As Zuckerberg bets on TikTok-style videos, Meta heads for first-ever revenue drop

Men take selfies in front of a sign of Meta, the new name for the company formerly known as Facebook, at its headquarters in Menlo Park, California, US, on Oct 28, 2021.
PHOTO: Reuters

Meta's future may lie in the metaverse, but when the company reports results on Wednesday (July 27) investors will be focused on two more immediate bets: pumping up short-video offering Reels to compete with TikTok and rebuilding its ads system after Apple throttled access to user data.

Chief Executive Mark Zuckerberg believes that will take time, and that the company needs to speed up the process, he told staffers on a call late last month. The discussion hit on key issues that will be watched in Meta's quarterly results release on Wednesday. 

Meta is expected to record its first-ever revenue drop in its history as a public company, down 0.4per cent to about $29 billion, according to IBES data from Refinitiv.

Investors are also bracing for flat user growth and a third consecutive quarter of profit declines and are watching for signs of hardware project cuts and slower hiring to manage costs. 

The social media giant this year has unveiled sweeping redesigns of Facebook and Instagram, imitating rival TikTok's look and algorithmically driven recommendations of viral short videos.

Meta is also investing heavily to rebuild its ads system around its own user data, after privacy changes introduced last year by Apple degraded Meta's ad targeting capabilities.

Zuckerberg told employees on the call, which took place on June 30, that Reels represented a "huge opportunity" for Meta, but also noted that the format was "still only around 15 per cent of the size of TikTok."

"I think realistically we're looking at a year and a half, maybe even longer, before we'll really have a line of sight to having a strong leadership position," he said.

The timeline for rebuilding the ads system was similar, he said. He repeatedly urged staff to increase their "intensity" to get through the period.

While Meta has the strongest first-party user data in the industry, it also "has a lot of credibility to restore before investors can get comfortable with maintaining its leadership position in digital advertising's secular growth," analysts from RBC Capital Markets wrote.

Zuckerberg told employees that the economy had worsened since executives first planned the Reels and ad changes, and outlined plans to expedite the transitions so profits from the core business could fund Meta's long-term metaverse bets.

"Our job is basically to bring in as much of the business that might be three years out into two years out, or one and a half years out, while also pushing on things like expenses and cost growth," he said.

If needed, he added, his inclination was to "take more pain in terms of a little bit less profitability" in the short term, rather than cutting back on "funding for future stuff."

The changes have created some backlash, though.

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Instagram, which has been testing TikTok-like features, last week postponed plans to replace the app's scrolling feed with a more immersive "panavision"-style layout that fills the entire screen, from October to early next year.

A Meta spokesperson said the company recognizes "that changes to the app can be an adjustment, and we want to take the time to make sure we get this right."

On Monday, two of Instagram's biggest users, Kim Kardashian and Kylie Jenner, both shared a meme imploring the company to "Make Instagram Instagram again."

"Stop trying to be TikTok I just want to see cute photos of my friends," the post said. It signed off: "Sincerely, everyone."

Instagram head Adam Mosseri acknowledged the criticism in a video on Tuesday, saying the layout was "not yet good" and the company would have to "get it to a good place if we're going to ship it" to all Instagram users.

The company would continue doing tests and shifting toward video however, he added.