Dive Brief:

• Meta Platforms saw revenue slide for the second consecutive quarter, down 4% year-on-year to $27.7 billion, according to a third-quarter earnings statement.
• The average cost per ad dropped 18% YoY, reflecting struggles to effectively target brand messages. The Facebook and Instagram owner also saw costs and expenses rise 19% versus the year-ago period to $22.1 billion amid a pricey bid to build the metaverse.
• The company offered mixed guidance for the fourth quarter, expecting revenue in the $30 billion to $32.5 billion range. Headwinds were expected but still offer a grim signal to a digital ads market combating a tough economy ahead of the holidays. 

Dive Insight:

After years on an upward trajectory largely unaffected by numerous controversies tied to brand safety and data privacy, Meta’s core business drivers appear on the wane. Q3 marks the second consecutive quarter of shrinking ad revenue, with a steeper loss compared to the prior period, when the segment slid 1% YoY. The picture does not seem to be improving much heading into Q4, a crucial window that usually heralds a spike in promotional activity due to the holiday season. 

The tech giant’s short-term challenges are clear and common to the social media category. A down economy is affecting advertiser demand, with even some well-performing verticals tightening their belts as they brace for a possible recession. Privacy changes Apple implemented last year are hampering the effectiveness and measurement of mobile campaigns that are Meta’s bread and butter, leading to what executives term “ads signal loss.” And TikTok, the teen-favorite app, is stealing attention away from Facebook and Instagram, which is putting the focus on a lookalike feature called Reels that is immature compared to other advertising levers. 

Still, there are some silver linings for Meta. The core big blue app is growing again after some stumbles earlier in 2022, with daily active users up 3% YoY to reach an average of 1.98 billion in September. Across Facebook and Instagram, Reels are played about 140 billion times daily, a 50% jump versus six months ago, according to CEO Mark Zuckerberg.   

At least for now, Reels effectively siphons off ad revenue from other products, resulting in a more than $500 million quarterly loss. Zuckerberg expects the situation to reach a more “neutral place” in the next 12 to 18 months as Reels continues to scale and attract brand investment. That’s a long time in the business world, particularly considering that almost every major competitor is developing a similar short-form video feature and ramping up the war for creator talent.

Meta’s other big bet, the metaverse, is at the same time drawing heavier scrutiny from investors and analysts. The endeavor has so far proved costly, while consumer adoption of offerings like virtual reality (VR) headsets remains low despite improvements to the user experience. Reality Labs, the Meta division charged with creating the technology that powers the metaverse, saw expenses up 24% YoY in Q3 to $4 billion. Its operating loss was $3.7 billion for the period. 

Heading into earnings season, reports surfaced that even Meta employees are reticent to use the company’s metaverse tools like the VR platform Horizon Worlds. Earlier demonstrations of the service drew widespread mockery on social media, hurting the project’s public image.

More importantly, stakeholders increasingly seem kind of fed up with the idea. Brad Gerstner of Altimeter Capital, a long-time investor in Meta, earlier this week published an open letter pleading to set hard caps on investing in the technology and put more energy toward business fundamentals. That’s a sentiment echoed elsewhere. 

“Mark Zuckerberg’s decision to focus his company on the future promise of the metaverse took his attention away from the unfortunate realities of today," said Insider Intelligence principal analyst Debra Aho Williamson in emailed comments, citing challenges like TikTok’s growing share of the market and Apple’s app-tracking policies. 

“As Facebook Inc., it was a revolutionary company that changed the way people communicate and the way marketers interact with consumers,” Williamson continued. “Today it’s no longer that innovative groundbreaker. While Alphabet’s poor Q3 results show that no digital publisher is immune to the worsening economy, Meta would benefit from less priority on the metaverse and more on fixing its core business.”