There's no doubt that Meta Platforms (META -1.12%) CEO Mark Zuckerberg is focused on TikTok. He mentioned the company by name five times during the company's fourth-quarter earnings call earlier this year. All that focus on short-form video, though, may be paying off.

The company's Reels product, available on Facebook and Instagram, is set to surpass the pioneer in the space by next year, according to Truist analyst Youssef Squali. He sees Meta's Reels generating more revenue than TikTok (excluding China) by next year.

A massive shift

There's already a massive shift in time spent on Instagram toward Reels. The feature makes up more than 20% of time spent on the platform, Zuckerberg shared on Meta's first-quarter earnings call. Video, in all its forms, accounts for 50% of time on Facebook, he said.

But Meta's ability to monetize Reels hasn't followed as quickly. As Meta catches up by building new ad technology in order to maximize the value of the new format, it's competing with TikTok.

The Chinese company is expected to generate $5.96 billion in revenue in the U.S. alone, according to analysts at eMarketer. The U.K. -- where TikTok is still growing rapidly -- will add another $1.04 billion. Squali estimates Reels will generate $5.6 billion in revenue for Facebook in the U.S. this year.

As Facebook works to increase engagement on Reels and improve monetization, it should see revenue surpass TikTok's. If Reels can generate average ad revenue per minute of engagement equal to the rest of the time spent on Instagram, it would translate into around $8 billion in U.S. revenue next year, based on eMarketer estimates.

That said, Reels is somewhat cannibalistic to Stories and feeds in the Facebook and Instagram apps. "Reels does pull time away from other surfaces, but we do believe it's additive to overall engagement," CFO David Wehner told analysts on the first-quarter earnings call. While improving engagement and monetization should help offset headwinds elsewhere in the ad business, it's not pure growth. 

That said, even for a company with $120 billion in annual revenue, a $10 billion product built in three years is still impressive.

The long-term potential for Reels

What makes Reels a great long-term investment for Meta is the artificial intelligence investments that go alongside it. TikTok grew extremely popular because of its recommendation engine. Its "For You" section -- which the app opens to by default -- can suck you in and get you to keep scrolling forever. There's no need to explicitly follow any accounts.

Meta is building on that concept, improving its recommendation engine for Reels over time in order to become competitive with TikTok. What it's found, however, is that it can apply that same AI engine to its feed. Now it's surfacing content in feed from accounts users don't follow, and it's driving increased engagement.

Beyond that, Meta can use the same AI to surface more relevant ads. This becomes especially important in the face of signal loss from the iOS changes that went into effect last fall. Meta is working to improve targeting as well as measurement, and the AI investments it's making for Reels ought to improve its ability to surface ads that are most likely to engage users.

While Reels may be growing quickly for Meta, potentially surpassing TikTok by next year, it's still only a portion of the business. That said, the broader impact on Meta's social media business could be even more substantial.