Lean in

Reality Labs, Meta’s division for virtual reality and the metaverse, lost $13.72bn in 2022. The whole company made an operating profit of $28.94bn.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} Put another way, nearly half of what Facebook, Instagram and WhatsApp earned went on a bet that people will want to meet as cartoon torsos. Shareholders, who had watched this happen for some time, noticed. On 1 February Meta’s reply was to call 2023 the “Year of Efficiency”.^{2Yahoo FinanceMeta Platforms, Inc. (META) Q4 2022 earnings call transcript1 Feb 2023}

The numbers explain why. Revenue fell by 1% in 2022 to $116.61bn. Operating profit was down 38% and net income down 41%, to $23.20bn.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} Meanwhile headcount at the end of the year was 86,482, a rise of 20%.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} A firm whose sales shrink while its payroll grows is conducting an experiment in unit economics, and the results are in.

Mark Zuckerberg, Meta’s chief executive, had already begun the correction. On 9 November he told staff that about 13% of them, more than 11,000 people, would go. “I got this wrong,” he wrote, of his bet that the pandemic surge in online activity would last.^{3Meta PlatformsMark Zuckerberg's Message to Meta Employees9 Nov 2022} This week he went further, saying Meta was “working on flattening our org structure and removing some layers of middle management”.^{2Yahoo FinanceMeta Platforms, Inc. (META) Q4 2022 earnings call transcript1 Feb 2023} Susan Li, the chief financial officer, now expects total expenses in 2023 of $89bn to $95bn, down from a range of $94bn to $100bn previously.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023,2Yahoo FinanceMeta Platforms, Inc. (META) Q4 2022 earnings call transcript1 Feb 2023} Planned capital spending has also been trimmed, to $30bn to $33bn from $34bn to $37bn.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} And the company announced a $40bn increase in its share-repurchase authorisation, against $10.87bn remaining on the old one.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023,5U.S. Securities and Exchange Commission (EDGAR)Form 8-K, Meta Platforms, Inc. (Items 2.02 and 8.01)1 Feb 2023}

The cuts were handled decently, which is not a given in the industry. Laid-off American staff were offered 16 weeks of base pay plus two more for each year of service, with no cap, and hiring was frozen through the first quarter.^{3Meta PlatformsMark Zuckerberg's Message to Meta Employees9 Nov 2022} A firm that sheds about an eighth of its people while paying them properly has at least understood that the next hire will be easier if the last departure was not a scandal.

The revenue side is harder to fix by memo. Ad impressions rose by 23% in the quarter while the average price per ad fell by 22%.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} Meta is selling far more of a product that advertisers value far less. Part of that may be a weak advertising market, which would pass. Whatever the cause, the company cannot cut its way out of a falling price.

We think this is the right response. Public companies are meant to return capital that they cannot invest at a decent rate, and Meta had been investing at a rate that suggested the board was playing with other people’s money. The reaction was instant. By 2 February, according to Zacks, the shares were up by a quarter.^{4Zacks, via Yahoo FinanceMeta Stock Rallies Big on Earnings: Time to Buy?2 Feb 2023} That is a spectacular verdict on a few spreadsheet cells, and it says something that the market is pleased by a smaller cost line rather than any new product.

The company’s defenders make a fair point: the core business is in fine health. Some 2.96bn people used at least one of its apps every day in December, up 5% on a year earlier.^{1Meta Platforms, Investor RelationsMeta Reports Fourth Quarter and Full Year 2022 Results1 Feb 2023} Such reach is the reason it can afford to be sloppy, and the reason it can afford to tighten. A firm with fewer users would not have a $40bn cushion for buybacks. Ordinary competition would, one imagines, have forced some of this discipline earlier.

That is also the caveat. Cost-cutting has its limits. A company can only become 13% leaner once, and the shares will need something else to run on. Reality Labs’ operating loss in the fourth quarter alone was $4.3bn,^{2Yahoo FinanceMeta Platforms, Inc. (META) Q4 2022 earnings call transcript1 Feb 2023} and nothing announced this week suggests the metaverse has been dropped. The rally rewards the fast discount, not the argument that the long-term gamble will pay.

Efficiency is a fine thing to be good at. It is not a strategy, and Meta now has a year to say what the saved money is for.