Welcome to the metaverse - Meta reels against trouble from TikTok and Apple's ad impact

Earnings expectations missed, user numbers in decline and a 22% share price collapse, wiping around $200 billion off of the market value - welcome to the metaverse for The Company Formerly Known As Facebook.

It certainly wasn’t a good day for Mark Zuckerberg yesterday as Meta - the parent of Facebook, WhatsApp and Instagram - reported Q4 net income of $10.3 billion, missing analyst expectations, on revenue of $33.67 billion.

Most alarmingly, Facebook itself saw a drop in daily user logins of nearly 500,000 for the last three months of 2021, the first such decline in the firm’s 18 year history. Global daily active users declined from the previous quarter for the first time, to 1.929 billion from 1.930 billion, while the monthly active users number was flat on 2.91 billion.

Two big problems are giving Meta pain - the first is the rise of TikTok as a platform, sucking up ad revenue away from Facebook; the second is Apple’s requirement for iOS user permission to gather data for ad tracking, the impact of which overall as a headwind on business in 2022 is estimated to be in the order of $10 billion.

So what’s to be done?

Here's the long game

On the threat from TikTok, Zuckerberg made clear that Facebook’s own Reels short form video offering would be getting a lot more attention, but at a price:

People have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly. This is why our focus on Reels is so important over the long-term, as is our work to make sure that our apps are the best services out there for young adults…we’re in the middle of a transition on our own services towards short-form video like Reels. So as more activity shifts towards this medium, we’re replacing some time in News Feed and other higher monetizing surfaces. So as a result of both competition and this shift to short-form video as well as our focus on serving young adults over optimizing overall engagement, we’re going to continue to see some pressure on impression growth in the near term.

But that does little to address the problem of making money from Reels in the near term, he noted, but insisted that long term there will be 'jam tomorrow':

We’ve made these types of transitions before with mobile feed and Stories, where we took on headwinds in the near-term to align with important trends over the long-term. And while video has historically been slower to monetize, we believe that over time short-form video is going to monetize more like feed or Stories than like Watch. So I’m optimistic that we’ll get to where we need to be with Reels too.

That will be an investment priority in 2022, he affirmed:

Reels is now our fastest growing content format by far. It’s already the biggest contributor to engagement growth on Instagram and it’s growing very quickly on Facebook too. As we continue to improve tools for creators, ranking for people watching, and as we roll out the product everywhere across the world, we expect that this will continue growing quickly. So looking ahead, we’re investing in simplifying video across Instagram, building more great creative and monetization tools for creators, and helping more people discover and interact with relevant Reels.

But the problem is that TikTok is a formidable competitor so Reels is coming from being on the back foot, admitted Zuckerberg:

The dynamic that I think is actually a little bit different with Reels than what we've seen with Stories and Mobile Feed in the past, [is] with Reels, I would say that the teams are executing quite well, and the product is growing very, very quickly. The thing that is somewhat unique here is that TikTok is so big as a competitor already and also continues to grow at quite a faster rate off of a very large base. And so…it takes us longer to kind of get to where we want on this. Even though we're compounding extremely quickly, we also have a competitor that is compounding at a pretty quick rate too.

As for Apple’s impact on ad revenue with its tougher regulations, Zuckerberg said this too is going to require spending more money:

With Apple’s iOS changes and new regulation in Europe, there’s a clear trend where less data is available to deliver personalized ads. But people still want to see relevant ads, and businesses still want to reach the right customers. So we’re rebuilding a lot of our ads infrastructure so we can continue to grow and deliver high-quality personalized ads. 

But building back here is also going to take time, conceded COO Sheryl Sandberg:

Like others in our industry, we faced headwinds as a result of Apple iOS changes. Apple created 2 challenges for advertisers: one is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes; the other is that measuring those outcomes became more difficult. These challenges are complex and inter-related. We're working to try and improve things, for example, by making progress in closing the under-reporting gap for iOS web conversions and by introducing tools like our aggregated event measurement solutions to deliver better insights for advertisers. These efforts will help to mitigate some of the challenges. But we expect the overall targeting and measurement headwinds to moderately increase from Apple's changes and from regulatory changes in Q1 and throughout 2022.

Battle plans are being drawn up to overcome what Sandberg identified as two main challenges from Apple’s changes - targeting and measuring performance:

On targeting, it's very much a multi-year development journey to rebuild our ads optimization systems to drive performance while we're using less data. And as part of this effort, we're investing in automation to enable advertisers to leverage machine learning to find the right audience with less effort and reduce reliance on targeting. That's going to be a longer-term effort.

On measurement, there were 2 key areas within measurement which were impacted as a result of Apple's iOS changes. The first is the under-reporting gap. What's happening here is that advertisers worry they're not getting the ROI they're actually getting. On this part, we've made real progress on that under-reporting gap since last quarter, and we believe we'll continue to make more progress in the years ahead. I do want to caution that it's easier to address this with large campaigns and harder with small campaigns, which means that part will take longer, and it also means that Apple's changes continue to hurt small businesses more.

The second area underneath the measurement challenge is really data delays. As part of the iOS changes, we and many other ad platforms receive less granular conversion data on a delayed basis. What advertisers share with us is  that this makes real-time decision-making especially difficult. That’s particularly important during the Holiday period, where people are often spending a lot and really monitoring their ads and adjusting spend, not even on a daily basis, but often on an hourly basis. That was one of the challenges we faced during this holiday quarter.

My take

We still have a lot of kind of fundamental questions to overcome in order to make progress to get where we're going. 

Indeed, Mr Zuckerberg. What an unusual feeling this must be. It’s hard to see how the next few quarters are not going to be painful for Meta. All that and Reality Labs - the division charged with executing on the much vaunted metaverse vision - managed to lose $10.1 billion across 2021, 50% higher year-on-year.

You’ve got to speculate to accumulate, but Zuckerberg and Sandberg are going to be dealing with nervous investors in the coming months, investors that might have been able to ignore other failings in the firm when users numbers kept climbing, but now…