Are meta-platforms losing ground chasing after the metaverse?

Fritz Jorgensen

Meta’s business

Meta (NASDAQ: META) business revolves around ads: Through its family of apps that includes Facebook, Instagram, and WhatsApp, Meta enables businesses to advertise to a specific target audience. All companies interested in advertising on Meta’s apps should participate in an auction system by which the prices of advertisements are decided: the more there is demand, the more the price increases. The lower the demand, the lower the cost per ad. In addition to social, Meta has been developing for several years a section dedicated to the study and marketing of products with augmented reality and virtual reality. This is the Reality Labs section, where Oculus VR, Beat Games, and (for now) Giphy are featured.

To date, the vast majority of Meta’s revenue (97.5% in 2021) comes from advertising, while only a tiny fraction is tied to Reality Labs, which requires billions in investment each year and is a heavily deficit to date. The company is betting on building a Metaverse and being the monopolist of this new market: to do this, it is converging as many resources towards Reality Labs, but without being able to predict any future returns.

How big is this metaverse?

Defining what the metaverse is is quite complicated because the definition must encompass the full spectrum of possibilities that can be realized through VR and AR technology. For example, Meta announced that it is continuing to expand Horizon, its Metaverse social platform in which avatars will be featured. So to this day, it is also difficult to imagine all the possible variations of the Metavers. However, if we are to trust an estimate, the revenue from the Metaverse could be worth over $1 billion.

metaverse revenue

Grayscale report

What the quarterly results tell us

Meta has reached 3.65 billion monthly users across all of its platforms. This number is roughly equivalent to 45% of the human population. It is therefore fundamentally impossible for Meta to significantly increase the number of new users until the socio-economic conditions in which the remaining 55% of the world’s population lives change. So we cannot expect Meta revenue to increase as users increase. DAUs and MAUs in Europe declined during the second quarter of 2022, offset by growth in Asia and South America. Additionally, Europe was negatively affected by the loss of users in Russia and Ukraine following the outbreak of war.

Meta map


If it can’t grow users, Meta’s only hope is to increase revenue per user, which the company did until the end of 2020. However, since then, revenue per user remained stable. What is the reason for this?

Meta arpp


There are two main reasons for this: the first relates to changes that Apple (AAPL) made to privacy controls, which made it much more complicated for companies to collect user data. With the new update, whenever users start using an app that leverages advertising and user data collection, a pop-up will be displayed to allow the user to prevent data collection . This change had a significant impact on Meta’s revenue in 2021 and continues to have an impact in 2022.

The second reason for the stagnation in revenue growth per user was the reduced value of advertisements. During the second quarter of 2022, the average price per impression fell by 14%, although this was offset by the growth in the number of impressions of +15%. Even during Snapchat’s (SNAP) quarterly earnings report, this reduction was seen in auctions, while Google (GOOG) didn’t seem particularly affected. The motivation is simple: in times of macroeconomic deterioration and recession, companies will cut costs that are not necessary to preserve margins. Unfortunately, one of these costs is precisely advertising.

Meta’s advice reflects this situation where users are not growing and ads are not producing like before. The company expects total Q3 2022 revenue to be between $26 billion and $28.5 billion and Reality Labs revenue to be lower than Q2 revenue (which was $452 million, in up 48%, mainly due to sales of Quest 2). In Reality Labs, spending for the quarter was $3.3 billion, up 19% due to higher personnel costs and R&D operating expenses. The company’s goal is to generate sufficient operating income growth from Family of Apps to fund Reality Labs’ investment growth while increasing overall profitability. To date, however, this situation is not present and investments in Reality Labs will be reduced to compensate for the drop in advertising revenue:

“We expect total spending in 2022 to be between $85 billion and $88 billion, down from our previous forecast of $87 billion to $92 billion. We have scaled back our overall hiring and growth plan spending to accommodate the more challenging operating environment while continuing to direct resources to our business priorities.”

What does Meta do?

It seems clear that a substantial change is occurring in the content of Meta and the way it is offered to the public. We talk about Reels and the use of AI. TikTok represented the equivalent of an atomic bomb in the world of social networks. However, the emergence of Chinese social has reminded us that Meta’s moat may not be that deep, and the company needs to show some adaptability to maintain its moat.

An example is the case of the use of artificial intelligence. AI will increasingly be used to recommend content to users that reflects their interests but is outside their circle of friends. The risk of this policy is that the social sense that has always characterized Meta’s products is lost, transforming the platforms from places of sharing into spaces of pleasure. In addition, the company must and will have to invest heavily to implement AI correctly.

The additional 11.5 billion CAPEX expected by analysts in 2022 corresponds to 20% of 2021 Operating Cash Flow. As for creators, the massive use of AI will benefit new content creators who will be able to reach a wider audience by little time but will disadvantage established creators, who will have a harder time retaining their audience. Choosing to increase the use of AI is arguably the best route Meta can take, but care must be taken to balance it with its social networking nature.

Another topic that sparked the Meta results call was Reels. These are increasing significantly, by 30% in Q2 alone and account for 20% of time spent on Instagram and more than half of content shared in posts. Reels have cannibalized other content on IG. However, they have generally increased the time users spend on the platform, which is a good thing. Also, from last year, ads on Reels were introduced. Reels still don’t monetize at the same rate as streams or stories, which is only to be expected as it’s a type of content that was only recently introduced. Even stories had taken years to monetize as much or more than streams. Reels have a higher revenue rate than Stories at identical times after launch, having already surpassed 1 billion in revenue.

The big problem Meta faces is the ability of small businesses to use Reels as it is easier for these businesses to use photos than videos as they require more time and money to create. The idea of ​​the company is therefore to help these small businesses by creating tools that make their work easier:

“We also launched AI-powered tools to simplify the creation of video ads for Instagram Stories, and we continue to test ways for advertisers to transform static images with music and motion, so that they look more like video.”

A less flashy but equally profitable activity is click-to-message. The company reported that one billion users message a business weekly on WhatsApp, Messenger and Instagram. Click-to-message is already a multi-billion dollar business and continues to see significant double-digit year-over-year growth, especially for small and medium-sized businesses in Mexico and Brazil. With this system, consumers and businesses have a direct connection, which can be achieved without excessive data usage. Click-to-Messenger ads generated 2.3x more qualified leads, resulting in a 57% reduction in cost per lead.


There are two ways to win in business, like in football: you can play attack or defense. Both have advantages and disadvantages. Unfortunately, Meta seems to have decided to play on the offensive, relying on its enormous resources to win all the prizes in the Metaverse. However, Meta cannot forget that its core business remains and will remain for many years that of advertising. In this area, the company seems to be running out of steam and is struggling to make up for its accumulated disadvantage. The transition to intensive use of AI will not revolutionize the company, but it will certainly make it different from what we know today, a little less social but a little more “Creator-friendly”.

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