Meta’s Strategic Transformation Yields Impressive Results

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Things are starting to click again at Meta. Throughout 2022, the company’s outlook was clouded by metaverse malaise as the NFT hype was evaporating and skeptics penned obituaries for Meta’s metaverse. Doubters questioned Mark Zuckerberg’s priorities and control; share prices plunged. While some still doubt operating in an unsettled digital ad market rocked by inflation, global tensions, consumer privacy restrictions, and uncertainty, Meta’s outsized investments in the platform’s Reality Labs appear prescient, and the Twitter(X) alternative Threads is ascendant. Meta’s stock price is now nearing its all-time high. The force propelling this turnaround is (of course) AI. In the company’s Q2 earnings call, Zuckerberg described AI as a “major technological wave we are riding in our business.” This wave dovetails with Meta’s agile engineering chops, social media supremacy, and a culture that takes the long view.

“In Zuckerberg’s words, “One of the main transformations in our business right now is that social feeds are going from being driven primarily by the people and accounts you follow to increasingly also being driven by AI recommending content that you\’ll find interesting from across Facebook or Instagram, even if you don\’t follow those creators.”

Comprehensive AI Integration 

Zuckerberg emphasized the company’s plans to “build [AI] into every single one of our products.” Among Meta’s product suite, engagement with Reels has skyrocketed as the initial pain of its introduction and its criticism as a less compelling TikTok clone has faded. Zuckerberg boasts “Reels engagement is growing quickly. I shared last quarter that Reels already made up 20 percent of the time that people spend on Instagram. This quarter, we saw a more than 30 percent increase in the time that people spent engaging with Reels across Facebook and Instagram. AI advances are driving a lot of these improvements.”

Advertiser Optimism

While AI implementation is a recent development at Meta, the company’s sustained grip on global social engagement through Facebook, Instagram, WhatsApp, and Messenger holds firm. Even so, TikTok, which is far less transparent about its AI-driven recommendation software, challenges Meta’s dominance in user engagement and advertising dollars in the U.S. market. According to Insider Intelligence, TikTok’s U.S. advertising revenue growth increased by 23.1 percent in 2023. Meta’s growth increased 2.7 percent. While the growth rate differential is dramatic, to put it in perspective, Meta is still David to TikTok’s Goliath. Meta’s share of U.S. digital ad spend in the first two quarters of 2023 across its platforms was 19.5 percent, while TikTok’s was 2.3 percent.

TikTok is moving fast, but Meta’s premium advertising advantage demonstrates more than fifteen years of iteration under former COO Sheryl Sandberg. In her final analyst call covering Q-2 2023, Sandberg said, “We know we need to make it really easy for advertisers to create that content and to give them measurable tools. Small businesses are better at static photos than they are at video. I think we have tools that are working and a number of tools in development. But the idea is to help businesses really easily create those Reels ads and really easily test them”.

For retail, e-commerce, and brands, Meta’s recent success comes as a relief. A portion of the platform’s advertising revenues likely result from residual trust, habit, and lack of an alternative at a comparable scale, but as the business strategist Ben Thompson recently wrote in Stratchery, “The important thing for Meta is that the company has a proven track record of overcoming challenges. Its ad tools are much better than the competition, especially TikTok. That matters because advertising is an ROI equation.” Deborah Aho Williamson of Insider Intelligence concurred, “I would say Meta has way better performance advertising products [than TikTok]. Its Advantage series of ad products that are based on AI is one of its most successful product launches over the past couple of years, really helping the company turn around when it comes to building out solutions that combat the loss of information from privacy changes from Apple, and then now in the EU with the Digital Services Act. In sum, Meta may not have the creative pizazz of a TikTok, but it makes up for it by being a workhorse of the digital advertising economy, and something that advertisers can\’t live without.”

Meta’s Moat

Another differentiator of Meta is the global reach and depth of its user base. In the Q2 earnings call, analyst Michael Nathanson asked whether this advantage would be further fortified by AI, “The previous moat, we would argue, was just the social graph of billions of people, families, and friends. Do you think what you’re building now with AI is a better moat, is a better business than the one you had before.”

Zuckerberg hinted at the answer earlier in the earnings call, “One of the main transformations in our business right now is that social feeds are going from being driven primarily by the people and accounts you follow to increasingly also being driven by AI recommending content that you\’ll find interesting from across Facebook or Instagram, even if you don\’t follow those creators.” As AI increasingly drives the social feed, Meta will compound its existing social graph with its own iteration of TikTok’s addictive AI-fueled algorithms. Meta is perfecting the drivers of individual user engagement within its existing user base, feeding people not only products that they may find appealing but also determining what entertains them.

Slimmed Down and Dialed Up

Zuckerberg called 2023 “The Year of Efficiency at Meta.” In the last twelve months, Meta held four rounds of layoffs while simultaneously launching Threads, growing its user base at Reels, and rapidly adding AI features. Another long-anticipated and efficient shift is the requirement that all Shops on the platform enable checkout with Facebook or Instagram. TechCrunch reported that native checkout through Facebook or Instagram Pay will be compulsory for all new Shops on the platform, while the requirement will phase in for current Shops that connect to a company’s site for checkout. This requirement takes us back to the advertising/ ROI equation. When ads and conversions share the same platform, brands and retailers will collect measurable data as Meta demonstrates either a lackluster marketing effort or a virtuous advertising feedback loop.

As Meta continues the pivot to AI, the opportunity to train AI models on effective messaging strengthens the proposition. Meta has the scale, engineering, and problem-solving chops to keep advertisers coming back. While TikTok, Snap, and other challengers keep Meta on its toes, the company recently reported a 23 percent increase in advertising revenue in the third quarter of 2023 generating $33.6 billion. With its impressive advertising revenue growth and strong capabilities, Meta stands as a formidable Goliath in the ever-iterating integration of AI, social media, and commerce.

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