Bumpy road ahead as Facebook looks to overcome challenges and crises

Facebook has 1.929bn daily users, but the first fall in numbers in 18 years triggered a share price collapse that wiped the equivalent of Portugal’s GDP off its value, writes Dan Milmo.

Mark Zuckerberg announced an immediate rebrand of Facebook to Meta, but everything has not gone according to plan. 

Mark Zuckerberg’s social media empire felt the full force of investors’ concerns about its growth prospects, as the revelation of Facebook’s first-ever drop in daily users helped trigger a share price rout.

It was the first set of quarterly results for the parent company of Facebook under its new name, Meta.

The huge collapse, wiping over $200bn off its value — more than the value of McDonald’s, or nearly the GDP of Portugal — came after Zuckerberg’s newly rebranded social media empire, Meta, said daily active user numbers at its main app — a key growth target for investors — fell to 1.929bn in the three months to December, from 1.93bn in the previous quarter.

The loss of about 1m users was the first drop in 18 years.

After a boom during the pandemic, markets have punished formerly hot tech companies including Netflix and PayPal for disappointing results.

While Meta’s revenues were slightly higher than expected at $33.7bn for the last three months, the drop in daily active users has grabbed investors’ attention.

Here are some key points to take away from the figures and why Meta’s stock fell 20% in after-hours trading.

Declining user numbers at Facebook

Facebook is Meta’s biggest app, and it recorded its first fall in daily active users — a key growth metric — since the company was founded in 2004.

It was led by a decline in users in Africa and Latin America, which is worrying for Meta because it needs to grow outside of its main market in the US, where growth fell too, albeit not for the first time.

Former Facebook data scientist Frances Haugen speaks during a US Senate hearing in 2021. PIcture: Jabin Botsford/The Washington Post via AP, Pool

Last year a whistleblower, Frances Haugen, released internal documents that included presentations warning that Facebook was losing young users. One document revealed that “engagement is declining for teens in most western, and several non-western, countries”.

TikTok is a problem

Picture: Sheldon Cooper/SOPA Images/LightRocket via Getty Images

Zuckerberg, Meta’s founder and chief executive, identified the video-sharing app TikTok as a key contributor to the user growth problem.

People have a lot of choices for how they want to spend their time, and apps like TikTok are growing very quickly,” he said on an earnings call.

Zuckerberg said he was “proud” of the work the company had done last year but acknowledged the company faced tough competition for attention from rivals including TikTok.

Chief of Facebook Mark Zuckerberg.

“Facebook’s big problem is competition for attention — there are only so many people and so many hours in a day and we’re already close to saturation point,” said Neil Wilson, chief markets analyst for trading platform markets.com

Chinese-owned TikTok has 1bn users worldwide, and is one of the reasons why Meta is struggling to compete in the market for young consumers.

On the call, Zuckerberg said he was hopeful Facebook’s rival to TikTok, Reels, would help win back young users.

“This is why our focus on Reels is so important over the long-term, as is our work to make sure that our apps are the best services out there for young adults.”

In the meantime, however, it means slower revenue growth, he admitted.

Hits to revenue growth

Meta makes 97% of its revenue from advertising, by building up profiles of its users that can then be matched to advertisers’ needs.

So if an advertiser is looking for a consumer in a certain location, of a specific demographic and with certain hobbies, then Meta can direct those ads towards particular groups, thanks to the data it has compiled about them.

Meta, which also owns Instagram and WhatsApp, said recent changes with Apple’s iOS software for iPhones had hurt the business. Apple now requires users to give permission for companies such as Meta to gather data about them as they browse across the web.

Unsurprisingly, users have said: 'No thanks', and it has made its ad targeting less effective.

The company said on Wednesday that the hit to its revenues this year would be $10bn — about 8% of last year’s income at Meta.

Sheryl Sandberg, Meta’s chief operating officer and architect of Facebook’s advertising strategy, said during an investor call on Wednesday that the company had ways of targeting users with less data.

There are also a lot of things that small businesses and large businesses can do to take advantage of the many targeting and measurement tools we have,” she said.

However, it should be pointed out that overall revenue did grow in the three months to December, up to $33.7bn compared with $28.1bn for the same period last year.

Net income — a US measure of profit — was $10.3bn for the quarter, down nearly $1bn on last year. Nonetheless, Meta remains a very wealthy and profitable business.

Patience — and money — is needed for the metaverse

The metaverse is a catch-all term for a blending of the physical and digital worlds, where people carry out their professional and social lives via a mix of virtual and augmented reality.

Zuckerberg is so convinced it is the next big thing in tech that he renamed the company from Facebook Inc to Meta. But it is years away from being a fully-fledged part of people’s lives.

So the results from Meta’s virtual reality unit — Reality Labs, which includes the top-selling Oculus VR headsets — showed a loss of $3.3bn on revenues of less than $1bn. This is the future of Meta’s business, so expect the revenues to grow, as well as the costs.

Meta also revealed for the first time how much it had spent so far on its new strategy.

The company’s Reality Labs division, which makes virtual reality goggles, smart glasses, and other yet-to-be-released products, spent more than $10bn in 2021.

The spending dragged down quarterly profits by 8%, and Zuckerberg has indicated that there is much more spending to come.

The company set out a series of issues that could affect growth in the near term, including platform and regulatory changes, as well as tough comparisons to a year when online advertising was boosted by the pandemic.

The move also followed a series of crises at the company, which has been blamed for promoting fake news worldwide, stoking hostilities, and invading privacy.

“Although the direction is clear, our path ahead is not yet clearly defined,” said Zuckerberg. “Last year was about putting a stake in the ground about where we are heading. This year is about execution.”

Dan Milmo is global technology editor at the Guardian