What’s new in Meta’s business model: Q2 2023 investor update
Analysis and commentary of Meta’s shareholder update from a business model perspective
In this update we will discuss the main call outs of Netflix in their Q2 2023 investor update from 25 July ‘23.
The key topics that Meta covered in this update are relating to their:
family of apps (Facebook, Instagram, WhatsApp, Messenger, Threads), their
Reality Labs segment (VR headsets and more broadly the Metaverse) and
their broader AIs endeavours (mainly Llama 2)
Interesting updates from a business model perspective pertained to:
You can also check out our article on the Facebook Business Model Canvas for more details (you can complete this article first).
Check out the video version of this article
You can also just watch the video version of this article. It does contain more info than the article.
Check out the entire video or your sections of interest:
00:00 Financial Updates Q2 '23
01:37 Biz Model Updates - Supply Side
04:46 Engagement Metrics, Discovery & AI
06:25 Competition (TikTok)
08:26 Evaluating new Value Propositions (Reels)
10:05 Demand Side Growth
13:25 Biz Model Updates - Demand Side
17:35 Reality Labs update
18:55 AI & other key topics
Revenue
Let’s start with the financial side. Total revenue was up 11% (YOY) and that is what drove the share price. Operating profit went up by 12% YOY.
98.4% of revenue came from advertising
0.7% from other Family of Apps revenue (share of developer revenues). This is a declining revenue source and lower both compared to YOY and YO2Y
0.9% from Reality Labs revenue (VR headsets, gear and “the metaverse”
Source for these figures and quotes in this article is Meta’s Q2 Earnings Call.
Business Model Canvas - Supply Side
We are showing the main updates in the business model canvas and splitting it in updates for the supply side and the demand side.
The supply side in Facebook’s business model are all users. They create advertising spaces on their phones/desktop while using Meta’s apps. These ad spaces are auctioned to the demand side (advertisers) which determines their revenue. Users can consist of many different types of people and organisations:
Ordinary users
Influencers, micropreneurs
Celebs, “VIPs” (esp on Instagram)
Businesses from the smallest to the largest
Advertisers typically come from the latter group and often have an organic presence as well as a paid one (as advertisers).
Meta biz model canvas showing the supply side updates from the quarterly report. Blue italics items are direct quotes from Meta
Artificial Intelligence drives Engagement
They have pointed out that their investments (of billions) in AI have led to measurable improvements in engagement metrics.
As Mark Zuckerberg pointed out, these billions, were spent (among others) to improve the Discovery System (being one of their key assets) and specifically the ranking and recommender algorithms.
Within the Facebook Feed and Stories (two of their most popular Digital Properties or as they call it “Surfaces”), this is manifested as updates from accounts that users dont follow. According to their updates, this has led to incremental engagement (as opposed to replacement engagement). In addition, we can assume this has led to additional followership and with that to an increase in network effects.
The diagram below from our Premium Products outlines that - when done right - Network effects and Platform design can translate the number of participants into over proportionally to usage (=engagement metrics) and revenue.
Based on the Q2 Earnings updates it’s clear that the updated AI algorithms have led to higher engagement metrics. But whether that has also translated to higher revenues is still another question that we will elaborate on when we cover the demand side updates.
Reels: the response to competitor TikTok
Things are a bit different when it comes to “Reels” which is another digital property (hence key asset) that was their main response to TikTok. The latter was/is probably the biggest direct competitor (in Social Media, not necessarily in Digital Advertising where Google is the key competitor) that Meta has faced to date.
They devised Reels as their key response to the risk of losing users to TikTok. It has been growing extremely quickly in terms of user adoption. And in this Earning Call they provided further convincing updates on the supply side (i.e. user side).
But as Meta pointed out for several quarters in a row, it was monetisation at lower rates than Feeds and Stories.
And that is a very interesting point. Because not always do usage metrics directly translate to revenue metrics. Many social media companies have experienced this.
Some of the reasons why this is the case are that (a) users scroll slower through reels and (b) it what not been taken up by their full demand side (i.e. advertisers). To that end they reported that 3/4 of advertisers have some form of Reels ads.
But it brings us to 2 interesting points:
The evaluation of digital properties within an App
Monetisation is a function of supply & demand
Let’s look at these points
How to evaluate new features / value propositions
New value proportions are typically provided through new (or modified) features. Within Apps, this usually occurs via new digital properties (“Surface” in Meta’s lingo) like Reels. Facebook has been giving selected data points on Reels in the previous Earning Calls to give investors a taste of how it performs.
The evaluation of new digital properties occurs over a period of time and has to be on a relative basis compared to other digital properties that could take that screen space and occur on several dimensions as shown below and in our premium products. We have pointed this out long before Reels ever existed because of its wider relevance.
Some of the evaluation metrics for digital properties include the relative comparison across:
Engagement metrics
Network effects (for platform business models)
Usage parameters (daily sessions, session duration, DAU/MAU, etc)
The data captured
Monetistion metrics
and more
Does the demand side grow with supply?
The business models of Meta’s Apps - especially Facebook and Instagram - revolve around creating user engagement which generates ad spaces on their screens (supply of ad spaces) and these to be auctioned off to advertisers (demand of ad spaces with targeting characteristics, etc).
All that we looked at so far which were Q2 updates from Meta revolved on the supply of ad spaces. And there was ample growth in these numbers which is good.
But another key question is whether the demand side has grown commensurately. And Meta has stated that this was not the case.
It was evidenced in ad monetisation metrics not growing in lockstep with supply. This has led to lower ad prices on average.
Some of the reasons were the lower monetising “surfaces” like reels and some other factors that we are elaborating on in our (free) video of this update.
Key demand side (=Customer) updates
Here is the demand side biz model canvas that shows the key updates to the Q2 shareholder update in the canvas.
It included interesting updates on WhatsApp advertising that reduces barriers to entry for businesses.
And and update on how AI algorithms support advertisers.
Check out the free video
There are more updates in our video coverage of Meta’s Q2 shareholder update which has more details on all the above plus on their updates regarding Reality Labs which includes their products on the MEtaverse, their VR headsets and more.
Check out the full video here…
Further Reading
For more details check out our article on the Facebook Business Model Canvas.