How can FB and Google survive the outbreak when traffic is soaring and advertising revenue is falling?
From:Tencent Technology
Focus
Even if the outbreak of the new coronavirus has contributed to the surge in the use of Facebook's services, it is bound to have the same or even the opposite effect on Facebook's core revenue-driven advertising business.
As businesses close, unemployment increases, consumer demand falls, advertising budgets plummet in almost all categories, from travel to entertainment to cars. That's bad news for Facebook, which accounted for 98 percent of its advertising revenue last year.
Facebook has made a lot of money from advertising, nearly $70 billion last year alone. It has $54 billion in cash reserves on hand.
Google's revenue could plummet 18 per cent in 2020, with $28.6bn cut due to new coronavirus, as tourism, hotels and other industries slash advertising spending.
The growing Google cloud computing business, which has a wide range of customers including PayPal, Tagit, 20th Century Fox and The New York Times, is not expected to be affected by the downturn. From 2018 to 2019, Google's cloud computing business grew 53% year-on-year, generating $8.9 billion in revenue last year.
First, let's take a look at Facebook.The technology the company has built to connect billions of people around the world has never seemed more critical, because real-world connections are almost completely cut off.As family, friends and neighbors maintain a safe physical distance to help stop the spread of the new coronavirus, they turn to Facebook, WhatsApp and Instagram to continue to see friendly faces and the outside world.
But even if the outbreak of the new coronavirus has contributed to the surge in facebook's service use, it is bound to have the same or even the opposite effect on Facebook's core revenue-driven advertising business. As businesses close, unemployment increases, consumer demand falls, advertising budgets plummet in almost all categories, from travel to entertainment to cars. That's bad news for companies that accounted for 98 percent of total advertising revenue last year.
But the good news is that Facebook has made a lot of money from advertising, nearly $70 billion last year alone. With $54bn in cash on hand, all indications are that the company will emerge from the health crisis largely unscathed, at least financially. "There's no survival risk for this company, but it's not the case for other companies," said Laura Martin, senior analyst at Needham and Company. "
How has Facebook's advertising business changed?
In a study in early MarchIn the report, Martin and her colleague Dan Medina cut their forecast for Facebook's first-quarter revenue, saying 30 to 45 percent of facebook's global revenue came from the "risk" ad category. These categories include travel, retail, consumer packaging and entertainment, all of which will be hit hard by the new coronavirus crisis and could slash advertising. Martin and Medina further noted that six of The 10 countries with the largest Facebook ads are now hot spots for outbreaks.
The downturn in advertising poses risks for all advertising-driven businesses. But that's not too much of a problem for Facebook, which sells ads at auction. Now that usage is soaring, there will be more ad inventory to fill, but fewer people will advertise. Martin warned that this would drive down the price of Facebook ads because competition would not be so fierce. "There are more advertising spaces available for sale, and demand is lower," she said. So guess what happens with pricing? "
In a media interview last week, Sheryl Sandberg, Facebook's chief operating officer, acknowledged that the company could be under pressure. "Everything will change and the marketing industry will definitely feel the real impact of the outbreak," she said. I don't think anyone knows how big the impact will be, so we just have to keep a close eye on it. "
How are Facebook's products performing?
As demand for advertising has fallen, real demand for Facebook products has soared. Mark Zuckerberg, Facebook's chief executive, said on a conference call with reporters that the number of calls on WhatsApp and Messenger more than doubled, even more than the number of New Year's Eve calls on the company's most important day of the year. The use of these services is growing so fast that Mr Zuckerberg says the company is busy building its infrastructure.
"We really need to strengthen the infrastructure to make sure that we can continue to deliver the level of service that people need at times like this," Zuckerberg said. "Typically, the growth of average monthly users will keep pace with the growth in advertising revenue, which are two trends investors want to see." But if the two figures are at odds during the crisis, it may be difficult for markets to understand how to assess average monthly user growth at the end of the crisis.
Kate Klonick, an assistant professor at St. John's University School of Law who studies Facebook, said: "The metrics will change a lot compared to the isolation period, and people won't know if Facebook's user growth will continue." "
As for Facebook's product roadmap, the company canceled its annual F8 developer conference, scheduled for earlier this month. Facebook said it would host virtual online events for its developer community, but it remained unclear what form the events would take or what products and tools the company would release during that time.
Of course, Facebook also sells hardware. While the global blockade appears to be an opportunity for breakthroughs in virtual reality products such as Oculus or video chat products such as Portal, hardware is a small part of Facebook's business. Mr Martin says the business may not grow much as long as consumers don't spend money.
How do Facebook employees respond?
All of Facebook's full-time employees, including Zuckerberg, now work from home, and the company gives them a $1,000 bonus each. Meanwhile, Facebook announced last week that it would ask most contractors to stay at home and continue to pay them even if they were unable to work. This includes a global army of content censors who censor objectionable content posted on the platform.
Facebook now relies heavily on automation to make these content censorship decisions and on full-time employees to censor the most pressing and dangerous posts, such as suicides and self-injury attempts. If someone now reports a post that contains suicide content, a banner with this alert appears: "Please note that we now have fewer reviewers available due to the new coronavirus outbreak." "We expect to make more mistakes and review longer than usual, but we will continue to monitor the performance of our systems and make adjustments," the company wrote in a blog post late Thursday. "
Facebook says full-time employees who perform content reviews can now have weekly virtual one-on-one contact with licensed therapists and attend weekly virtual group therapy sessions.
As its content review team will significantly reduce the number of people who typically work on safety and security issues, Facebook has announced that it will not review content that has been removed for a second time if users request an appeal against a given review decision. The company also warned advertisers that they would see delays in ad censorship and an increase in ads that were wrongly rejected.
Despite the changes, Facebook said it would appoint members of its oversight review committee within the next month or two. The commission should act as some sort of "Supreme Court" to rule on content review decisions on user appeals. It is unclear how the temporary shift to automation will affect the commission's operations.
How has Facebook's content changed?
Since the outbreak, Facebook has banned ads for masks, hand sanitizers and wet wipes to combat price fraud. It also bans product advertising that "creates panic" or promises a panacea, and works to eliminate potentially hurting hashtags about new coronavirus and hash tags that prevent the spread of misinspole about viruses. But even before Facebook moved to automated vetting, these policies proved difficult to enforce in practice.
To help people get more reliable information, Facebook is developing tools to show people more trusted sources of information about the new coronavirus. Last week, Zuckerberg announced that the company would place an information box at the top of news feeds in Italy, France, Germany, Spain, the United Kingdom and the United States, adding them to other countries over time. This information box provides real-time updates from authoritative sources such as the World Health Organization. On WhatsApp, the World Health Organization has launched a chat tool where about 2 billion users can get answers to questions related to the new coronavirus.
Another question is, what did Facebook do behind the scenes? It is already working with researchers on how to use the company's large amount of data to study the spread of viruses and whether people are really keeping a safe distance. Facebook has briefed the CDC on the work, but Zuckerberg said in a phone call that reports that Facebook shares location data with the federal government are "overblown."
Finally, Facebook pledged $100 million in grants to 30,000 companies around the world affected by the new coronavirus. It has also launched the COVID-19 Solidarity Response Fund, through which Facebook will donate $10 million to the World Health Organization and an additional $10 million to the CDC Foundation.
What is Facebook's long-term prospects?
Despite the short-term risks to Facebook's business, the long-term outlook remains strong. First, Facebook's business has not been hit hard by outbreaks like technology giants such as Apple. In a recent update, eMarketer cut its global advertising spending forecast to $691 billion from $712 billion, a change that analyst Jasmine Enberg wrote was largely due to the outbreak.
eMarketer has yet to change its estimate of advertising spending in the rest of the world by 2020, in part on the assumption that the crisis will be resolved before the busiest advertising season at the end of the year. "As consumers spend more time at home, we're seeing an increase in digital media spending," Enberg said in an interview. Coupled with advertisers' tendency to turn to proven real platforms such as Facebook and Google in uncertain times, it is too early to tell how much any short-term loss in digital advertising spending will affect the market as a whole by 2020. "
Martin and his colleagues also didn't change their revenue forecasts for Facebook this year, as they assumed the new coronavirus outbreak would resolve itself by mid-June. But the question is how long it will take consumers to start spending again after the public health crisis is over. Until then, Facebook's advertising business will continue to suffer. However, thanks to the historic success of the advertising business, Facebook itself will survive.
Now that Facebook is safe from a new coronavirus outbreak, what about Google?
Cowen and Co, the investment bank, estimates that advertising spending has been slashed as a result of travel, hotels and other industriesGoogle's revenue could plummet 18 percent in 2020, with $28.6 billion less due to the new coronavirus. Such a crackdown would not change the long-term health of advertising as a business for Alphabet, although analysts said it could change the composition of the company and prompt Alphabet to diversify further in other areas, including Original Content on YouTube, Waymo, the self-driving unit, and its secret lab X.
How is Alphabet's business affected?
In good times, Google's advertising business made an outrageous amount of money, generating $134 billion in advertising revenue in 2019, or 83 percent of Google's revenue, which the company uses to fund or support other teams and departments. But an unprecedented crisis like the new coronavirus outbreak could have a major impact on advertising revenues as companies cut budgets in the face of growing financial turmoil.
Andrew Frank, vice president and analyst at Gartner, a market research firm, has found evidence that travel and hotel companies are cutting or eliminating ads that appear in Google searches. "Two days ago, I was watching Marriott and Hilton ads," he said. If you just search for these two words on Google, they usually run paid search ads for their brand name. But they don't do it anymore, and some companies don't even advertise at all. "
This is not surprising, given recent developments. On March 19th Arne Sorenson, Marriott's chief executive, posted a video to employees via Marriott's Twitter account in which Henson admitted that the business was 75 per cent below normal. Hilton has put employees on leave, delayed the hotel's opening and withdrew its 2020 earnings forecast. Amazon, meanwhile, slashed advertising spending in most of Google's categories in March.
Ellen Zentner, chief U.S. economist at Morgan Stanley, expects U.S. GDP to plunge 30.1 percent in the second quarter as a result of the new coronavirus outbreak, pushing the U.S. unemployment rate to 12.8 percent. Experts say the shrinking economy will prompt a sharp drop in advertising spending on Google. A Google spokesman declined to comment.
Another area in which Google may be feeling the pressure is Waze. The popular crowd-sourced car navigation app is driven by advertising and user engagement, and Google bought it in 2013 for $1.3 billion. But restrictions in many states do not encourage citizens to drive unless they are "necessary," which is likely to mean a sharp drop in user engagement, not to mention a reduction in advertising spending.
"They're losing consumers, and then their advertisers tend to be brick-and-mortar advertisers," Colin Coburn, a senior analyst at Forrester, said of Waze. Sure, I live in the suburbs, but ads are usually like Dunkin Donuts, Subway and Exxon Mobil saying, 'Oh, there's a Dunkin Donuts 3km down the street.' 'I have to assume that everyone is withdrawing their ads. "
Not everyone. Earlier this year, Google showed ads for masks, hand washes and gloves in product searches, flooded with third-party websites and sponsored shopping lists, and some marketers openly tried to exploit concerns about the new coronavirus. After widespread criticism, Google blocked tens of thousands of ads, even though users complained weeks later that mask ads were still appearing in new coronavirus articles.
What did Alphabet do to fight the epidemic?
U.S. President Donald Trump announced at a news conference in mid-March that nearly 1,700 Google engineers were developing a website to help people test for new coronavirus. His announcement came as a surprise to everyone, including Google itself. But Mr. Trump's statement, while inaccurate, noted that Alphabet, with its vast technical and scientific resources, has the ability to play a huge role in helping society fight the outbreak.
Shortly after Trump's announcement, Alphabet's life sciences company, Verily, launched a new coronavirus evaluation website and testing site in California, offering free online screening appointments and directing patients with symptoms to an undecloded test site. Google also offers hangout Meet, its video conferencing tool, to all G Suite customers, regardless of their pricing plans, until July 1. In addition, Google has created an outbreak fund designed to support infected or quarantined temporary employees or suppliers.
Earlier this week, Google announced several updates to provide more resources on the new coronavirus, including a website that provides basic information about the new coronavirus, safety and prevention tips, as well as links to home-based work guides and "stress response tips."
YouTube has joined other streaming platforms in reducing the default video quality to save bandwidth. YouTube is currently doing this in Europe, but a spokesman confirmed that the company will default to the standard definition of all traffic worldwide around next month. In an effort to curb the spread of misinfo, the popular streaming service also announced earlier this month that it would change its rules to run ads only on limited channels that discuss new coronavirus outbreaks, such as news channels. This does not include deleting thousands of misleading videos and highlighting healthy and accurate information in a variety of ways.
Google's business outlook for the future
Google is still in a good position to weather the new coronavirus outbreak, even as ad sales revenue is expected to decline. First, its growing Google cloud computing business, which has a wide range of customers including PayPal, Tagit, 20th Century Fox and The New York Times, is not expected to be affected by the downturn. From 2018 to 2019, Google's cloud computing business grew 53% year-on-year, generating $8.9 billion in revenue last year.
But like Facebook and Amazon, Google can certainly improve its position in the public. Google, which has been hit by high-profile privacy scandals and allegations of sexual harassment by workplace executives over the past few years, must now proceed with caution. "For Alphabet, it's kind of like a double-edged sword, because on the one hand, of course they want to be seen as a positive force for good in society, and they can do a lot of good with all the data," says Frank of Gartner. On the other hand, I think they are exposed to the danger that they have the ability to collect data, and that's what I think they need to be careful about. "
Charlene Li, founder and senior researcher at Altimeter, a digital research and consulting firm, suggests alphabet take an althroid route during the new coronavirus outbreak. "In this crisis, they will be under enormous pressure not to re-gain financially in any significant way, " he said. Over time, alphabet's website could provide marketing and advertising support for professional clinics that want to advertise, he added.
Analysts agree that Alphabet should focus on business diversification rather than volatile advertising. "This could accelerate Alphabet's continued diversification, so it no longer relies solely on advertising because the limitations of Google's day-to-day business are becoming more apparent in such crisis situations," Frank said. "
That could mean investing more in Original Content on YouTube, which you can access without ads through paid members. YouTube has about 2 billion subscribers a month, but YouTube Premium and YouTube Music have only 20 million subscribers. Given that its budget is only a fraction of what competitors are investing in, the streaming platform is likely to invest more in developing original content. YouTube admits it will spend hundreds of millions of dollars on original content in 2019. By comparison, Netflix spent an estimated $15 billion on original content, and Amazon spent $7 billion on video and music content last year.
Alphabet may also decide to invest more in edge projects like X. Secret Lab X is developing cutting-edge, far-reaching technologies in science fiction, including robotic pants that help paraplegics and the elderly walk, and underwater camera systems that study fish and protect the ocean's ability to "sustain life and help feed humans." X doesn't bring meaningful revenue to Alphabet, but several of its projects have become established companies, including Verily and Waymo, the self-driving business that Google spun off in 2016.
"The new coronavirus outbreak is devastating, and it makes you rethink the entire technical foundation of our infrastructure to see if we have a different way of doing business around the world and are less vulnerable to this destruction," Frank said. At this point, Alphabet is not so different from the advertising-dependent business of its revenue. But unlike some companies struggling to survive, Alphabet has the financial strength to win.
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