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Reality crashes down on Meta

After a decade of unprecedented growth, Meta has finally hit a wall.

Driving the news: The tech giant told investors Wednesday that it’s planning to cut costs, slow investments and reduce head count as it braces for what CEO Mark Zuckerberg called a “downturn” that has already begun to wreak havoc on its business.

  • While Meta is still massive — it now reaches more than 3.65 billion people monthly around the globe across all of its apps — its user growth and revenue growth have slowed significantly in the past few quarters.
  • The company on Wednesday posted its first ever year-over-year quarterly revenue decline since it went public in 2012. That came months after it reported Facebook’s first ever year-over-year user drop.

Why it matters: Meta became one of the biggest companies in the world by selling ads against an unprecedented trove of social networking data.

  • Now, amid privacy changes and increased competition, the company says its strategy needs to change even as its resources become more limited.
  • “We’re in a new era, where we have to do the same form of targeting, that same form of measurement using less data,” outgoing chief operating officer Sheryl Sandberg told investors. “I think we’re in the pretty early days of doing that.”

Details: Zuckerberg told investors that the company will need to “steadily reduce headcount growth over the next year” and that many teams “will shrink so we can shift energy to other areas inside the company.”

  • “This is a period that demands more intensity,” he said. “I expect us to get more done with fewer resources.”
  • Last week, Meta announced sweeping changes to Facebook that will provide a more TikTok-like experience, as it transitions from connecting friends to helping them discover new content that they can share privately. It also starting testing new features on Instagram that offer a similar experience.

Yes, but: That transition won’t come without pain points.

  • A slew of Instagram’s biggest stars publicly denounced the new Instagram tests, arguing the app was pushing creators to post more video over photos.
  • The new formats the company is transitioning to are less lucrative, at least in the short term.

  • For example, while engagement with the TikTok-like feature Reels grew 30% last quarter, the new format right now delivers less ad income than the older kinds of content it’s replacing, Zuckerberg said.

Between the lines: Zuckerberg’s ambitions for Meta to continue to invest billions in building the metaverse may run up against the realities of a tough ad market and the challenges of reorienting the company’s existing services to meet the challenge posed by TikTok.

The big picture: Facebook’s transition from a feed that connects friends to a “content discovery engine” marks the end of the social networking era, and in some ways, the end of Meta’s unprecedented growth.

  • Currently, algorithmic recommendations to posts from accounts users don’t follow make up around 15% of the content users see on Facebook and a little more than that on Instagram, Zuckerberg said. By the end of next year, that percentage is expected to double.

What’s next: Meta will face more revenue challenges as the year progresses.

  • The company offered sobering third quarter revenue guidance, and said it believes the weak advertising demand it experienced in the second quarter will persist in coming months.

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