Our product trends look better from what I see than some of the commentary I have seen suggests.
Self-confidence or self-delusion from Mark Zuckerberg as he bets the Meta farm on his pet Metaverse ambitions, which are soaking money away from the firm with no apparent benefit other than pandering to the ego of a CEO whose iron grip on the company looks increasingly unhealthy?
Meta’s Q3 results last week, with revenues down four percent year-on-year and operating income down 46%, wiped $65 billion from the firm’s market capitalization. Some core business metrics were still positive - Facebook daily users rose three percent, while the ‘Family of Apps’, including Instagram and WhatsApp, saw daily usage rise four percent. Ad impressions look healthy at 17% growth year-on-year, until you consider the fact that average ad pricing fell 18% over the same period.
But it’s the Metaverse that’s bleeding red ink, with revenues almost halved in a year, while losses increased to $3.7 billion. Overall, Reality Labs cost the company roughly 40% of its overall operating income. And that’s not going to change anytime soon, admits Zuckerberg, noting that CapEx will be on the rise to pay for the underlying infrastructure. But he insists:
We expect Reality Labs expenses will increase meaningfully again in 2023, with the biggest drivers of that being the launch of the next generation of our consumer Quest headset and hiring that has been done in 2022, but for which we are going to be paying the first full year of salaries next year.
Long game, big price
You’ve got to play the long game with innovation, he argues, citing the example of the firm’s TikTok competitor, Reels. There are now more than 140 billion Reels plays across Facebook and Instagram each day, he argues, up 50% in six months. On Instagram alone, people already re-share Reels 1 billion times a day through DMs, he says. All of which is well and good - but it’s not making significant money! Zuckerberg is defiant:
Moving to monetization, I’ve discussed in the past how the growth of short-form video creates near-term challenges since Reels doesn’t monetize at the rate of Feed or Stories yet. That means that as Reels grows, we are displacing revenue from higher monetizing surfaces. I think this is clearly the right thing to do, so Reels can grow with the demand that we are seeing. But closing this gap is also a high priority. Even with the progress we have made, we are still choosing to take a more than $500 million quarterly revenue headwind with this shift, but we expect to get to a more neutral place over the next sort of 12 to 18 months.
He goes on:
For Reels monetization specifically, anytime we’ve had a new format, like when we added Stories or even before that when we were primarily on desktop and we shifted to mobile feed, we sort of had this dynamic where we focused on increasing engagement and growing demand for the product. But while that was happening, monetization efficiency for the new format lagged behind the News Feed or mobile News Feed compared to Stories for some period while that was ramping up.
It’s really hard for us to answer questions now that are like, ‘What is the eventual monetization efficiency going to be?’, it’s really hard to predict that in advance. What I can say is I think on Stories, we’ve ended up achieving something that was way greater than what we even hope to achieve at the time, in terms of where we thought that Stories could net out. And a lot of the progress that we’ve been making on Reels monetization so far has been at a clip that we’ve been pretty happy with. So obviously, we want to close the monetization gap as quickly as possible. We want this to be a tailwind, not a headwind. I think we’re going to get there. But I think we’ve gone through a few of these transitions, and I think that’ll just take some time.
Messaging is another major monetization opportunity, he said, opening another big jar of ‘jam tomorrow’:
Billions of people and millions of businesses use WhatsApp and Messenger everyday and we are confident that we can connect them in ways that create valuable experiences. We started with click-to-messaging ads, which lets businesses run ads on Facebook and Instagram that start a thread on Messenger, WhatsApp or Instagram Direct, so they can communicate with customers directly. And this is one of our fastest growing ads products with a $9 billion annual run-rate. And this revenue is mostly on Click-to-Messenger today since we started there first, but Click-to-WhatsApp just passed a $1.5 billion run rate and growing more than 80% year-over-year.
Paid messaging is another opportunity that we are starting to tap into. And it continues to grow quickly, but from a smaller base. We are putting the foundation in place now to scale this with key partnerships, like Salesforce, which lets all businesses on their platform use WhatsApp as the main messaging service to answer customer questions and updates and sell directly in chat. And we also launched JioMart on WhatsApp in India, and it’s our first end-to-end shopping experience that shows the potential for chat-based commerce through messaging. So between click-to-messaging and paid messaging, I am confident that this is going to be a big opportunity.
Gamble
But all eyes inevitably fall back to the Metaverse gambit, one from which there is, it seems, no turning back. Zuckerberg says:
There is still a long road ahead to build the next computing platform, but we are clearly doing leading work here. 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 that 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.
I just say that there is a difference between something being experimental and not knowing how good it’s going to end up being. But I think a lot of the things that we are working on across the 'Family of Apps', we are quite confident that they are going to work and be good. The Reels work, the discovery engine work, all the ads work on Signals, the business messaging work, we can’t tell you right now how big they are going to scale to be. But I think that each of these things are kind of going in the right direction.
Obviously, the Metaverse work is a longer term set of efforts that we are working on...I think that that is going to end up working too. Look, there are a lot of things going on right now in business and in the world, so it’s hard to have a simple ‘we are going to do this one thing, and that’s going to solve all the issues’. I mean there are macro-economic issues. There is a lot of competition. There is ads challenges, especially coming from Apple. And then there are some of the longer term things that we are taking on expenses because we believe that they are going to provide greater returns over time. I think we are going to resolve each of these things over different periods of time. I appreciate the patience. And I think that those who are patient and invest with us will end up being rewarded.
My take
Patience is a virtue, but...
Having a vision for the future is an essential attribute for a tech entrepreneur. Having a blind vision from which you won’t deviate, less so. But give the corporate structure of Meta, the only person who can tell Zuckerberg ‘no’, is Zuckerberg himself. And I doubt that’s going to happen anytime soon…
