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Meta’s Next Five Years Comes Down to Reels

Buried in the vortex of topics around Meta’s September quarterly report is one core question. Can the platform successfully shift engagement and monetization away from Stories and toward Reels? Answering this question is more important than understanding the slowdown in ad spend ahead of recession, navigating the continued impact of IDFA, modeling the tightening of costs or understanding how leadership changes will impact the company’s priorities. If history repeats itself, Meta will eventually get the Reels formula right and return to growth. Maybe even with the help from a surprise TikTok ban in the US. Investors including ourselves should be prepared, and patient, because the transition will likely take a year or two to unfold.

Why is Reels so important?

Reels is important because short-form video is at the center of engagement growth. TikTok is a force that Meta has never had to compete with in the past. While exact numbers are not available, I estimate that global TikTok DAUs have increased from about 0.3B at the start of 2020 to 1.1B today. That compares to Meta’s DAUs increasing from about 1.7B to 2.0B during the same period. While a large portion of engagement comes from short video, its monetization has under-indexed given the user demo is largely below 30. That said, those users are getting older and spending more money and will be the center of the ad spending bullseye in the next five years. In short, to win in social advertising over the next five years, you need to have a large audience for short-form video.

Can TikTok be caught?

I believe they can be caught. This is in part because of the strength of the network of its two biggest competitors, YouTube Shorts and Meta Reels. Meta has never had first-mover advantage, but always found a way to catch up and surpass competitors with vertical growth. Instagram was never a competitor, but would have been if left alone. Snapchat was copied by Facebook in the form of Stories, essentially draining Snap of its growth potential, and now Meta faces TikTok. Comments from the Google earnings call indicated that momentum in its short-form video product, Shorts, is “encouraging.” Meta’s comments indicated that Reels is a net positive for overall engagement, up 30% QOQ. Some of that progress is attributed to Instagram filling its feed with Reels content, tricking users to view Reels. Call it a trick or smart marketing, it appears TikTok is slowly losing ground.

There’s also the wildcard of a potential TikTok ban in the US. I don’t think it’s as much a long shot as others believe. In 2020, TikTok was banned in India for geopolitical reasons. This could also happen in the US as distance grows between the superpowers, which could stoke concerns that the Chinese government will tweak TikTok’s content algorithm to influence public opinion. Essentially, TikTok is a weapon in modern information warfare. And, there is precedence with both YouTube and Facebook banned in China. My guess: There is a 50/50 chance that TikTok is banned in the US after the next presidential election.

Can Reels result in reaccelerated revenue growth?

First, Meta needs to build Reels engagement which appears to be on track. Next, they need to make money. Today, Reels is cannibalizing Meta’s overall revenue given that advertisers are not ready to make the jump from static ads to video. That will come over time. For some context on the Reels revenue ramp, it is currently on an annual revenue run rate of $1B. While this is small compared to the company’s $120B annual revenue, it’s encouraging given the product was launched in September 2021. Ramping short-form video into a $100B+ ad business will take time. The headwind will likely last a year and, in the back half of 2023, we should start to see stability if not an uptick in ad revenue growth.

Beyond five years, there’s the metaverse

While Reels adoption is today’s central question, the key question five years from now will be the impact of the shift to the metaverse. I believe that the metaverse is coming and that it’ll have a profound impact on how much time we spend online (I know, it’s hard to imagine spending more time online). I envision multiple forms of the metaverse including some 2D and some immersive. Either way, Meta will have a seat at the table which opens new revenue growth opportunities around advertising, commerce, work and play.


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