The Facebook group Meta suffered its first drop in sales in the past quarter and blames economic fears for it. Meta does not expect an improvement for the next few months either. The development is tantamount to the end of an era: Since the IPO in 2012, things have only gone up rapidly. Founder and boss Mark Zuckerberg announced that the group now wants to focus on long-term investments.
Meta revenue fell about 1 percent year over year to $28.8 billion in the second quarter. The bottom line is that profits shrank by 27 percent to almost 6.7 billion dollars (6.6 billion euros). Top executive Sheryl Sandberg also pointed to the strong dollar leading to an unfavorable translation of foreign earnings on the balance sheet. Without the rise in the dollar exchange rate, there would have been a three percent increase in sales, she emphasized in a conference call with analysts.
The sales forecast for the current quarter fell with a range of 26 to 28.5 billion dollars, lower than analysts had expected. CFO Dave Wehner justified this with a noticeable weakening of the online advertising market in the second quarter in view of the economic uncertainty. “I would say the situation looks worse than a quarter ago,” admitted Zuckerberg. Investors dropped the stock 4.65 percent in after-hours trading on Wednesday.
So far, Facebook and Meta have shown themselves to be resilient to all economic downturns. Because with the knowledge of the interests and social connections of billions of users, the platform offered advertisers the opportunity to address their ads specifically to the desired target groups.
But the first cracks in the system appeared last year after Apple introduced new privacy protection rules. Developers like Facebook are now required to ask iPhone users for permission if they want to track their behavior across different apps and services. Many users rejected this – and thus torpedoed ad models on Facebook, among others.
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Despite this, Facebook and its influence are still huge. The number of users who access at least one app from the group every day rose from 2.87 to 2.88 billion within three months. Facebook saw an increase from 1.96 to 1.97 billion daily users. The group also includes Instagram and Whatsapp.
Among Zuckerberg’s long-term initiatives is the company’s focus on the “metaverse,” a virtual world into which he envisions business and social life increasingly shifting. Facebook is at the forefront of the movement with its virtual reality (VR) activities, which immerse users with special glasses into digital worlds. The Reality Labs division, in which the “Metaverse” development and the VR business are bundled, posted an operating loss of $2.8 billion in the last quarter alone. Meta announced a price increase for its VR glasses a few days ago.
A clear signal also came from Washington on Wednesday that the US competition authorities are keeping an eye on these “metaverse” activities. The FTC went to court to bar the company from acquiring Within Unlimited, which develops a VR fitness app. According to the lawsuit, among other things, Meta wants to dominate the entire “Metaverse”.
Zuckerberg relies on reels
In today’s core business, Meta faces competition from the Chinese app Tiktok, which attracts mostly young users with its endless flow of short videos. The clips are suggested by a software algorithm that adapts to users’ interests. Meta’s short video copy, dubbed “Reels,” is now being widely embedded on Facebook and Instagram.
For the platform, this means a fundamental departure from its roots: after all, the original idea is that as a user you can network with friends, family and acquaintances as well as organizations or companies and then see their contributions. But now 15 percent of the content in users’ Facebook feeds — and even more on Instagram — comes from someone they don’t follow, Zuckerberg said. The proportion should double by the end of 2023.
The advance of the reels is not even good for business at first. Because Meta earns less from ads in the vicinity of the clips than from advertising in the feed or the daily changing so-called stories of the users. As a result, the more short videos spread, the more they crowded out more lucrative formats for meta, as Zuckerberg conceded. They will still be relied on because they increase user activity on the platform and, over time, bring in a similar amount of money as other formats. However, Meta admits that this could take years. Currently, Reels advertising is only on track to bring in $1 billion annually.
Meta also announced a change in leadership on Wednesday. The previous CFO Wehner is to take over the newly created position of strategy chief in November. The new CFO will therefore be Susan Li. A gap had opened up on the executive floor because Sandberg had announced her retirement. She was regarded as Zuckerberg’s right-hand man and an architect of Facebook’s business model.