Meta announced earnings two days ago. The company missed analyst expectations on revenue slightly, with $28.8BN in revenue versus expectations of $28.9BN for a 1% decline on a year-over-year basis. As many news outlets noted, this was the first time that Meta has experienced a year-over-year decline, but this decline feels less meaningful than the unprecedented quarter-over-quarter decline that Meta posted in Q3 2021, the first full quarter for which ATT impacted a majority of iOS devices. Meta also posted a DAU increase of 3%, a 15% increase in ad impressions served, and a 14% decrease in average price paid per ad. Meta’s stock price, which had been up by almost 7% that day, dropped by roughly 6% in after-hours trading following the earnings release.
As I discuss in Unpacking Meta’s pivot to an open graph and short-form video, the total transformation of Meta’s underlying social infrastructure from a friend graph to an open graph is being led by Reels, its short-form video content format. Zuckerberg noted in the call that the company saw a “more than 30% increase in the time that people spent engaging with Reels” in the quarter across both the Facebook and Instagram apps, and Reels is obviously a critically important initiative for the company. From the article:
Meta’s goal with the open graph — and in prioritizing short-form video, which is generally more engaging and entrancing than short-form text-based content — is to expand the pool of content available to be exposed to each user. And with more content available to be shown to a given user, Meta benefits from more opportunities to score relevance and personalize the experience to that user: the user is exposed to the best and most relevant content from a larger pool of possibilities.
But just yesterday, Meta announced that it would pause the further rollout of a redesign of the Instagram app that rendered content in a way that mirrors TikTok’s form and function. This redesign had been met with considerable criticism from users and commentators; reshaping the entire Instagram experience to harness the power of the open graph for driving engagement is not a trivial task. But it’s a task that Meta must undertake — because Reels monetization is weaker than its other scaled content formats. From the call:
Reels doesn’t yet monetize at the same rate as feed or stories, so in the near term, the faster that Reels grows, the more revenue that actually displaces from higher-monetizing surfaces. Now in theory, we could mitigate this short term headwind by pushing less hard on growing Reels, but that would be worse for our products and business longer term since we’re confident that Reels will grow engagement overall and quality will eventually monetize closer to feed.
Zuckerberg also noted in the call that roughly 15% of content served in Facebook (“and a little more than that” in Instagram) is surfaced from out-of-graph accounts (accounts that a user doesn’t follow), and that these numbers are expected to double by the end of 2023. But the increased penetration of out-of-graph content in the feed — presumably in the Reels format — isn’t sustainable unless Meta can match the monetization of non-Reels placements. Simply increasing engagement and therefore ad impressions per session doesn’t necessarily improve revenue if the overall impression mix shifts to a lower-value format. There’s some indifference curve between Engagement and Monetization that Meta must navigate just to break even with a shift to Reels, let alone to drive revenue growth.
Zuckerberg makes the point in the call that this investment is worth making because he is confident that the long-term opportunity with Reels justifies it, but that assumes that Reels monetization can improve over time. In this Twitter thread from a year ago, I identified three time-based imperatives for the company on its journey to realizing its vision of the Metaverse:
- Short term: fix ads measurement to remediate the damage from ATT;
- Medium term: capture more first-party transaction data for use in ads targeting by expanding Content Fortress capabilities;
- Long term: disintermediate from non-owned platform app stores.
Fixing ads measurement is still the company’s most pressing imperative, even with the growth of Reels and other various initiatives the company is undertaking. Zuckerberg referenced a new measurement tool called Private Lift in the call, but the company’s incoming CFO, Susan Li, provided more general color on company’s efforts to improve measurement and, consequentially, targeting in the post-ATT environment in a follow-up call:
So to the first part of your question, Apple’s IDFA changes remain a headwind to revenue and to things like measurement and targeting in Q2, but it was not a contributor to the sequential deceleration in year-over-year growth relative to Q1. And, in fact, we started to see a benefit to year-over-year growth throughout Q2 because we were lapping the increased adoption of iOS 14.5 from a year ago, and we’ll get a further tailwind in Q3 as we lap the full first quarter of iOS impact. But that benefit has been really offset by the macro trends we discussed, by weaker advertiser demand, and that’s all reflected in the Q3 outlook.
You asked a question about Private Lift. That is in beta, so it’s pretty early. We don’t have a lot to say about that specifically yet. It’s just a measurement solution that we’re developing using secure multi-party computation so that Meta and advertisers can share results without actually seeing each others’ data.
In August of last year, Meta teased some of the approaches it was utilizing to build privacy-preserving measurement solutions. One of those approaches was Secure Multi Party Computation, which uses encryption and data separation to match data sets while limiting the visibility that any participating party has into the underlying component data. Private Lift utilizes multi party computation, as does Meta’s Interoperable Private Attribution (IPA) solution, which it is developing in cooperation with Mozilla.
The broader point is that, while Zuckerberg did address the company’s Content Fortress developments (“our approach here is to grow first-party understanding of people’s interests by making it easier for people to engage with businesses in our own apps”), Reels and the open graph are not panacea for the company unless the thornier problem of ads measurement and targeting can be solved.