What’s causing the perfect storm at Meta?

Falling growth has led to a huge drop in Facebook parent’s value

As $200 billion (€177 billion) was wiped off the value of Meta, chief executive Mark Zuckerberg focused blame on falling profits and users at Facebook's parent company on a rival: TikTok, the viral short-form video app.

“The thing that is so unique is that TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base,” he said during an analyst call on Wednesday. “Even though we’re compounding extremely quickly, we also have a competitor that is compounding at a pretty quick rate too.”

Zuckerberg spoke after Meta warned that the current quarter was likely to be its slowest period of growth on record. Wall Street reacted in horror. Shares plunged 20 per cent, leading to the biggest ever single-day drop in market capitalisation for any company.

That dramatic fall reflected how investors foresee an even grimmer future beyond just new competition from TikTok. Other Meta executives, such as chief financial officer Dave Wehner, admitted it faced a perfect storm of "headwinds".


The company has lost about $10 billion in revenue since Apple brought in software privacy changes last year, damaging Meta's business model based on targeted advertising. Macroeconomic conditions such as inflation and supply chain disruptions were also squeezing advertisers' budgets.

The company has also scored own goals. Privacy scandals have contributed to user discontent. Younger users are fleeing to the likes of TikTok, owned by China’s ByteDance. For the first time since Meta went public, daily active users across its apps fell slightly, while monthly active users remained flat.

"This was one of the most shocking earnings of my 27-year career. It's insane," said Rich Greenfield, partner at consultancy LightShed. "Nobody was expecting it. There is no other way to react to that other than Facebook is facing an existential threat from TikTok."


That threat comes as Zuckerberg seeks to diversify Meta’s revenues beyond advertising. A Facebook-led initiative to launch a global digital currency, a hubristic effort to revolutionise global payments, was shuttered this week after stumbling into regulatory hurdles.

Zuckerberg has been left chasing after visions of the metaverse, an avatar-filled online world supported by virtual and augmented reality technology. “Facebook is being forced to build something that we have no visibility into until it bears fruit tens years into the future,” said Greenfield.

Facebook had previously seen off challenges to its hegemony in social networking by being acquisitive, such as snapping up photo-sharing site Instagram and messaging app WhatsApp. Meanwhile, its advertising business has been largely untroubled by rivals like Twitter and Reddit, which have not had the same access to detailed user data.

But Apple's changes to its iOS software which powers iPhones are having a devastating impact on Meta's model. That is in stark contrast to an unexpected surge in advertising at Google, which sent shares in parent Alphabet up by nearly 8 per cent on Wednesday. Google executives said they were seeing strong demand from advertisers across the board, particularly from retailers, and that consumer activity had been strong.

Some analysts suggested after Google’s earnings that it was indirectly benefiting from the same Apple privacy changes that have hurt Facebook. Its search advertising – the main source of its recent outperformance – is less dependent on personal data collected on Apple’s devices, leading some to conclude that advertisers have directed more of their budgets to Google and away from companies like Meta.

Wednesday’s results have also crystallised long-held suspicions that Meta is losing the war for attention to rivals, after it has lurched from crisis to crisis over privacy and moderation during the past decade.

Internal Meta documents disclosed by former Facebook employee Frances Haugen to regulators late last year revealed much fretting within the company over its growth problems.


A Forrester survey found that weekly usage of TikTok surpassed Instagram among 12 to 17 year olds in the US in 2021. "Such is the nature of social media," said Andrew Lipsman, analyst at Insider Intelligence. "There's a 'cool factor' that drives network effects."

Meta is attempting to clone TikTok with its own short-form video feature Reels. Last year, Zuckerberg announced that the company would be “retooling ... to make serving young adults the north star,” by making Reels a more central part of Facebook’s product experience.

The shift is forcing Meta to switch to a less profitable business model, where advertising placed in the video feed brings in less money than ads placed in a news feed or in its ephemeral Stories feature.

Zuckerberg said: “while video has historically been slower to monetise, we believe that over time short-form video is going to monetise more like Feed or Stories than like Watch,” a reference to Facebook’s long form video feature, which has so far been a flop.

In the longer term, Zuckerberg is prioritising his metaverse plans over the legacy business. He warned in the last quarter that the investment is “not going to be profitable for us any time in the near future” but added that he believes the metaverse will be the successor to the mobile internet and one day generate billions of dollars in digital commerce daily.

For the first time in its earnings, Meta broke out its Facebook Reality Labs unit, which accounts for its virtual and augmented reality products as well as its metaverse effort. This showed that it brought in $2.3 billion in revenues in 2021 after a bump in sales of its Oculus VR headset. It is far from profitable, posting a full-year operating loss of $10.2 billion.

First indicator

"Investors will look at these numbers closely as a first indicator of how far off the Metaverse is from being a profitable reality," said Tom Johnson, global chief digital officer, at Mindshare Worldwide.

“Google found it hard to grow a new business, social media, to diversify its revenue and it is still reliant on search dollars. Everyone will be looking for signs that Meta can crack the challenge with the metaverse.” – Copyright The Financial Times Limited 2022