When Meta released its Q1 2022 results, it disclosed that revenue was up only 7% from the previous year. Revenue for the quarter totalled $29.9 billion, representing the slowest revenue growth the company has achieved in the last decade. Notably, ad-generated revenue growth had decelerated from the previous quarter, representing a crucial component of Meta’s core business model. Meta—and much of the tech industry—is facing strong headwinds from factors such as a changing regulatory landscape and economic uncertainty amid the Russo-Ukraine war. Yet Meta must navigate these headwinds while protecting its advertising model, otherwise it may risk being able to maintain its planned investment into its metaverse.

Funding the metaverse

At the end of 2021, Meta (Formerly Facebook), made a bold move by rebranding itself and signaling to the entire industry that it wanted to be the company that embodies the Metaverse. Its Reality Labs division is tasked with creating the tools to effectively create this vision, developing both the requisite hardware and software. Meta has invested heavily into this division, which was operating at a loss of $3 billion in the first quarter of 2022. Due to this significant investment, Meta is relying on revenue generated by its Family of Apps (Facebook, Instagram, and WhatsApp) and the advertising model to fund this.

Meta spinning towards Reels

A clear shift is evident in how people consume content. There has been an obvious pivot towards short-form video content, with platforms such as TikTok recording a record-breaking growth in users. Meta has finally taken note of this and has developed its own version, known as Reels.

This is long overdue, but Meta revealed in its earnings results that Reels now account for 20% of the time spent on Instagram and video represents 50% of time spent on Facebook. But its focus on developing the metaverse may have distracted the company from developing Reels. As a result, Meta is now lagging behind its competitors, with TikTok surpassing Instagram as the most downloaded app in 2022.

Sacrificing Meta’s ambitions

Meta is still in the early stages of understanding how Reels will work for the company. It has not yet sure how it can successfully monetize Reels, with the risk of cannibalizing its ability to expand its ad-generated revenue. After its historic, first-ever, drop in daily users on Facebook at the end of 2021, user numbers have since recovered. However, this should not disguise the fact that it remains in stiff competition with other platforms, like TikTok, for user engagement.

Crucially, if Meta does not quickly learn how to monetize Reels, it will also be competing with itself, as watching Reels is accounting for a greater amount of time spent on Meta’s Family of Apps. Reels is also pulling users away from other places, such as the Newsfeed, and these are currently where Meta’s advertising model operates successfully, unlike on Reels, and are responsible for the vast majority of Meta’s revenue.

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By GlobalData

Banking on Reels

CEO Mark Zuckerberg warned that any rewards gained from pumping investment into the Reality Labs division would not be seen this decade, reiterating that it was a long-term investment. But focusing on the long-term should not mean sacrificing its core business model—especially considering that Meta plans on generating enough income operating growth from its Family of Apps to fund its metaverse ambition.

Although Meta stated that this would prove increasingly difficult, blaming business and economic uncertainty, this attribution ignores a bigger issue. There has been a shift in how we choose to consume media, and Meta must quickly adapt its advertising model in line with this. Failure to expand its Reels engagement and monetize this form of content will concern investors as only then can it successfully support its haemorrhaging metaverse division.