Meta’s clock gets TikTok’d

As a general rule, if a company is using its time with investors to discuss a rival, it is losing.

ByteDance Ltd.’s TikTok has proven so fierce a competitor for Meta Platforms Inc. that it mentioned the short-form video platform five times on its February earnings call. The company that essentially invented social media is now having to meaningfully alter its playbook to remain dominant in the game, possibly with lasting financial consequences.

. Meta launched Reels globally on Instagram in 2020 and on Facebook earlier this year. The company said last month that Reels was its fastest-growing content format “by far” and that it was already the biggest contributor to engagement growth on Instagram. While Reels is helping slow user attrition, investor attrition is another matter: Meta’s stock is down by a third this year.

TikTok, which last year said it reached one billion global users, is still early in its monetization efforts, formally launching ads on its platform in 2020. Reels is even earlier, though, and still seems to be giving priority to user engagement over ad dollars. Today one can scroll through as many as six or seven Reels on Instagram without encountering an ad; but you will likely run into an ad after just two Instagram Stories or Feed posts.

While Reels’ ad load is expected to ramp over time, its ads might never be as prevalent as they have become on some of Meta’s more mature formats. Morgan Stanley’s Brian Nowak estimates Reels could still be monetizing as much as 45% lower than core Instagram and Facebook even by the end of next year.

Positively, Meta has said recently that ads on Stories are finally monetizing at the same levels as its Feed ads in some geographies, suggesting Reels, too, can become much more valuable over time. There may be added costs, though. To attract quality content in what is already a competitive space, Meta says it will offer a revenue share to its Reels creators on some ad formats like overlays and stickers.

How much Meta will ultimately have to offer creators might be a function of how formidable the competition in short-form video really is. Morgan Stanley’s Mr. Nowak estimates that 40% of the Reels ad revenue will be subject to sharing with creators and that the company will pay out a generous 55% of that to them, consistent with what YouTube has paid out and what he said Meta has paid out in the past with Facebook Watch and Instagram’s IGTV. UBS’s Lloyd Walmsley thinks it will be much less. He says creators are accustomed to earning the bulk of their profits from sponsorships rather than revenue-share and that sponsorships broadly require them to build a large and diverse audience, obtained across a variety of platforms.

Meta has been clear that Reels usage will cannibalize some engagement on higher-monetizing formats like Newsfeed and Stories to begin with, but the hope is that overall engagement will climb, leading to increased ad revenue over time. Instagram this week announced several new messaging features in the hopes of making the platform more palatable for its users to spend long periods. But it could have its work cut out for it: While Instagram grew its audience by being a fresh, cool face in dedicated photo sharing, Reels feels a lot like a photocopy of an existing video app slapped onto a Meta platform.

Meta seems to have reached its expiration date, with many users set upon moving on to newer, shiner platforms. The risk is that its short-form video products fail to make the financial highlight reel.

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