Meta has landed itself in a risky situation, pouring billions of dollars into building its lofty metaverse plans at the same time as its core advertising business is faltering.
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The tech giant’s revenue decline worsened in the third quarter of 2022 and profits plummeted 52% to $4.4 billion as it faced a challenging reality of rising costs, mounting economic pressures and slow monetization of its newer products.
Revenue of $27.7 billion was 4% down from the same period last year, while spending escalated by 19% to $22.1 billion.
Reality Labs, the division responsible for building Meta’s augmented reality and virtual reality technology, grew losses by 40% year-on-year to $3.7 billion in Q3. Meta said it anticipates operating losses for the division to grow “significantly” in 2023.
Meanwhile, advertising revenues fell further in Q3, dropping by 4% to $27.2 billion from a 1.5% loss in Q2. While ad impressions across Meta’s apps Facebook, Instagram and Whatsapp increased by 17% in the quarter, the average price-per-ad continued to decrease — from 14% in Q2 to 18%.
The tech company struggled most in Europe, where ad revenue dropped by 16%, followed by a 3% decline in North America. Meta’s strongest growth continues to come from Asia-Pacific, which posted 6% ad revenue growth, while the ‘Rest of World’ region grew 3%.
The results alarmed investors, who, searching for assurances that Meta’s expensive pivot in Web3 technologies and short video would pay off, were told that “things are going in the right direction” and to be “patient,” on an investor call Wednesday (Oct 26.)
“There are a lot of things going on right now in the business and in the world,” chief executive Mark Zuckerberg said. “I think we are going to resolve each of these things over different periods of time. I appreciate the patience and I think those who are patient and invest with us will end up being rewarded.”
An investor penned an open letter to Zuckerberg on Monday urging him to dial back the company’s metaverse ambitions and slash staff to address a steep drop in the company’s share price.
Zuckerberg said Wednesday the company was becoming more disciplined with spend, but remained steadfast on his metaverse plans.
“I get that a lot of people might disagree with this investment, but from what I can tell I think this is going to be a very important thing and I think it would be a mistake to not focus on any of these areas which are going to be fundamentally important to the future,” he said.
“This is a massive undertaking and it’s often going to take a few versions of each product before they become mainstream, but I think our work here is going to be of historic importance and create the foundation for an entirely new way that we will interact with each other and blend technology into our lives, as well as the foundation for the long term of our business,” he added.
Meta is forecasting continued declines in the fourth quarter. The results sent Meta shares plunging more than 19% in after-hours trading.
Chief financial officer Dave Wehner, who is due to start his new role as chief strategy officer in November, said the business was taking measures to return to stronger topline growth, including slowing the pace of hiring “dramatically.” Meta added 3,700 new hires in Q3 but said it was planning to keep headcount flat in 2023.
‘Weak’ advertising demand
The uncertain macroeconomic landscape has driven weakened ad demand for Meta and its rivals. Google and Snap both reported declining revenue in Q3.
Wehner said commerce, gaming, financial services and consumer packaged goods companies cut spend, while citing healthcare and travel as growth categories. Smaller advertisers have been more “resilient” than larger ones, he said.
While the impact of Apple’s ATT framework on Facebook’s ad business “diminished” in Q3, Zuckerberg said the smartphone maker continued to present “big risks.” Apple rolled out new app store rules on Monday that will give it a cut of sales to post ‘boosts’ purchased on social media apps, including Facebook and Instagram.
Reels’ $500 million revenue hit
The other factor hurting Meta’s ad revenue is its own product, Reels. The short-form video product was rolled out in 2020 to address growing competition from TikTok, but it doesn’t monetize at the same rate as Facebook and Instagram’s feeds or stories.
Reels is costing Meta more than $500 million in lost revenue per quarter, Zuckerberg revealed. He said the company expects to break even with Reels “over the next 12 to 18 months.”
“We believe we are gaining time spent share on our competitors like TikTok,” said Zuckerberg. “[But] the growth of short-form video creates near-term challenges.”
Ads were introduced to Reels in June last year and have now crossed $3 billion in annualized revenue across Facebook and Instagram, Zuckerberg said.
Consumption of Reels increased 50% in the past six months, with more than 140 billion Reels played each day across Facebook and Instagram.