Success requires a better algorithm, and cooperation from advertisers and creators
(Bloomberg) — As Meta Platforms Inc. pursues an expensive, unproven metaverse strategy, success will depend in part on whether Instagram can pay the bills.
Instagram is a major growth driver for the company, with 2 billion monthly active users worldwide, closing in on the 2.96 billion who use Meta’s Facebook. Meta’s stock is down more than 70% this year, with investors unsure about two major bets. There’s the long-term investment in the metaverse, creating hardware and software for a virtual reality-fueled future internet. And in the near-term, there’s the initiative for improving the company’s social media recommendation algorithm, to better highlight content from people you don’t know— especially in Reels, the video format taking over Instagram.
Driving more revenue via Reels depends on getting advertisers comfortable with the format, enticing creators to share there and improving the recommendations, Adam Mosseri, the head of Instagram, said in an interview. The longer that takes, the less patience investors have with the dollars going to the metaverse. So Instagram is facing “a fair amount of urgency,” Mosseri said. “I’m trying to balance that urgency with making sure we don’t make any mistakes by pushing too hard or too fast.”
Instagram is locked in a battle for relevance among current social media users, and those of the next generation. The app is leaning into its short-form video feature, Reels, as a way to get people to spend more time on the app, going head-to-head with Bytedance Ltd.’s TikTok, which popularized the format. Instagram’s move to stay relevant with the internet’s tastes is important for maintaining user growth and for convincing advertisers to spend on the platform, even when marketing budgets are shrinking, said James Lee, managing director at Mizuho Securities.
“Instagram, by far right now, is a probably strategically more important asset to Meta” than any of the rest of its family of apps, Lee said. The number of users on Meta’s legacy Facebook app has largely plateaued over the past 18 months, while the amount it makes for each user slid to the lowest in six quarters.
But the wait to see if Instagram’s experiment pays off has been uncomfortable for investors. While Chief Executive Officer Mark Zuckerberg has said Reels will start contributing meaningfully to revenue in 12 to 18 months, for now it’s taking attention away from other parts of Facebook and Instagram that make more money – an opportunity cost of $500 million last quarter, as Meta spends heavily on experimentation in virtual reality and artificial intelligence. The stock lost almost a third of its value since the report to become the second-worst performing stock in the Nasdaq 100 this year.
Still, the fact that Reels is popular is promising, Mosseri said. Time spent perusing videos, he explained, is “milestone one.” People on Instagram re-share Reels 1 billion times a day through direct messages, the company said last week. That’s an important measure for Instagram as it blends the new, short videos from people you don’t follow, with friends’ posts.
Milestone two, he said, would be getting Reels ads to make money as quick as other places marketers can spend on the app. “We’ve hit milestone one — we are well on our way but not yet at milestone two.”
Instagram is moving away from exclusively showing photos and videos from friends and the accounts they follow, to those selected by an algorithm and what it gleans of a person’s interests. That’s required a massive investment in coding the artificial intelligence tools to make it happen, which is still a work in progress, and in the technology infrastructure to power it. Much of the expected growth in additional capital expenditures across Meta next year will go toward data centers and equipment.
“A ranking system that tries to surface what we call unconnected content of photos and videos from sources that you, or accounts that you do not yet follow is a very different technical problem than ranking photos and videos from accounts that you already follow,” Mosseri said. “I’ve been encouraged by the progress particularly in the last six months, but I think there’s a lot, lot more room to grow.”
Once that ranking system is improved, it won’t just help capture Instagram users’ attention – it will help inform the advertising business. Meta is trying to find new ways to target users with relevant promotions following privacy rules from Apple Inc. that have made it more difficult to gather user data on iPhones.
Some of Instagram’s path to increased relevance will also require luring the best talent to its platform. The company continues to try to win favor among influencers and professional content creators by offering more ways to make money, like selling NFTs or subscriptions to exclusive content.
Those features were announced at an event in Los Angeles on Wednesday, with social media stars in attendance. The historic Victorian-style Lombardi House was transformed into a playground for video creation. Staff with “Content Crew” T-shirts captured video in various backdrops, including a basketball court decked out with the familiar Instagram colors, and walls formed by large speakers.
“If they are able to fix the core business and things are turning around – IG reels is monetizing and they’re able to maintain the engagement – I think a lot of investors will start feeling better about the metaverse investment,” Lee said. “If they don’t fix it, then you know that that’s a bigger issue to come down.”
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