the reasons for an unprecedented bad pass

For the first time since the IPO of Facebook (now Meta) in 2012, its turnover declined compared to the previous year. More specifically, it fell 1% in the second quarter of 2022, to $28.8 billion, whereas it had climbed 55% between 2020 and 2021. Neither the Cambridge Analytica scandal in 2018, nor the market slowdown in publicity at the start of the Covid-19 pandemic had stuck him in such a situation.

As a result of the slowdown, the company’s net profits fell 36% from a year earlier to $6.7 billion. They had not collapsed in this way since 2012. To make matters worse, the number of Facebook users – the founding stone of the company – has stagnated since the start of the year, with a gain of a few million daily users (from 1.96 to 1.97 billion) but a loss of 2 million monthly users compared to the first quarter.

In summary, Meta is going through a period of unprecedented turmoil, even as it pivots from strategic model. “We are going to have to do more with fewer resources“, said its leader and founder Mark Zuckerberg. Following these announcements, its price fell by 5% in electronic exchanges after closing. beginning of the year.

Meta suffers the turbulence of online advertising

First cause of this situation: the state of the online advertising market, from which Meta derives more than 97% of its income. Macroeconomic conditions (inflation, risk of a recession, war in Ukraine, etc.) are pushing companies to cut spending as a precaution, and advertising budgets are suffering the consequences. As a result, the group’s average price per advertisement fell 14%, while it posted annual growth of 47% at the same time last year. Google, Twitter and Snap all mentioned the economic climate to justify their disappointing or even catastrophic results.

Then, Mark Zuckerberg’s company is still digesting the consequences of the changes imposed by Apple on the iPhone, which allow users to refuse the collection of data necessary for advertising targeting. This change directly affected Meta’s revenue generated by iPhone users, nearly one in two smartphone owners in the United States, and more than one in six in the rest of the world.

To compensate for this shortfall, the company is considering new targeting methods that require less user data. She cites, for example, advertisements that immediately open a discussion space with the advertiser when the user clicks on it. But if she is convinced that these novelties will accelerate the growth of the market, this is not yet the case. To make matters worse, Meta is going through this turmoil without Sheryl Sandberg, the architect of its advertising model, who left the company in June after 14 years of service.

And another threat is already emerging in the short term. Meta has hinted that it may shut down Instagram and Facebook in Europe following the Irish data regulator’s decision to block its data transfers to the United States. A standoff is now underway, and could greatly affect the group’s turnover if no compromise is found between the two parties.

The TikTok threat, insoluble

Beyond the turmoil in the ad market, Meta’s biggest problem is called TikTok, by Mark Zuckerberg’s own admission. The short video app is breaking growth records and is capturing the attention of young users in particular, an audience that Facebook and Instagram (to a lesser extent) are struggling to attract. It surpassed one billion users in September, an amount that already flirts with Instagram’s 1.2 billion users, all a winner in the battle for time spent on the platform. In response to this success, the group – as it had done with Snapchat – decided to copy the features of its competitor. In the summer of 2020, he therefore launched Reels, a space on Instagram dedicated to short videos. But despite some success, the social network has failed to stifle TikTok’s growth.

This month, it has therefore moved up a gear, by changing its recommendation algorithm. Instagram and Facebook have so far been content to show users content published by the accounts to which they have subscribed. With the change, the two social networks now display 15% of publications from accounts to which the user is not subscribed, according to recommendations of the algorithm. Or one publication in 6. And Mark Zuckerberg specified that by the end of 2023, this ratio could approach 30%, or almost one publication in three. This idea comes from the “For you” tab of TikTok, which made the success of the application by presenting videos from accounts followed by the user and videos from other accounts.

Following this change, a large number of Instagram users expressed their dissatisfaction, with Kylie Jenner (361 million subscribers) and Kim Kardashian (326 million subscribers) leading the charge, two figures among the most social media influencers. They relayed an image in the form of a slogan addressed to the leaders: “Make Instagram become Instagram again. (Stop being TikTok, we just want to see cute pics of our friends.) Sincerely, everyone.

Strategic change for Instagram

This episode triggered public speaking of the leader of the platform, Adam Mosseri, the day before the publication of the quarterly results. Facing the camera, he explains that while some people want more photo posts on their Instagram feed, in general, users post less on their own account in favor of “stories” posts. [le format éphémère d’Instagram, copié sur Snapchat, ndlr] or sharing in private messaging.

According to the Washington Post, Instagram has been working to connect with the entertainment industry for a year, and it has been mobilizing an advisory board of industry figures since this week. In other words, these changes are part of a real strategic pivot from its historical model of a photo platform aimed at family and friends towards a video platform model focused on entertainment. And too bad if users proclaim their dissatisfaction, because in the figures, this shift seems to work.

According to Mark Zuckerberg, Reels watch time increased by 30% in the quarter. “In theory, we could limit near-term headwinds by forcing less on Reels growth. But it would be a less good decision for our products and our business model in the long term.“, he detailed to justify the drop in turnover. Still, according to him, Reels’ advertisements should generate $ 1 billion in turnover in 2022, less than one hundredth of the the group’s revenues.In other words, video is not yet a viable source of growth.

The bend towards the Metaverse has lead in the wing

Due to the turbulence of its advertising revenue base, Meta’s strategic shift towards the metaverse [un monde virtuel accessible en réalité virtuelle et augmentée, ndlr] took lead in the wing. To begin with, the company – like the entire tech sector – had to revise its recruitment prospects downwards, while counting on new workers to develop the metaverse. In this perspective of cost reduction, its Reality Labs division is doing poorly: it achieved 452 million dollars in turnover in the second quarter (+48% compared to last year), but it accuses 2, $8 billion in net losses.

Faced with this observation, Meta announced on Tuesday that it would pass on the increase in the price of materials and logistics to the price of the Quest 2, its virtual reality (VR) headset supposed to evangelize the general public. The bill is salty, since from August its price will increase from 299.99 dollars to 399.99 dollars, or 33% increase. The problem is that the call price of the Quest 2 was intended to lower the barrier to entry into virtual reality. However, this barrier has just been raised, since even at its new price, the Quest 2 remains among the cheapest.

Beyond the potential effects on VR headset sales, this change affects Meta’s entire strategy. Like Android and Apple in the smartphone market, the company intends to build its business model on controlling the software ecosystem rather than just selling products. Concretely, the Quest 2 gives access to the Oculus Quest Store, an application store on which Meta collects a commission on transactions. In other words, by risking selling fewer helmets, the company is cutting other revenues.

To make matters worse, the Federal Trade Commission (FTC), the American competition regulator, announced yesterday that it intended to block the acquisition of Within Unlimited, the publisher of the virtual reality fitness app Supernatural. , by Meta. The FTC says the purchase violates competition laws, and it accuses the company “buy market share instead of earning it on merit“. In other words, the regulator is opposed to Meta reproducing in the metaverse the growth strategy it had applied in the social network sector with the takeovers of Instagram and WhatsApp. Bad news for the rest of the metaverse.

How Meta (Facebook) wants to siphon revenue from the metaverse