demand

Early versions of the metaverse struggled to gain credibility. Avatars looked unfinished, and one widely shared image of Mark Zuckerberg inside Horizon Worlds became a symbol of overpromising and underdelivering. Meta relied on a “build in the open” approach, releasing immature products in hopes that user feedback would guide improvement.

That model depends on strong consumer interest. In VR, interest was limited.

Despite Meta controlling most of the VR headset market through Oculus, sales declined. Counterpoint Research reported that global VR headset shipments fell 12% year on year in 2024, marking a third consecutive annual drop. Meta accounted for 77% of those shipments, tying its fortunes to a shrinking category.

A platform strategy before a market existed

Meta prioritised platform economics before proving demand. Zuckerberg wanted to reduce reliance on Apple and Google’s app stores.

“This period has…been humbling, because as big of a company as we are, we’ve also learned what it is like to build for other platforms. And living under their rules has profoundly shaped my views on the tech industry,” Zuckerberg said at Facebook Connect 2021. “I’ve come to believe that the lack of choice and high fees are stifling innovation, stopping people from building new things, and holding back the entire internet economy.”

He predicted the metaverse could reach a billion users and generate “hundreds of billions” of dollars in digital commerce. Analysts at firms such as McKinsey and Citi echoed those expectations.

Adoption never followed. Apptopia estimates the Meta Horizon app has been downloaded 60.4 million times globally since 2018. Engagement increased modestly, but Meta now serves more than 3.5 billion daily active users across Facebook, Instagram, WhatsApp and Messenger. VR remained marginal by comparison.

Developer incentives also fell short. Meta announced it would take 47.5% of digital asset sales within Horizon Worlds, exceeding the standard 30% charged by Apple and Google. Developers pushed back. Momentum faded.

Safety gaps accelerated disengagement

Meta also underestimated safety risks. Reports of sexual harassment and virtual assault emerged before the company introduced basic protections such as avatar boundaries. Enforcement remained vague. A published code of conduct stated Meta would “take action on users” without explaining what that meant.

Users told TechCrunch they often removed their headsets after abuse rather than reporting it. Reporting tools failed to capture incidents once a session ended. Core safety systems did not reflect how people actually behaved.

Meanwhile, AR and AI gained traction

While VR stalled, other bets paid off. Meta’s Ray-Ban AR glasses gained momentum in 2024, outselling traditional Ray-Bans in some stores. Hands-free recording, audio playback and AI features resonated with consumers. Bloomberg reported Meta is considering doubling production.

The company also introduced Ray-Ban Display glasses with built-in visual prompts and app alerts. Meta paused international expansion after demand exceeded forecasts.

As AI hardware gains industry-wide momentum, VR increasingly looks like a detour. Meta has made its choice. The company is now focused on AI, smart glasses and large language models. Virtual reality is no longer central to its future.

Author: George Nathan Dulnuan