Facebook has already successfully revamped its business. This time will be harder

But in two years, the company had managed to turn the tide. In the first three months of 2014, its sales grew 72% year-on-year and its profits tripled after it reorganized to be “mobile-first”. This successful transition has since become part of Facebook’s tradition and a major reason for its dominance.
A decade later, the company, now called Meta (Facebook), is at a similar crossroads. It shocked Wall Street on Wednesday when it reported falling quarterly profits, stagnant user growth and a bleak revenue outlook for the start of this year, prompting the worst trading day in its history as a public company. .
CEO Mark Zuckerberg has positioned a combination of virtual and augmented reality technologies – which he calls the metaverse – as the innovation that will help change things like the pivot to mobile has done. He even called the metaverse “the successor to the mobile internet.”

But there’s a key difference for Zuckerberg’s company between today and a decade ago: While mobile technology was already a thriving platform when Facebook made this shift, the company’s vision of ” metaverse” – essentially an immersive virtual world where everyone can interact with friends. and strangers through digital avatars – is still years away, if it ever happens.

Hundreds of millions of smartphones were sold in 2012, the year Facebook went mobile. By contrast, only about 9.4 million VR headsets — which aren’t “the metaverse” but a stepping stone to getting there — shipped in 2021, according to technology market researcher IDC. (Meta’s Oculus headset is considered the most popular in this market, accounting for the majority of these shipments.) VR and AR technologies are also in their early stages of development (just look at all those legless avatars).

In the meantime, Meta’s activities are threatened on several fronts. Its user base is stagnant (and aging). Its core advertising business is challenged by operating system changes made by fellow tech giant Apple. And a series of scandals have put the company under the microscope of regulators, limiting its ability to buy its way to continued growth through acquisitions (although it has gobbled up a number of smaller companies for its push into the metaverse).

An undefined path to the metaverse

As these issues pile up in the real world, Zuckerberg is betting he can pull off another big transition into the virtual world. But even he admits some uncertainty ahead.

Regarding the company’s move to the metaverse, Zuckerberg said on this week’s earnings call that “while the direction is clear, our path forward is not perfectly defined.”

It is perhaps to say it charitably. Not only is the path not perfectly defined, but it is strewn with obstacles and extremely expensive. Meta’s AR and VR unit lost more than $10 billion last year, according to the company’s earnings report this week.

“Meta sacrifices its core business model for its fascination with the metaverse,” said Rachel Jones, analyst at GlobalData, a data analytics firm. “Betting big on the metaverse isn’t a bad thing – the technology should be huge and provide a wealth of opportunity – but it will take at least another decade to really kick off.”

And this is in addition to the many years he is already trying to popularize virtual reality. Facebook acquired Oculus in 2014, saying the headset had the potential to be a “new communications platform” – but it made relatively little headway against rapid mobile adoption.

In fact, despite its splashy rebrand bringing attention to the space last year, some of Meta’s competitors seem better positioned to lead the transition to the Metaverse, according to Angelo Zino, senior equity analyst at CFRA Research.

It points to rivals with more popular existing hardware products (Apple) or software products (Roblox) or just younger user bases that might be more likely to embrace the metaverse (TikTok and Snap). Facebook, on the other hand, is often seen these days as the place to stay in touch with older parents, who seem less likely to be early adopters of VR and AR technologies.

“You look towards [Meta] today and, yes, they have almost all the money in the world to spend on it,” Zino said. “But at the same time, there are many, many other players trying to do the same thing as Meta. trying to do… and I would say there are a lot of players who are way ahead.”

Real-world editing issues

Some critics of the company have speculated that Facebook changing its name to Meta and going all-in last fall was intended, at least in part, to distract from the company’s current problems. If so, this week’s investor reaction proved not to be very good.

Changes in Apple’s iOS 14.5 update have shaken Meta’s mighty ad business, making it harder to track users across the internet for ad targeting and to track the success of ad campaigns. The company expects to take a $10 billion hit from the changes in 2022, chief financial officer Dave Wehner said this week.

A perhaps more damaging long-term trend, if it continues, is that Facebook failed to gain new users last quarter. The company pointed to stiff competition for user time, including from rival apps like TikTok that are more popular with younger users. And with nearly 3 billion people already on the platform, Facebook faces the challenge of simply running out of humans it can convert into users.

The stagnant user base is “definitely a threat,” Zino said. “Once you get monthly active users like this to a screeching halt, it becomes noticeable to advertisers.”

Meta’s rough forecast for the current period – it projects revenue growth of between 3% and 11% in the first three months of 2022, compared to 48% growth in the first quarter of 2021 – could be a sign that it “loses wallet share within the ad space,” Zino said. (Meta’s ad business still accounts for more than 99.5% of its total revenue.)

The company told investors this week that it was betting big on Instagram Reels, its version of TikTok’s short-form video product, as a revenue stream. But Meta executives said the format has proven harder to monetize than other products. That may continue to be the case as Meta tries to sell it to its user base, which experts say is older than users watching and interacting with similar short videos on TikTok and Snapchat.

At another time, Meta might have tried to carve its way to growth through acquisition, as it did in 2012 with Instagram. (Notably, he reportedly tried to buy Snapchat in 2013.) After all, the company made nearly $40 billion in net income last year and ended the year with $48 billion in cash equivalents of cash and negotiable securities. But, unlike 2012, there are far more critical eyeballs watching the company, and regulators would almost certainly challenge any blockbuster acquisition. (In fact, Meta is currently battling an antitrust lawsuit over its acquisitions of Instagram and WhatsApp, both of which were shut down many years ago.)

All this presents many challenges for the company at once. “We were struck by the breadth of priorities the business juggles (seven?) simultaneously,” UBS analysts Lloyd Walmsley, Chris Kuntarich and Mary McKennon wrote in a note. to customers on Thursday. And analysts noted that most of them aren’t expected to “lead to a near-term improvement” in the company’s revenue.

In other words: Facebook has hit a wall and there is no easy way to get past it.