Virtual Reality Hits Economic Reality as Meta Posts First-Ever Sales Decline

Just nine months into its new life as Meta Platforms and the social media giant’s money-losing pivot to the metaverse and augmented reality has slammed head-on into economic reality.

Not only did the renamed parent company of Facebook, Instagram, WhatsApp and Reels just deliver its first-ever decline in sales, but CEO and Founder Mark Zuckerberg told investors that hopes for a near-term turnaround were unlikely.

“We seem to have entered an economic downturn that will have a broad impact on the digital advertising business,” Zuckerberg told analysts on the company’s second quarter earnings call Wednesday (July 27) afternoon.

“It’s always hard to predict how deep or how long these cycles will be, but I’d say that the situation seems worse than it did a quarter ago,” the 38-year-old billionaire added just hours after the Federal Reserve approved its fourth rate hike this year as the central bank wrestles with its own economic challenges in the form of rampant inflation.

Trouble Ahead, Trouble Behind

Along with Meta’s gloomy outlook, reduced guidance and the reported 1% dip in revenues for the three months ending June 30, Zuckerberg also outlined a future that will see less spending, reduced investment, slower hiring and shrunken headcount.

The companywide reorg and rethink comes at a time when Meta’s former $1 trillion market valuation — as well as its founder’s net worth — have both been cut in half in the past 11 months, with the company shifting its focus to longer-term pursuits and outcomes aimed at making it stronger when economic conditions improve.

See also: Meta, Apple Competing to Conquer the Metaverse

“Based on the revenue growth we were seeing in 2021 we kicked off a number of multi-year projects to accelerate our business,” Zuckerberg said, “but given the more recent revenue trajectory that we’re seeing, we’re slowing these investments [down],” he added, while noting that other planned expenses for the next year or two would now be pushed out even further.

As striking as that strategic downshift and leaner forecast were, Zuckerberg wasn’t finished, and went on to address Facebook’s other sore spot — its highly paid employees — whose ranks grew 30% in the past year to more than 83,000.

“Our plan is to steadily reduce headcount growth over the next year,” Zuckerberg said. “Many teams are going to shrink so that we can shift energy to other areas inside the company,” he cautioned, echoing a policy that has been espoused by most — if not all — of Meta’s so-called “Big Tech” rivals in recent weeks.

AI and Adios

While many investors and skeptics have derided the social media company for its turbulent transition and rebranding, Meta is still very much aligned with the metaverse, which Zuckerberg called out as being one of two trends the company was riding.

“The first wave driving our business today is AI,” he said, “and then the second longer term wave is the emergence of the metaverse.”

In the case of the former, and with Meta’s average price per ad down 14% last quarter versus a year ago, Facebook and Instagram users can expect to see substantially more computer-curated posts from strangers populating their feeds in the coming weeks and months compared to the musings, rants and “cat pics” uploaded by actual friends.

At the same time, the company is trying to balance the the needs of advertisers — and some widely followed and influential celebrities — who prefer a little more time to convey their messages against the rising demand from users for more short-form videos, such as those on TikTok, YouTube Shorts or its own Reels platform.

In fact, just yesterday, the head of Instagram, Adam Mosseri, made an effort to rebut criticisms about increased video and changes to recommendations, assuring angry users that photos were not going away — but neither was video.

“I want to be clear. We’re going to continue to support photos. It’s part of our heritage,” Mosseri said in his Twitter video post. “That said, I need to be honest. I do believe that more and more of Instagram is going to become video over time. We see this [happening] even if we change nothing.”

Meta also said it sees AI as the solution to the “signal loss” it, and other websites, have suffered as a result of changes to Apple’s iOS location and tracking systems that make it easier for users to opt-out.

See also: Alphabet’s Pichai Says AI to Power New Wave of Growth for Google Search

“Our approach here is to grow first-party understanding of people’s interests by making it easier for people to engage with businesses in our own apps,” Zuckerberg said, “whether that’s through business messaging, shops or new ad products.”

One other thing that is changing at Meta is the C-suite, as current CFO David Wehner will assume the new role of chief strategic officer Nov. 1, and be replaced by Finance VP Susan Li. At the same time, long standing COO Sheryl Sandberg made her last earnings call appearance ahead of her recently announced transition to full time philanthropy in the fall.