Facebook CEO Mark Zuckerberg defended his company’s massive changes of recent years, like its pivot to the metaverse and rearranging its social media apps to compete with TikTok, as the company dealt with its first revenue drop year over year in its history.

On Wednesday, Meta announced quarterly results that showed a slight dip in overall revenue and ad revenue compared to the second quarter of 2021. Meta’s ad revenue, which encompasses Facebook and Instagram, was $28.15 billion in the second quarter, down from $28.58 billion in the second quarter of 2021. Total revenue dropped 1% year over year to $28.82 billion. Meta’s stock is down about 50% since the start of the year, and saw another modest drop of about 4% in after-hours trading on Wednesday.

“We seem to have entered an economic downturn that will have a broad impact on the digital advertising market,” Zuckerberg said in a call with Wall Street analysts after releasing results on Wednesday.

Meta’s social media platforms are under threat from Chinese-owned TikTok, which is grabbing a greater share of attention from consumers, creators and advertisers. Meta also has been affected by Apple’s platform changes, which really kicked in last year with its new App Tracking Transparency rules, forcing all apps to collect express permission from users to collect data about their behavior on iPhones. Without that permission, it has become more difficult for apps like Facebook and Instagram to report to marketers how their ads perform. There also is a tougher general economic climate that is weighing down brands’ appetite to spend money on marketing, which makes the effects of Apple’s changes doubly damaging to Facebook.

In its earnings report, Meta said that ad impressions grew 15% year over year across its family of apps, but that the average price of ads dropped 14% year over year. Meta said its monthly user base increased across its apps to 3.65 billion, up 4% year over year. Meta’s leadership is in flux, too, as longtime chief operating officer Sheryl Sandberg is set to leave the company in the fall. She has been with the company since 2008 and was key to its advertising fortunes.

Zuckerberg defends Reels

On the call with analysts, Zuckerberg had to address how Facebook and Instagram are redesigning their experiences to focus on Reels. Reels are short-form video products that mimic the experience of TikTok, which has become an attention-getting machine. Meta has to show how Reels can appeal to its users, and eventually generate ad revenue. “We’re confident that Reels will grow engagement overall and eventually monetize closer to Feed,” Zuckerberg said. “Feed” is the personalized content stream that has been the engine for targeted ads on Facebook and Instagram.

Instagram introduced Reels in 2020, followed by the format coming to Facebook. There has been some vocal user pushback against how Reels are changing the experience on Instagram, but Zuckerberg and other executives were confident that the video format is the future of social engagement. Instagram and Facebook have been through this type of re-design before when they introduced Stories, which are another type of video that the platform borrowed from another rival Snapchat.

Why Reels are so significant

Reels are not just a format change. Reels also change the mix of content that everyday users see in their apps, because Meta is trying to train its artificial intelligence to surface media to people, even if it’s from accounts they don’t follow. Facebook and Instagram are moving from “social feeds driven by people and accounts you follow to increasingly driven by AI,” Zuckerberg said.

Zuckerberg said that right now 15% of a person’s Facebook feed is recommended by AI, and a little more than that on Instagram, and he expected that figure to double by the end of the year. Zuckerberg also said that Reels ads have reached a $1 billion revenue run rate, attaining that milestone faster than Stories had at this point in their lifecycle.

Sheryl Sandberg says goodbye

Sandberg participated in the earnings call, marking her last appearance there before leaving as chief operating officer. Sandberg will remain on the board of Meta. “It’s really hard to overstate how big of an impact Sheryl has had,” Zuckerberg said, on the business and “me personally.”

Sandberg presented her usual advertiser report saying that brands were testing Reels successfully as an ad format. Sandberg said she saw “significant potential for growth in the future. It’s going to take time but we have a playbook.”

Metaverse still on the roadmap

Meta’s emphasis on being a metaverse-first company has drawn skepticism since its business plan seems vague. Zuckerberg is chasing a future in which virtual reality and devices will be ubiquitous, and change commerce and daily life. It will “unlock hundreds of billions of dollars, if not trillions over time,” Zuckerberg said.

That said, Zuckerberg did hint at belt-tightening at the company during the current economic climate, which many companies expect could lead to broad retractions.

Apple looms

Of course, Apple’s platform changes have hit a lot of apps, including Facebook, Instagram, Snapchat, Twitter and more. Apps that rely on advertising for revenue are having trouble proving to brands that their ads are effective, because of Apple anti-tracking changes. It’s now harder to trace a consumer from the point of seeing an ad to where they take an action, like making a purchase or a download.

Meta still thinks it can develop new artificial intelligence models to power its ad platform, which could reduce its reliance on Apple data. ‘We’re adapting our ads system to do more with less data,” Sandberg said.

Zuckerberg said that Meta is hurt by the “signal loss coming from iOS,” which is Apple’s software for iPhones. But Meta would invest in new  infrastructure, and has a “technological advantage over other competitors,” Zuckerberg said.