Facebook owner lives perfect storm with user flight and privacy changes

While more than US$ 200 billion (R$ 1.06 trillion) was being wiped away from the value of Meta, its chief executive, Mark Zuckerberg, blamed the fall in profits and users in the Facebook matrix on a rival: the app. short video viral TikTok.

“What’s so unique is TikTok is already so big as a competitor and continues to grow at a very fast pace from a very large base,” he said during a conference call with analysts Wednesday. “Although we are building extremely fast, we also have a competitor that is accumulating at a very fast pace.”

Zuckerberg spoke after Meta warned that the current quarter is likely to be the slowest growth period on record. Wall Street reacted with horror. The company’s shares are down 20%, leading to the biggest single-day drop in market capitalization of any company.

This drastic drop reflected how investors predict an even bleaker future, not just from new TikTok competition. Other Meta executives, such as Chief Financial Officer Dave Wehner, admitted that it faced a perfect storm of “headwinds.”

The company has lost about $10 billion in revenue since Apple adopted privacy policy changes to its software last year, undermining Meta’s targeted advertising-based business model. Macroeconomic conditions such as inflation and supply chain disruptions have also squeezed advertisers’ budgets.

The company also scored own goals. Privacy scandals have contributed to user discontent. Younger people are fleeing to TikTok, owned by China’s ByteDance. For the first time since Meta went public, daily active users across all its apps dropped slightly, while monthly active users remained flat.

“That was one of the most shocking earnings of my 27-year career. It’s insane,” said Rich Greenfield, a partner at consultancy LightShed. “Nobody expected it. There’s no other way to react than to admit that Facebook is facing an existential threat from TikTok.”

That threat comes as Zuckerberg seeks to diversify Meta’s revenues beyond advertising. A Facebook-led initiative to launch a global digital currency, an arrogant effort to revolutionize global payments, was abandoned this week after stumbling over regulatory hurdles.

Zuckerberg was left chasing visions of the metaverse, an online world full of avatars supported by virtual and augmented reality technology. “Facebook is being forced to build something that we don’t have visibility of until it bears fruit, ten years from now,” Greenfield said.

Facebook had already faced challenges to its hegemony on social media for being greedy, such as when buying the photo-sharing app Instagram and the messaging platform WhatsApp. Meanwhile, its advertising business hasn’t been much bothered by rivals like Twitter and Reddit, which didn’t have the same access to detailed user data.

But Apple’s changes to the iOS software that powers iPhones are having a devastating impact on the Meta model. That stands in stark contrast to an unexpected surge in advertising at Google, which sent its parent Alphabet’s shares up nearly 8% on Wednesday. Google executives said they are seeing strong demand from advertisers across the board, particularly retailers, and that consumer activity has been strong.

After Google’s earnings release, some analysts suggested that the company is indirectly benefiting from Apple’s privacy changes that have hurt Facebook. Its search advertising — the main source of its recent good performance — is less reliant on personal data collected on Apple devices, leading some to conclude that advertisers have devoted more of their budgets to Google rather than companies like Meta.

Wednesday’s results also crystallized longstanding suspicions that Meta is losing to rivals in the war for attention, having experienced several crises over privacy and moderation over the past decade.

Internal Meta documents released by former Facebook employee Frances Haugen to regulators late last year revealed much concern within the company over its growth woes.

A Forrester survey found that weekly use of TikTok overtook Instagram among 12- to 17-year-olds in the United States in 2021. “That’s the nature of social media,” said Andrew Lipsman, an analyst at Insider Intelligence. “There’s a ‘cool factor’ that drives network effects.”

Meta is trying to clone TikTok with its own short-form video asset, Reels. Zuckerberg announced last year that the company would be “reequipping itself to make youth service its guiding star,” making Reels a more central part of Facebook’s product experience.

The move is forcing Meta to shift to a less profitable business model, where advertising placed in the video feed makes less money than ads placed in a news feed or its ephemeral stories feature.

Zuckerberg said that “while video has historically been slower to monetize, we believe that over time, short-form video will monetize more as a feed or stories than as a Watch”, referring to the long-form video feature. of Facebook, which so far has been a failure.

Longer term, Zuckerberg is prioritizing his metaverse plans over his established businesses. He warned last quarter that the investment “will not be profitable for us at any point in the near future”, but added that he believes the metaverse will be the successor to the mobile internet and will one day generate billions of dollars in digital commerce daily.

For the first time in its earnings reports, Meta revealed its Facebook Reality Labs unit, which accounts for virtual and augmented reality products as well as the Metaverse initiative. This showed that it generated $2.3 billion in revenue in 2021, following a surge in sales of its Oculus VR headset. It is far from profitable, posting an operating loss of $10.2 billion for the full year.

“Investors will look at these numbers closely, as a first indicator that the metaverse is far from a profitable reality,” said Tom Johnson, global digital director at Mindshare Worldwide.

“Google found it difficult to develop a new business, the social network, to diversify its revenue, and it still depends on revenue from the search engine. Everyone will be looking for signs that Meta can overcome the challenge with the metaverse.”

Additional reporting by Richard Waters in San Francisco

Translated by Luiz Roberto M. Gonçalves​