TikTok has quickly risen to social media superstardom. In 2018, the app surpassed Meta Platforms' (META 1.12%) Messenger, Facebook, and Instagram in overall mobile downloads, according to SensorTower. It was arguably that moment when Meta CEO Mark Zuckerberg recognized TikTok as a rising threat.
However, it took Wall Street a bit longer to catch on to the extent of the threat TikTok posed to Meta's family of apps. In Meta's earnings report for fiscal year 2021, the company revealed that it lost one million daily active users between the third and fourth quarters. While that might not seem like much, it was the first time in the platform's history that user numbers declined. .
During the accompanying earnings call, Zuckerberg explicitly mentioned TikTok as a quick-growing competitor for users' attention. He also emphasized the importance of Reels, Meta's own short-form video product, in attracting business from young adults.
Wall Street didn't respond well to the possibility that TikTok could unseat Facebook as the global social media king. In 2022, Meta's stock fell 64%.
Meta's response to TikTok's popularity is Reels, the copycat short-form video type. But will Zuckerberg's big bet on Reels pay off? Let's look at Reels to see if it can help Meta keep its social media crown.
NASDAQ: META
Key Data Points
Late to the party
Facebook made a name for itself by being one of the first social media apps to jump onto the digital scene. But for its family of apps to remain prominent, Meta will need to recognize newer trends and appeal to younger cohorts - especially those in Gen Z.
Born with a mobile phone in their hand and digital media at their beck and call, these younger generations have a much shorter attention span than their older counterparts. Some experts estimate that Gen Z has an attention span of eight seconds.
Companies like TikTok and Snap (SNAP 0.65%) were the first to capitalize on this phenomenon, creating short-form video formats that became popular with young users. As these newer social media companies attracted more users in the critical advertising demographic of 18 to 34, Facebook began losing advertising dollars in one of its most valuable segments.
TikTok and Snap had a new goldmine. Meta, meanwhile, was late to the party.
Reels hurts Meta's business in the short term
Since it introduced Reels on Instagram and Facebook in 2020 and 2021, the format has grown like a weed. However, to investors obsessed with analyzing quarterly reports, Reels' rapid growth hurts Meta's near-term revenue numbers.
How is that the case? Reels is still gaining popularity with global consumers, so Meta currently maintains a relatively light ad load on the service. As a result, the format monetizes at a lower rate than the company's more mature social media products like News Feed and Stories. Consequently, as Reels' user engagement rapidly grows, it displaces user engagement with more profitable formats, creating a revenue headwind. According to Zuckerberg, this headwind today costs Meta $500 million per quarter. Yikes!
Reels has competitive advantages
Although Reels started operations after its competitors, it does have some advantages over TikTok and Snap.
First, Reels can rapidly catch up to TikTok in engagement using Meta's artificial intelligence-powered content discovery engine, one of the best in the industry. Content discovery is one of the most critical factors for increasing engagement on a platform, as great content is only meaningful if users can find it. Additionally, this discovery engine is attractive because it allows users to search beyond short-form video content to include long-form videos, photos, text, links, social media communities, and other content on the internet.
Second, the company plans to take advantage of an emerging trend of social interactions moving to direct messaging. Since Instagram Direct, Facebook Messenger, and Whatsapp are some of the most popular messaging apps, the company has an opportunity to create momentum between content discovery and messaging, strengthening Reels and its messaging apps. For example, people already reshare Reels one billion times daily through Instagram direct messaging.
These advantages are already producing positive results. For example, Mark Zuckerberg said in Meta's third quarter 2022 earnings call that Reels had reached 140 billion plays across Facebook and Instagram daily, a 50% increase from six months prior. Better yet, management believes Reels is now gaining time spent share on TikTok.
As for those wondering when Reels will cease being a drag on revenue: During the same earnings call, Zuckerberg said Meta plans to bring Reels' monetization closer to Feed and Stories over the next 12-18 months, which should explode Reels' revenue beyond TikTok.
So, what's next for Reels? A wise person would bet on this stock going into an uptrend as Reels helps bolster Meta's dominance of social media.
