Meta’s Q3 earnings point to turbulence ahead in the social marketplace

Meta’s Q3 earnings revealed strong revenue growth coming from its core business and “major milestones… toward delivering personal superintelligence for everyone”. Beneath that is a more  turbulent picture, however: low user growth, potential ad saturation of its existing audiences, and costly lawsuits and AI investments that could potentially spell disruption down the line. 

The core app business points to incumbency

Meta was able to point to a 26% revenue increase YoY, due largely to its family of apps (Facebook, Instagram, and WhatsApp). Meta’s app suite leads the marketplace across global regions, as highlighted in MIDiA’s upcoming social user market shares report.This makes it a strong ad partner, driving this continued growth. 

However, the flip side is that actual user growth is low. Daily Active People were only up 3% YoY, with increased revenues coming from more ad placements (impressions were up 10%) and higher ad pricing (cost per ad was up 14%). This means the revenue increases are coming from higher ad loads for audiences and higher prices for partners – not new users coming online. 

An increase in ads seen by audiences can undercut the quality of platform experience and overall ad efficacy. In turn, business partners end up paying increasing rates for decreasingly effective ads. While beneficial in the short term for that bottom line, in the long term, this creates the conditions for customer dissatisfaction. 

However, the silver lining for Meta comes with the launch of its new subscriptions. Facebook Plus and Instagram Plus offer users a low-cost way to experience the platforms without personalised ads. As the platforms become more saturated with advertising, this incentivises users to try out the subscriptions, ultimately growing a new revenue stream. 

Regulatory pressures are growing

Meta’s recent $18 billion US settlement had a huge impact, reducing its Q3 operations income by nearly half. With the report noting other pending legal cases and regulation that could “significantly impact” Meta’s business, this is no small aside. 

These impending regulatory and legal pressures will cut into profits. Meanwhile, regulations centring around protecting younger users will restrict user growth and potentially even ad efficacy. For example, if the infinite scroll becomes optional or is eventually altogether banned in the EU, this will by design reduce time spent on the platforms, and therefore ads served. 

It is rare that a market is so heavily affected by legal and regulatory shifts in real time. This is because social media, and Meta in particular, has emerged in a space largely unaddressed by legislation. As legal systems finally catch up to what is (in regulatory terms) still a “new” industry, the impact will go beyond quarterly earning numbers.

The cost of Meta’s AI-powered future

Meta has leaned hard into an AI-powered future with its AI-connected wearables – a bet it continues to back with heavy investment. As a public company with a strong core business, Meta has been able to play both sides: invest its own revenue heavily, while keeping investor confidence high on the hope of long-term gain.

However, the window for AI’s initial investment bubble is closing. The market will not accept limitless spend on development without returns for long. OpenAI has hinted at an IPO for some months now, and Anthropic officially filed with the SEC on October 26th. More than having an impact on any specific AI company, once one of them goes on the stock market, the bet gets called. Prospective investment will be over, and the new question will be: Just how much is AI worth? Meta won’t be immune to this. Its own shareholders will look at the value of the company’s investments and use Anthropic’s stock benchmark to judge just how much Meta’s AI investments will pay off long-term. If Anthropic’s stock thrives, Meta will have more runway to play with; if it performs poorly, Meta is going to have to turn its own numbers around rapidly. 

An incumbent company making big bets

The Q3 earnings call highlights Meta’s incumbency. It is at a stage of revenue optimisation rather than user growth, and its AI bets are going to be called along with the rest of the AI industry when Anthropic finally enters the open market. Further court cases could, meanwhile, chip away at its foundations. 

Meta is too big to fail from any of these pressures alone, but together, they could create an opening for competitors to take its top spot in the marketplace. This could come from an existing smaller, more agile competitor like Snapchat. Or from more streamlined major propositions such as YouTube and TikTok. The likely result is greater market fragmentation, but if Meta’s business model becomes a downward flywheel, there could be even bigger impacts across media, marketing, and social networks more broadly as they all try to find new common platforms to use.