Nov 10, 2022 - Economy

Meta's foundation is crumbling

Meta quarterly operating margin
Data: Meta; Chart: Tory Lysik/Axios Visuals

Meta, formerly Facebook, once seemed an impenetrable fortress, but it's now showing big cracks.

Why it matters: These problems run deeper than the current ad slowdown and won't be fixed by big layoffs announced Wednesday.

Driving the news: Meta said it will lay off 11,000 jobs, or 13% of its staff.

What's happening: While many other big tech companies are making or considering job cuts, Meta faces major structural challenges that predate this year's economic downturn — and now need to be addressed by a smaller, potentially demoralized staff.

Signs of slowed momentum have been surfacing for months.

  • The company reported its second consecutive quarter of year-over-year revenue declines last month, after confirming its first-ever user decline in February.
  • Meta's stock has lost more than 70% of its value this year, making it the worst performer so far this year in the S&P 500.
  • Its net income has grown significantly slower than its revenues in the past five years.
  • Meta said at the outset of the year that it expected Apple’s changes to app tracking would cut $10 billion from its bottom line this year — a huge tax on a company that was already starting to see growth slow.

The big picture: Meta has been investing heavily in a years-off metaverse future, while scrapping forays into cryptocurrency, gaming and live shopping.

  • At the same time, it has not found ways to counter huge near-term threats to its core social network advertising business, including an aging user base, the rise of TikTok and a new Apple privacy policy that makes ad targeting much harder.
  • The company's unchecked metaverse investment and hiring might have been sustainable in a growing market, but the sudden, sharp slowdown in advertising is making that project's cost stand out as a problem.

Between the lines: Meta's old playbook for dealing with setbacks and challenges isn't working any more.

  • New internal projects — including a Facebook Gaming effort to take on Twitch and YouTube as well as a live shopping feature for Facebook — keep getting scrapped.
  • Cloning the features and services of rivals worked to a degree to counter the rise of Snapchat, but it hasn't done much to fend off TikTok, despite the launch of Meta's TikTok clone Reels last year.
  • Buying other companies with promising new technologies and services — as Facebook did through its purchases of Instagram in 2012 and WhatsApp in 2014 —is largely off the table today thanks to a hostile antitrust climate in D.C.

"Meta is amidst an identity crisis," Forrester research director Mike Proulx said in a statement. "The company has one foot in a risky long-term metaverse bet and another foot failing to compete with TikTok."

  • "Expect more headwinds for Meta as Gen Z continues to exit Facebook and favor TikTok over Reels, and CMOs consolidate their slashed media budgets towards safe and sure bets.”

Yes, but: CEO Mark Zuckerberg, in a message announcing Wednesday's layoffs, told workers Meta had become a "deeply underestimated" company.

  • "Billions of people use our services to connect, and our communities keep growing," he wrote. "Our core business is among the most profitable ever built with huge potential ahead."

What's next: Meta still faces all the same problems that it has failed to address in recent years — only now with less ad revenue and a smaller staff worried about job security.

Editor's note: This story has been updated with Mark Zuckerberg's comment.

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