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The technology Facebook built to connect billions of people around the world has never seemed more vital than now, when real-world connection is being discouraged, if not outright prohibited. As families, friends and neighbors keep their distance to help stop the spread of COVID-19, they're turning to Facebook, WhatsApp and Instagram for glimpses of friendly faces and a taste of the outside world.
But even as the outbreak boosts Facebook's services, it's bound to have an equal and opposite impact on Facebook's core revenue driver: advertising. With businesses shuttered, unemployment lines growing, and consumer demand falling, ad budgets in just about every category, from travel to entertainment, are plummeting.
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That's bad news for a company that made more than 98% of its revenue from advertising last year. The good news: Facebook has made an awful lot of money from advertising already, nearly $70 billion last year alone. With $54 billion in cash on hand, all signs suggest that the company will emerge from this crisis largely unscathed, at least financially.
"There's no survival risk for this company," said Laura Martin, a senior analyst at Needham & Company. "That's not true of a lot of companies."
What's happening to the ad business?
In a research note in early March, Martin and her colleague Dan Medina lowered their estimate for Facebook's revenue in the first quarter of this year, citing the fact that 30% to 45% of Facebook's global revenue comes from "at-risk" ad categories. Those categories include travel, retail, consumer packaged goods and entertainment — all industries that stand to take a massive hit from the crisis, and are therefore likely to slash advertising. Martin and Medina further noted that six of the largest 10 countries for Facebook advertising are now COVID-19 hot spots.
The advertising slump poses a risk to all ad-driven businesses. But it's a particular problem for Facebook, because it sells ads in an auction. Now that usage is surging, there will be much more ad inventory to fill but fewer ads to fill it. Martin warns this will push down the price of Facebook ads, because there won't be as much competition.
"There's a higher supply of ad units to sell, and lower demand. So guess what's happening to pricing?" she said.
In an interview with CNBC last week, Sheryl Sandberg acknowledged that the company could feel a crunch. "This is not going to be business as usual, and the marketing industry is certainly going to see a real impact," Sandberg said. "I don't think anyone knows how big. So we're going to watch and look."
What about its products?
As demand for ads falls, demand for Facebook's actual products is surging. On a call with reporters, Mark Zuckerberg noted that calls on WhatsApp and Messenger have more than doubled, exceeding even the spike that the company ordinarily sees on its biggest day of the year, New Year's Eve. Use of these services has grown so much that Zuckerberg said the company is rushing to shore up its infrastructure.
"We really need to make sure we're on top of this from an infrastructure perspective to make sure that things don't melt down, and we can continue to provide the level of service that people need in a time like this," Zuckerberg said.
Ordinarily, growth in monthly average users tracks alongside growth in ad revenue, two trends investors like to see. But if those two numbers diverge during the crisis, it could be difficult for markets to understand how to value monthly average user growth at the end of it.
"The metrics will be so skewed from the quarantine period," said Kate Klonick, an assistant professor at St. John's University School of Law, who studies Facebook. "People won't know whether the increase for Facebook will last."
As for Facebook's product roadmap, the company canceled its annual F8 developers conference, which had been scheduled for earlier this month. Facebook has said it will hold virtual events for its network of developers, but it's still unclear what form they will take or what will happen to whatever products and tools the company would have announced there.
Of course, Facebook also sells some hardware. While a global lockdown might seem like an opportunity for a virtual reality product like Oculus or a video chatting product like Portal to break through, hardware is an infinitesimal part of Facebook's business, which Martin says likely won't grow much as long as consumers aren't spending money.
What about its staff?
All of Facebook's full-time employees (including Zuckerberg) are now working from home. The company also gave them each $1,000 bonuses. Meanwhile, Facebook announced last week that it would send its contractors home, too, and continue to pay them, even while most are not able to work. That includes the global army of moderators who review objectionable content that gets posted on the platform. Now, Facebook is relying heavily on automation to make those content review decisions and leaning on full-time employees to review the most imminently dangerous posts, like suicide and self-injury attempts. If you report a post that contains suicidal content right now, a banner appears that includes this alert: "Please note we have fewer reviewers available right now because of the coronavirus outbreak."
"We expect to make more mistakes, and reviews will take longer than normal, but we will continue to monitor how our systems are performing and make adjustments," the company wrote in a blog post on Thursday night.
Facebook told Protocol that full-time employees performing content moderation will now have access to weekly virtual one-on-one check-ins with licensed therapists as well as weekly virtual group therapy sessions.
Because its moderating team will be dramatically reduced from the 30,000 people who typically work on safety and security issues, Facebook announced it will not review content that has been removed a second time if users ask to appeal a given moderation decision. The company has also warned advertisers that they'll see a delay in ad review times and an increase in ads being incorrectly disapproved.
Despite these changes, Facebook says it's on track to debut the members of its new oversight review board within the next month or two. That board is supposed to act as a sort of Supreme Court, issuing rulings on content moderation decisions that users have appealed. It's unclear how the temporary move to automation will affect the board's operations.
What about content on Facebook?
Since the outbreak began, Facebook has banned ads and commerce listings for face masks, hand sanitizer and disinfectant wipes to crack down on price gouging. It has also prohibited ads for products that "create a panic" or promise miracle cures. It's also committed to removing misinformation about COVID-19 that health experts say could cause harm, as well as blocking hash tags that spread misinformation about the virus. But even before Facebook shifted to automated moderation, these policies were proving difficult to enforce in practice.
To help surface more-reliable information, Facebook is building tools to show people more trusted sources on COVID-19. Last week, Zuckerberg announced the company would be placing an information box at the top of everyone's News Feed in Italy, France, Germany, Spain, the U.K. and the U.S., with other countries being added over time. The so-called Coronavirus Information Center provides real-time updates from authoritative sources like the World Health Organization.
On WhatsApp, the World Health Organization has launched a chat tool where some 2 billion users can get answers to coronavirus-related questions.
Then there's the question of what Facebook is doing behind the scenes. Already, it's working with researchers on ways they can use the company's vast stores of data to study the spread of the virus and whether people really are keeping their distance from one another. Facebook has briefed the Center for Disease Control on this work, but in his call with reporters, Zuckerberg said that reports that Facebook is sharing location data with the federal government are "overstated."
Finally, Facebook has committed to spend $100 million on small-business grants for 30,000 companies around the world affected by COVID-19. It's also launched the COVID-19 Solidarity Response Fund, through which Facebook will match $10 million in donations to the World Health Organization and another $10 million to the CDC Foundation.
What's the long-term outlook?
Despite the near-term risks to Facebook's business, the long-term outlook is strong. For one thing, Facebook doesn't operate in China, so it was somewhat protected from the hit that its fellow tech giant, Apple, took when the outbreak first began there. In a recent update, eMarketer reduced its worldwide ad-spending estimates from $712 billion to $691 billion, a change that analyst Jasmine Enberg wrote was "primarily due to one country: China."
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The firm has yet to change its estimates for 2020 ad spending in the rest of the world, in part, on the assumption that the crisis will be resolved before the heaviest advertising season at the end of the year. "We are seeing an increase in digital media consumption as consumers spend more time at home," Enberg said in a video. "That combined with the fact that advertisers tend to turn to tried and true platforms like Facebook, like Google, in times of uncertainty means it's really too soon to tell how big of an impact any short-term losses on digital ad spending could have on the market as a whole in 2020."
Martin and her Needham colleagues also haven't changed their Facebook revenue forecast for the year on the assumption that the COVID-19 situation will resolve itself by mid-June. But the question is how long it will take consumers to start spending again after the public health crisis ends.
Until that happens, Facebook's ad business will continue to suffer. Thanks to the historical success of that ad business, though, Facebook itself will survive.