Meta's Metaverse Dream Crumbles Amid VR Layoffs, AI Pivot

Meta's ambitious foray into virtual reality appears to be concluding, with the company reportedly laying off approximately 1,500 employees from its Reality Labs division this week. This significant reduction, representing about 10% of the unit's staff, also includes the shutdown of several VR game studios, according to The Wall Street Journal. The move marks a dramatic reversal for Meta, which just four years ago staked its corporate identity on the metaverse concept, a vision now largely overshadowed by the surging interest in artificial intelligence.

Few in the tech world are likely to mourn the metaverse's decline. Meta, formerly Facebook, rebranded in 2021, promising a new technological era led by VR devices. This strategic shift was partly a bet on Gen Z's preference for socializing in online games like Fortnite and Roblox over traditional social media. It also served to distance the company from the negative publicity surrounding the Facebook brand, which had been plagued by data privacy scandals like Cambridge Analytica, whistleblower reports from Frances Haugen, congressional hearings on digital surveillance, and its role in spreading misinformation and monopolistic practices.

At the time, Meta envisioned the metaverse as the next major social platform, where users would connect in a virtual world via Meta's Horizon Worlds app and engage with games on VR headsets. However, the future envisioned by Meta has fast-forwarded to a reality where the metaverse has been largely abandoned in favor of AI.

The recent layoffs, as reported by CNBC, have impacted studios developing VR titles for Meta, including Armature Studio (known for "Resident Evil 4 VR"), Twisted Pixel ("Marvel's Deadpool VR"), and Sanzaru ("Asgard's Wrath"). The VR fitness app Supernatural, which Meta acquired in 2023 for $400 million, will cease producing new content and enter "maintenance mode." Additionally, Camouflaj, the studio behind the "Batman: Arkham Shadow" VR game, has also been affected by the layoffs, GeekWire reported. The Verge also noted this week that Meta's VR program for work, Workrooms, is shutting down.

These developments follow a Bloomberg report from December, which indicated Meta's plans to slash the virtual reality department's budget by up to 30%. Around the same time, Meta announced a pause in its program to share the Meta Horizon operating system, which powers its Quest VR headsets, with third-party manufacturers.

The deprioritization of Meta's metaverse efforts comes as no surprise to industry observers. The Reality Labs division consistently lost money at an alarming rate, worrying investors, and never turned a profit. In total, Meta funneled approximately $73 billion into Reality Labs, an expenditure so vast it would equate to spending $1 million daily for 200 years.

"Building in the Open" Fails to Deliver

Beyond being overhyped by investors and analysts, initial versions of the metaverse were simply subpar products. The early avatars were often described as goofy and soulless, famously lacking legs. A metaverse selfie of Meta CEO Mark Zuckerberg was so poorly received it became a viral meme. Meta's "build in the open" model, which ships early tech products for user feedback, failed because the company overpromised a future its product couldn't deliver.

This model relies on active consumer interest, but the metaverse saw only middling demand. While Meta quickly gained a majority share of the VR market with its Oculus headsets, sales declined. Last spring, Counterpoint Research reported a 12% year-over-year drop in global VR headset shipments in 2024, marking the third consecutive year of declines. Meta accounted for 77% of those 2024 shipments.

Meta's Premature App Store Ambitions

Meta's strategy seemed more focused on establishing its own app store platform for games and applications, aiming to bypass the revenue cuts imposed by Apple and Google. Mark Zuckerberg, in a keynote speech at Facebook Connect 2021, criticized the "lack of choice and high fees" of the Apple-Google duopoly, stating it stifled innovation and held back the internet economy. He optimistically predicted the metaverse would reach a billion users within a decade, generating "hundreds of billions" in digital commerce. Analysts from McKinsey & Co. and investment bank Citi even backed this questionable forecast with their own multi-trillion-dollar estimates for the metaverse by 2030.

Despite these grand projections, adoption of metaverse apps remained minimal, especially for a company of Meta's scale. While Meta's internal VR app store lacks external visibility, the Meta Horizon app on iOS and Android serves as a proxy for adoption. Apptopia estimates 60.4 million global downloads and 39.8 million U.S. downloads since May 2018. Although average sessions per daily active user in the U.S. grew from 3.49 in January 2023 to 4.93 in January 2026, this pales in comparison to Meta's over 3.5 billion daily active users across its social apps like Facebook, Instagram, WhatsApp, and Messenger.

Zuckerberg's desire to tap into developer revenue was telegraphed too early. Instead of offering competitive fees to attract developers, Meta did the opposite. Even before VR became a sizable platform, Meta announced plans to take a whopping 47.5% cut on digital asset sales within Horizon Worlds, comprising a 30% hardware platform fee and an additional 17.5% for Horizon Worlds itself. Unsurprisingly, creators were not pleased.

Metaverse Plagued by Safety Issues

Another significant setback for the metaverse was Meta's failure to prioritize user safety. Similar to its approach with its social network, the company was reactive rather than proactive in implementing safety features. For instance, the "Personal Boundary" feature, which created a buffer between avatars, was only rolled out after reports of users experiencing sexual harassment and even virtual rape and gang rape in Horizon Worlds. Meta later adjusted this feature to default to "on" only when interacting with "non-friends," allowing users to disable it entirely.

In May 2022, Meta outlined several support tools for Horizon Worlds, including blocking, reporting, and a "safe zone" button. However, the company declined to specify actions it would take against individual bad actors. Users reported that when facing abuse, they would often remove their headsets, only to find their harassers still in their recent encounters list upon returning, making it too late to submit a report with video and audio evidence. These scenarios highlighted a lack of foresight in safety design and detailed policies. When a metaverse code of conduct was eventually published, it still lacked specific consequences, merely stating Meta would "take action on users."

AR, Mixed Reality, and AI Prove More Popular

The success of Meta's Ray-Ban AR glasses has further contributed to the metaverse's decline. These smart glasses, featuring capabilities like hands-free recording, music streaming, and chatting with Meta AI, began to outsell traditional Ray-Bans in some retail stores in 2024. Bloomberg reported this week that Meta is now considering doubling the production of these glasses to meet consumer demand.

Last year, Meta also introduced Ray-Ban Display, smart glasses with a display for apps, alerts, and directions. While international plans for this product were paused due to "unprecedented demand" (or conservative forecasting), the growing interest in AI hardware from companies like OpenAI and Amazon positions AI as the next potential computing platform, making VR seem like a dated vision for the web that never fully materialized.

These combined factors, particularly the emergence of AI as a viable app platform, make it increasingly difficult for Meta to justify continued investment in VR. Instead, Meta is now strategically focusing on products with proven potential, such as its Ray-Ban and AI glasses, the growth of its AI apps, and large language models.