Tag: Augmented reality

A Reporter for NPR Encounters the Challenge of Network Externalities on an EV Road Trip

An electric vehicle (EV) charging station. (Photo from the Associated Press via the Wall Street Journal.)

Secretary of Energy Jennifer Granholm recently took a road trip in a caravan of electric vehicles (EVs). The road trip “was intended to draw attention to the billions of dollars the White House is pouring into green energy and clean cars.” A reporter for National Public Radio (NPR) went on the trip and wrote an article on her experience.

One conclusion the reporter drew was: “Riding along with Granholm, I came away with a major takeaway: EVs that aren’t Teslas have a road trip problem, and the White House knows it’s urgent to solve this issue.” The problem was that charging stations are less available and less likely to be functioning than would be needed for a road trip in an EV to be as smooth as a similar trip in a gasoline-powered car. The reporter noted that in her experience with her own EV: “I use multiple apps to find chargers, read reviews to make sure they work and plot out convenient locations for a 30-minute pit stop (a charger by a restaurant, for instance, instead of one located at a car dealership).”

EVs exhibit network externalities. As we discuss in Microeconomics and Economics, Chapter 10, 10.3 (Essentials of Economics, Chapter 7, Section 7.3), Network externalities are a situation in which the usefulness of a product increases with the number of consumers who use it. For example, the more iPhones people buy, the more profit firms and individuals can earn by creating apps for the iPhone. And the more apps that are available, the more useful an iPhone becomes to people who use it.

In this blog post, we discuss how Mark Zuckerberg’s Meta Platforms (which was originally named Facebook) has had difficulty selling Oculus augmented reality headsets. Many people have been reluctant to buy these headsets because they don’t believe there are enough software programs available to use the headsets with. Software designers don’t have much incentive to produce such programs because not many consumers own a headset necessary to use the programs.

The difficulty that Meta has experienced with augmented reality headsets can be overcome if the product is sufficiently useful that consumers are willing to buy it even if complementary products are not yet available. That was the case with the iPhone, which experienced strong sales even before Apple opened its app store. Or to take an historical example relevant to the current situation with EVs: When the Ford Motor Company introduced the Model T car in the early twentieth century, many people found that owning a car was such an advance over using a horse-drawn vehicle that they were willing to buy one despite there being realtively few gas stations and repair shops available. Because so many cars were being sold, entrepreneurs had an incentive to begin opening gas stations and repair shops, which increased the attractiveness of using a car, thereby further increasing demand.

As the NPR reporter’s experience shows, consumers choosing between buying an EV or a gasoline-powered car are in a situation similar to that faced by early twentieth century consumers in choosing between cars and horse-drawn vehicles. One difference between the two situations is that Congress and the Biden administration are attempting to ease the transition to EVs by subsidizing the construction of charging stations and by providing tax credits to people who buy EVs.

Mark Zuckerberg … All Alone in the Metaverse?

In October 2021, Facebook founder Mark Zuckerberg did something unusual–he changed the name of the company from Facebook, Inc. to Meta Platforms, Inc. According to Zuckerberg, he did so because he said, “Over time I hope our company will be seen as a metaverse company.” What is the metaverse? Definitions differ, but it typically refers to software programs that allow people to access either augmented reality (AR) or virtual reality (VR) images and information.  

 In both AR and VR, people wear headsets, goggles, or glasses to see images and information displayed. In VR, you wear goggles and have to remain stationary because your whole field of vision is a digital projection, so if you walk around you run the risk of tripping over furniture or other obstacles. With AR, you can walk through the physical world because your goggles display only limited amounts of information.

For example, Peggy Johnson, CEO of Magic Leap describes the device her firm sells this way: “You wear it over your eyes. You can actually think of it as a computer on your eyes. And you still see your physical world around you, but we place digital content very smartly in that physical world.” Among other uses, Magic Leap’s device can help to train a worker to use a new piece of equipment by overlaying a virtual version of the equipment over the actual piece of equipment. The virtual version would place instructions in the worker’s field of view. That worker would be in the metaverse.

While Meta has been selling Oculus AR headsets, Zuckerberg has focused more on VR than on AR.  An article in the Wall Street Journal described the VR metaverse that Zuckerberg is hoping to help build: “Eventually, the idea is that people will be able to do almost anything in the metaverse: go shopping, attend school, participate in work meetings.”  They would do these things while sitting at their desk or armchair. Meta’s first significant VR product was Horizon Worlds. On Horizon, after choosing an avatar, or virtual figure that represents you, you can shop, play games, or hang out with other people. You enter Horizon by using Meta’s Quest VR headset, which has a price of $400 to $700, depending on the headset’s configuration. Meta set a goal of having 500,000 monthly users of Horizon by the end of 2022 but ended the year with only around 200,000 active users. 

Horizon’s main problem seems to have been that the app was subject to large network externalities. As we discuss in Chapter 10, Section 10.3 of Economics and Microeconomics, network externalities describe the situation in which the usefulness of a product increases with the number of consumers who use it. The Horizon app is enjoyable to use only if many other people are using it. But because few people regularly use the app, many new users don’t find it enjoyable and soon stop using it. According to an article in the Wall Street Journal, in late 2022, “Most visitors to Horizon generally don’t return to the app after the first month … there are rarely any girls in the Hot Girl Summer Rooftop Pool Party, and in Murder Village there is often no one to kill. Even the company’s showcase worlds… are mostly barren of users.” Reality Labs, the division of Meta in charge of Horizon, the Quest headset, and other metaverse projects, had total losses of $27 billion by the end of 2022. The losses were partly the result of Meta selling Quest headsets for a price below the cost of producing them in an attempt to get more people to use Horizon.  

Zuckerberg peisists in believing that the firm’s future lies with the metaverse and continues to spend billions on metaverse projects. Investors aren’t convinced that this strategy will work because, as an article on economist.com put it in early 2023: “Few people are burning to migrate to the metaverse.” As investors’ became more skeptical of Zuckerberg’s strategy, Meta’s stock price declined by more than half between the fall of 2021 and early 2023.  To be successful in its metaverse strategy, Meta will eventually have to attract enough buyers of its Quest headsets and users of its Horizon app to begin taking advantage of network externalities. 

Source: Dylan Croll, “Magic Leap CEO Peggy Johnson on the AR revolution,” news.yahoo. com, January 4, 2023; “Things Are Looking Up for Meta,” economist.com, February 3, 2023; “How Much Trouble Is Mark Zuckerberg In?” economist.com, October 16, 2022; Jeff Horwitz, Salvador Rodriguez, and Meghan Bobrowsky, “Company Documents Show Meta’s Flagship Metaverse Falling Short,” Wall Street Journal, October 15, 2022; Sarah E. Needleman, “Facebook Changes Company Name to Meta in Focus on Metaverse,” Wall Street Journal, October 28, 2021; Meghan Bobrowsky and Sarah E. Needleman, “What is the Metaverse? The Future Vision for the Internet,” Wall Street Journal, April 28, 2022.