Meta Platforms (NASDAQ:META) has been having a hard time lately, trying to convince investors that its metaverse plan will work and Apple’s changes to iOS. Its main business has been hurt by the growing and getting tougher competition in social media, especially from the Chinese company TikTok. Meta launched Reels as a counterattack two years ago, and it has been a critical step in keeping users from leaving for other platforms. Even though it took a while for the company to make up for the money it lost when people started paying more attention to Reels, Meta’s lack of flexibility in its core business will keep it from making more money in the future.
Meta Lets You Look at Short Videos
Meta’s move into short-form videos began with the release of Instagram Reels in August 2020 in 50 countries, Facebook Reels in September 2021 in the US, and a global rollout in February 2022. Meta has been putting a lot of money into Reels to compete with TikTok. They have a $1 billion creator fund and a Reels Play bonus program to reward the creator community for making Reels on Instagram and Facebook. They have also made technological advances to support algorithmic recommendations of Reels on Feeds.
The social media giant has been able to get regular users to interact with Reels, making people spend more time on Meta platforms and less time on competing ones. Currently, Meta offers two types of advertising through Reels: 30-second video ads that play between natural Reels and overlay ads that look like banners or stickers on Reels. The second one could be a better way to advertise. Advertisers can make their ads look like natural Reels videos, making it seem like viewers are watching two Reels videos back-to-back while the advertiser subtly changes how people think about their product or service. Interstitial ads that use the same format as the organic Reels feel less annoying because they blend in with other videos. This makes it less likely that the user will have a bad time. They’re also better at getting impressions than annoying pre-roll and mid-roll ads on longer video formats, which can help advertisers get a higher Return on Investment (ROI).
Reels, a new and efficient way for the social media giant to place ads, could keep advertisers interested in Meta platforms. Meta is smartly using the fact that it is popular on multiple platforms to make it easier for creators to reach audiences by letting them post their Reels on both Instagram and Facebook. So, advertisers can now reach a bigger audience, making Meta’s advertising solutions more appealing than its competitors that only work on one platform.
More than 140 billion reels are now played daily on Facebook and Instagram. From six months ago, that is a 50% rise. Reels slowly add more time to our apps. The way things are going right now is good, and we are passing competitors like TikTok in terms of time spent.
Meta is making more progress than Google (NASDAQ:GOOGL), which is also in the advertising business for short-form videos. During Alphabet’s Q3 2022 earnings call, SVP and Chief Business Officer Philipp Schindler said that YouTube Shorts had “30 billion daily views.” This is the same number of views they said earlier in the year. Google is also trying to get more people to watch its YouTube Shorts by making its app for smart TVs work.
Meta Needs to Move Faster
Because Reels ads were used more quickly, Instagram and Facebook have a combined annual revenue run rate of $3 billion. But the new way to make money from ads still needs to compensate for the lost money from Instagram and Facebook Feeds. Meta has improved its recommendation algorithms to get people to spend more time on Reels and less time on TikTok feeds. However, this change in how people consume content has not been easily and adequately monetized, which has slowed Meta’s revenue growth.
Given that Meta had a playbook based on ad formats around Stories, it is reasonable to expect faster ways to make money to make up for lost ad revenue. 12 to 18 months is a long time in the trendy world of social media, where users’ interaction and content-viewing preferences change all the time. TikTok first came out in mainland China in September 2016, and its popularity has grown worldwide since 2018, when it became easier to use.
With the release of Instagram Reels in August 2020 and Facebook Reels the following year, Meta fought back. According to Zuckerberg’s advice, investors should expect Meta stock to reach a more neutral position (more adequate ad-revenue generation through Reels) by the end of 2023 or the middle of 2024. This means that it takes Meta about three to four years after its launch and about six to seven years since the start of TikTok to change how it makes money. These are long delays in a field where social media trends change all the time. Former COO Sheryl Sandberg pointed out that making video ad formats is more complicated than making formats for still images and that small businesses need help to use these new ad formats. Meta has been a popular social media platform for more than ten years, but it has yet to change enough to keep up with the times, especially when it comes to making money. This makes it harder for Meta to keep growing its core business in a way that makes money in the future.
Social media sites only stay popular for a short time. Before, there was Myspace. Now, there’s TikTok (and copies of it), and in the future, there may be social media sites we have yet to hear of. Meta’s strategy for keeping up with changing social media trends used to be mergers and acquisitions (M&A), especially with the purchases of Instagram and WhatsApp. Due to increased regulatory scrutiny, mergers and acquisitions are no longer a good way to grow. Instead, companies must develop new ways to lead their industries. Meta has been working to make its platforms more interesting by adding things like marketplaces and shopping to get people to stay longer and make new connections. Even so, Meta is putting a lot of money into its virtual reality system, the Metaverse. How well the plan works is a different story. Still, it limits the amount of money Meta can spend to improve its core products and stay at the top of the social media market.
Meta Stock: Bottom Line
Meta’s move into short videos could give it more ways to make money from ads. The company has increased user interaction with Reels so that people spend more time on its platforms than on its competitors.
Meta will have to keep changing its platform offerings and, in turn, its ad solutions and formats to keep making enough money from ads. Meta should have found it easier to handle the rise of short-form video consumption as a transition from Stories to Reels. But the gap between launch and good monetization is noticeable, which makes me worry about Meta’s ability to quickly adapt to new trends that are very different from those seen in Stories/Reels. Meta needs to work harder to ensure that advertisers adopt new ad solutions quickly. This will help them deal with the challenges to top-line growth that will come from changes in social media trends in the future.
When deciding whether to buy or sell Meta stock, all business segments and product lines should be taken into account. Since this article is about reels, the stock will be given a “hold” rating, which means it is neither good nor bad.
Featured Image: Unsplash @ Penfer
