Meta: Time to retire? Or is there still some hope?
Meta's core business is underperforming. Meta needs to refocus on reels monetization and steer its metaverse ambitions in the right direction to have a shot at improving earnings.
🤷♂️ What’s going on with Meta?
Once considered “big tech,” Meta is just now a shadow of its former self. It has lost a staggering 70% of its market value since last year. Recently, Meta missed WallStreet’s earning expectations and provided a weak Q4 earnings forecast, which resulted in a drop in share price below $100 (for the first time since 2015).
📉 Why is the share price crashing?
A decline in advertisement revenues
Meta reported a 4% decline in revenues, driven primarily by lower ad revenues, which comprise 98% of Meta’s total revenues.
Three factors are driving the decline in ad revenues:
Worsening economic climate: In light of increasing prices, businesses are reducing their fixed cost base where possible. Naturally, firms are reducing marketing budgets as their focus shifts from growth to profitability in a recessionary environment.
Apple’s privacy policy: Apple's stricter privacy policy is a significant headwind for Meta, which relies on tracking on-device activity to target and measure the effectiveness of online ads. With less accurate targeting, advertisers would leave Meta for competitors, further hurting Meta’s revenue.
The rise of TikTok: TikTok has taken the social media industry by storm, amassing over 1 billion users in just 4 years. The short-form video format is so popular that users spend almost 50% more time on Tiktok than on Instagram and Facebook (refer to figure 1). As a result of high user engagement, marketers are flocking to TikTok, where they can generate higher returns on marketing expenditures.
Reality Labs’ underperformance
Zuckerberg's metaverse vision has proved costly for Meta. This year, meta has poured $10 billion into Reality Labs, the unit that leads Meta's metaverse efforts.
Despite significant investments, Reality Labs is far from profitability. Reality Labs' losses have jumped 33% from the previous quarter, amounting to ~$3.7 Billion.
Two main factors are driving these losses:
Falling demand for VR headsets: Despite increasing prices for its VR headsets from $300 to $400, revenues have nearly halved from this time last year. In other words, the post-pandemic demand for VR headsets is declining.
Horizon Worlds (Meta's metaverse platform) is losing street cred: Horizon Worlds is a flop. Meta had promised over 500k monthly active users (MAUs) by the end of 2022 but has accumulated less than 200k MAUs. Making matters worse, user engagement is very low on Horizon Worlds — only >50 users have explored 9% of the worlds created by other players. Not a good sign for a company that wants people to essentially live on the metaverse by 2030.
🏥 What could Meta do to recover?
Increase reels monetization ASAP to boost ad revenues
While reels are increasingly driving customer engagement on Facebook and Instagram, they do not monetize at the rate feeds, and stories do. In other words, reels direct users away from Meta's revenue-generating features.
So how can Meta address this issue?
Increase the number of marketers using reels for advertisements: Given their video format, reel ads are more expensive than photo ads that appear on feeds and stories. Hence, advertisers promote less through reels, affecting Meta’s ability to monetize from reels.
Meta could work around this by allowing marketers to advertise photo ads on reels instead. In fact, Meta has launched its banner ad feature, which allows marketers to promote photo ads directly onto the reels users are watching. This way, Meta ensures businesses could avoid significant costs in creating reels while being able to leverage reels to publicize their products.
Increasing reels' cost per ad: Increasing the cost per ad is a product of increasing reel engagement. Put simply, if users spend more time on reels, Meta can command a higher price per ad to advertisers.
There are several ways to drive engagement, and I believe Meta is taking the right steps to achieve it:
Meta has built a $1 billion creator fund to incentivize reel creation on Instagram/Facebook. However, as creators use multiple platforms, Meta must gradually roll out more attractive incentive schemes (e.g., ad-revenue-sharing agreements). In doing so, Meta could incentivize creators to post their top-quality short-form videos on Instagram/Facebook instead of on their competitors’ platforms.
Meta is enhancing its AI capabilities to ensure users receive more targeted content. Meta has already achieved some great results (~140 billion reel plays daily across FB and IG, ~60% increase vs 6 months ago), but there is a long way to go to rival Tiktok.
Meta is increasingly focused on improving user experience, even when it comes to showcasing ads. A great example is its banner ad feature on reels. Unlike typical reel ads that suddenly appear between reels, banner ads do not interrupt the user experience, which is crucial in driving reel engagement.
2. Growing Horizon Worlds Strategically
Ideally, Meta should curtail investments for its metaverse project and re-focus on improving its ads business, which still drives a bulk of Meta's revenues. But, this is unlikely to happen as Zuckerberg remains adamant about building out his metaverse vision.
But there are a couple of ways Meta could still steer its metaverse ambitions in the right direction:
Diversify distribution channels: Limiting Horizon Worlds' player base to VR headset users is not a great strategy for achieving scale since VR headset penetration is still extremely low (2.4 headsets per 100k households).
The low user base leads to a myriad of problems that would further hinder Horizon Worlds’ scalability, as seen in the diagram below.
The first step Meta could take to address these issues is to make Horizon Worlds accessible through PC and mobile phones. In doing so, Meta can tap into its existing ~2 billion customer base, who otherwise would not have accessed Horizon Worlds. This way, Meta can drive organic game creation on Horizon Worlds as users now have the opportunity to share their games with a more extensive user base. With more games being developed on Horizon Worlds, new users would be more incentivized to return to the platform, increasing engagement and creating a cycle of positive reinforcement.
Being laser-focused on gaming:
Jack of all trades but master of none. Meta is overly ambitious with what it can realistically achieve through Horizon Worlds. Meta's efforts to build a virtual workroom is one such example.
Gaming is still the primary motivator for users trying out the Metaverse. Not work-related activities. In fact, a survey by Hubspot indicated only <20% of the respondents went onto the Metaverse to meet their co-workers or attend conferences. Hence, it is not surprising that successful metaverse projects (e.g., Roblox) are also centered around gaming.
Meta could learn a lesson or two from Roblox when developing a gaming ecosystem on the Metaverse. Since its inception, Roblox has been laser-focused on enhancing the platform's gaming experience — building the necessary features for game development, creating a game economy, and ensuring new games are constantly available for users. These strategies enabled Roblox to scale exponentially over three years to > 200 million users.
Horizon World's concept is fundamentally similar to Roblox's — building a metaverse ecosystem where users create and play games and interact with each other. Hence, there is still room for growth if Meta stays laser-focused on refining and expanding its current gaming features on Horizon Worlds.
💭 Departing Thoughts
When it comes to growing its ads business, Meta still faces an uphill battle. Meta can improve earnings by monetizing from reels, but the annual revenue run rate from reels is just $3 billion, a drop in the bucket, versus Meta’s $120 billion annual revenue. Meta must find innovative ways to boost its ad business — either through a new, engaging product or increasing ad-placement areas on IG/FB/WhatsApp.
As for the metaverse, I am not excited or optimistic about Zuckerberg’s vision. This “mini-project” is eating into Meta’s margins, and Meta needs a money-generating plan for Horizon Worlds. At least in the early stages, I foresee gaming as Meta’s best shot at generating some revenue from Horizon Worlds.