Facebook attributes ad decline to Apple, makes metaverse 'a major investment'

Facebook reported a 33% increase in ad revenue to US$28.3 billion during the third quarter of its 2021 financial year. Asia Pacific ad revenue grew 28% while rest of the world, Europe, and North America grew 50%, 35% and 31% respectively. CEO Mark Zuckerberg said during the earnings call that the company experienced revenue headwinds this quarter, including from Apple's iOS14 changes that are "negatively affecting" the business.

The total number of ad impressions served across Facebook's services increased 9% and the average price per ad grew 22% during the quarter. According to Facebook, impression growth was mainly driven by developing marketing, especially in Asia Pacific. COVID-19 resurgence in Southeast Asia have led to additional lockdowns and a curtailment of economic activity. Meanwhile, marketing and sales increased 32%, mainly driven by marketing spend and hiring. 

Similarly, COO Sheryl Sandberg said Apple's changes "advantaged [its] own advertising business" and that Facebook began to see the impact in the second quarter. As a result, it encountered two challenges: the decrease in accuracy of ad targeting, which increased the cost of driving outcomes for advertisers, and measuring those outcomes became more difficult.

Another external factor is slowing eCommerce growth. According to Sandberg, the strong eCommerce growth in recent quarters was driven in part by the acceleration of the digital transformation that she said is now tapering off. While this does not mean eCommerce has stopped growing, Sandberg said the channel is no longer growing at the pace it was at the height of the pandemic. "Overall, if it wasn't for Apple's iOS14 changes, we would have seen positive quarter-over-quarter revenue growth," she added. According to her, these factors have been compounded for many advertisers by major global supply chain issues and labour shortages. 

Facebook is not the only company to have been impacted by Apple's iOS14 change. Snap CEO and co-founder, Evan Spiegel, said during its recent Q3 2021 earnings call that the change made it more difficult for its ad partners to measure and manage their ad campaigns for iOS. This impact was compounded by the ongoing macroeconomic effects of the global pandemic, with Snap's partners also facing a variety of supply chain interruptions and labour shortages. According to Bloomberg, Snap's stock also tumbled following its results, as well as stocks for Alphabet, Facebook, Twitter and Pinterest, which dipped between 3% and 5%.

The tech giant was recently reported to be mulling a rebrand to highlight its focus on creating the metaverse. Media reports such as Reuters and The Verge said the name change would likely position the flagship Facebook app as one of the several products under a parent company with brands such as WhatsApp, Instagram, and Oculus.

(Read also: Facebook reported to rebrand. But will it really help rescue its image?)

Zuckerberg reiterated this during the earnings call, saying that the metaverse is "a major investment" for the company and an important part of its strategy. "Our goal is to help the metaverse reach a billion people and hundreds of billions of dollars of digital commerce this decade," he added.

To reflect the significance of this investment for the business, Facebook will begin disclosing financial metrics for Facebook Reality Labs separately from its family of apps. According to Zuckerberg, this will provide investors with additional visibility into the investments that the company is making in AR and VR. It also expects these investments to reduce its overall operating profit by about US$10 billion and Zuckerberg expects this investment to grow even further for each of the next several years. Currently, Facebook has been laying the building blocks for the metaverse, such as the recent launch of Quest 2. It also rolled out its first smart glasses together with EssilorLuxottica.

Meanwhile, video is still a segment that is growing for Facebook. More than 60% of its video revenue now comes from mobile-first video, and over two billion people per month now watch videos that are eligible for in-stream ads. Facebook is expanding access to Reels ads on Instagram to more advertisers with automatic placement and new creative formats.

As the company moves into the fourth quarter, Sandberg said it is working to fix measurement issues that businesses on its platform are experiencing and will bring exclusive gifts to Shops, as well as host daily Live Shopping experiences. 

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Separately, on the branding and reputation front, Facebook has been in the media spotlight over the past few weeks ever since The Wall Street Journal published its investigative series titled The Facebook Files, which alleged that Facebook's products are causing harm to users, such as mental health issues among teenagers. The company was also alleged to have prioritised profit over user safety. Just yesterday, former Facebook employee and whistleblower Frances Haugen also leaked internal documents to several news outlets, CNBC reported.

While Zuckerberg previously stated that claims about Facebook putting profit over its users' safety and well-being are untrue, he also addressed them in yesterday's earning call. According to him, large organisations should be scrutinised and good faith criticism helps the company get better. However, he views the recent string of events as "a coordinated effort to selectively use leaked documents to paint a false picture" of Facebook. 

He explained that when decisions are being made, the company needs to balance competing social equities, such as free expression with reducing harmful content, or enabling strong encrypted privacy with supporting law enforcement, or enabling research and interoperability with locking down data as much as possible. 

"It makes a good soundbite to say that we don't solve these impossible tradeoffs because we're just focused on making money, but the reality is these questions are not primarily about our business, but about balancing different difficult social values. And I've repeatedly called for regulation to provide clarity because I don't think companies should be making so many of these decisions ourselves," he added.

According to Zuckerberg, the company has made "massive investments" in safety and security with more than 40,000 people and it is on track to spend more than US$5 billion on safety and security this year. He believes this investment is more than any other tech company and that Facebook sets the standard for transparency with its quarterly enforcement reports and tools such as its political ads archive. He also sighted the Oversight Board model as a model of self-regulation, as well as a new model for independent academic researchers to safely access data. 

"I also think that any honest account should be clear that these issues aren't primarily about social media. That means that no matter what Facebook does, we're never going to solve them on our own," Zuckerberg said. He added that if social media is not the main driver of these issues, then it probably cannot fix them by itself either. Nonetheless, Facebook's three product priorities remain its focus on creators, commerce, and building the next computing platform. 

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Photo courtesy: 123RF

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