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Business in the Age of COVID-19: Facebook used the pandemic to develop non-advertising business, while ad money kept pouring in

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This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses and sectors. For other articles and earlier versions, go here.

Facebook Inc. has been weaning itself off an almost-slavish dependence on advertising during the COVID-19 pandemic, while still adding more advertisers and continuing to boost its core business.

Messaging is king on Facebook
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and subsidiary Instagram despite a pandemic and a largely ceremonial advertising boycott in July 2020 because, quite simply, the platform is so effective in delivering information — accurate or not. Consider misinformation on coronavirus and vaccines, which has been gushing like a fire hose for more than a year, as Facebook makes statements about stamping it out.

No matter if the information is good or bad, Facebook continues to draw users to its platforms to see it, as well as its real customers: advertisers. The proof is in the numbers: In late 2019, before the pandemic gripped the U.S. economy, Facebook reported 7 million advertisers and 140 million businesses using its services; as of Jan. 27, 2021, following its fiscal fourth-quarter earnings report, it was 10 million advertisers and 200 million businesses.

That has led to increasing profit and revenue throughout the pandemic, as well as higher stock prices. So far this year, Facebook shares are outperforming those of high-tech brethren Apple Inc. AAPL and Amazon.com Inc. AMZN, which are up 1.5% and up 3% so far this year through Friday’s close, respectively.

Credit Facebook’s concerted effort to move beyond its core social networks to become the center of social media, gaming, messaging and AR/VR — all good places to be as COVID-19 accelerated growth in all four markets. Non-advertising revenue was a particular focus of Zuckerberg’s during the company’s earnings call in late January. While advertising accounted for 98% of Facebook’s quarterly revenue, “other revenue,” such as Oculus VR headsets and Portal video-chatting devices, soared 156% to $885 million. The company highlighted more than 60 Oculus developers, and strongly hinted it intends to bring mixed-reality products to the workplace.

Underscoring the intersection of social media and commerce, Facebook Chief Executive Mark Zuckerberg said in late January that more than 175 million people message a WhatsApp business account every day, and “we’re building new features to make it even easier to transact with businesses in the app.”

New products and services gushed out of Facebook like a broken dam in the first year of the pandemic. Facebook Shops made its debut in May. The service, which allows brands to list their product catalogs directly on Facebook’s most popular apps and sell goods directly on Facebook and Instagram, now has more than 1 million active shops from which over 250 million people interact monthly, Zuckerberg says.

Bernstein analyst Mark Shmulik believes Facebook Shops will be a big contributor starting this year.

“We believe Facebook Shops is poised to start meaningfully contributing to revenues in 3Q21,” he wrote in a March 19 note that estimated quarterly sales of about $300 million. (Morgan Stanley analyst Brian Nowak pegged the annual take at about $1.9 billion in a March 19 note.)

Instagram Reels, a TikTok-like feature to record and edit 15- to 30-second videos with effects, was announced in August. In October, Quest 2, Facebook’s virtual-reality headset for gaming and entertainment, was launched for the holidays at about $300.

“We’re also laying the foundation for AR glasses, which will be the holy grail of delivering a sense of presence while not taking you away from the physical world,” Zuckerberg said during a conference call with analysts. “We’re partnering with Luxottica, the maker of Ray-Ban and Oakley, to build our first smart glasses which will launch sometime [in 2021].”

On March 23, Facebook said it is working on a version of its Instagram app for kids under 13, who are currently not allowed to use the app because of federal privacy rules. (An international coalition of 35 children’s and consumer groups on April 15 urged Instagram to deep-six its plans.) On April 19, Facebook unfurled new audio tools, including a would-be rival to invitation-only audio chat app Clubhouse.

Quest 2 holds particular promise, and possibilities, for Zuckerberg, who said in late January, “This is one of the areas that I’m most excited about our progress heading into 2021.”

“If you look at the history of computing, every 15 years or so a new major platform emerges that integrates technology more naturally and ubiquitously into our lives — starting with mainframes, then PCs, then browser-based computing, and then mobile,” Zuckerberg said in a conference call with analysts. “I believe that the next logical step here is an immersive computing platform that just delivers this magical sense of presence — that you’re really there with another person or in another place.”

How much so? “The big milestone that I’m focused on here is we want to get to 10 million active units in our VR systems because we think at that point, that’s when it will become (in three to five years),” Zuckerberg said in October 2020, in another call with analysts.

Here’s another tantalizing figure: Adobe Digital Index projects 2022 will be the first $1 trillion year in e-commerce.

“Once the pandemic hit, we were early adopters of employees working remotely and re-evaluating priority needs of people with video capabilities, paid-live events, and a big push into e-commerce to offset drops in travel ads,” a Facebook spokesman told MarketWatch.

Fear of the next Cambridge Analytica

Facebook’s advertising business as well as its diversification strategy comes fraught with some speed bumps. The biggest could be an update to Apple’s operating system that will allow users to more easily block Facebook and other advertisers from tracking their activity across other apps and internet sites, which has led to an open battle between the tech titans.

Company Chief Financial Officer David Wehner warned in January that Facebook faces “more significant ad-targeting headwinds in 2021. This includes the impact of platform changes, notably [Apple’s] iOS 14, as well as the evolving regulatory landscape.”

“We increasingly see Apple as one of our biggest competitors,” Zuckerberg said in a conference call with analysts following the earnings news in January.

Read more: Facebook beats expectations but warns of ‘cross currents’ in 2021

Another emerging threat is Amazon.com Inc.
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Its share of the U.S. digital ad market swelled to 10.3% last year from 7.8% in 2019 and could reach 12.8% in 2023, according to research firm eMarketer. Google and Facebook are Nos. 1-2 in the market, with 28.9% and 25.2%, respectively, in 2020, the report said.

The larger, more lingering, matter could be the bugaboo of misinformation, which continues to dog Facebook’s brand. Zuckerberg, Alphabet Inc.
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CEO Sundar Pichai and Twitter Inc.
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CEO Jack Dorsey were subjected to withering questioning from a House subcommittee on disinformation on March 25.

Whether all the talk and hand-wringing leads to legislation is the next logical step. Tech legal expert Jenny Lee said members from both sides of Congress demonstrated in Thursday’s hearing that they are “galvanized and ready to proceed with serious legislation.”

Read more: Big Tech CEOs pounded over social media’s role in promoting misinformation, extremism

On the European front, a German court in Düsseldorf has asked the European Court of Justice to determine whether Facebook was in breach of the EU’s stringent data protection rules, called the General Data Protection Regulation.

Read more: The fate of Facebook’s business model may lie in the hands of the European Union supreme court

Of course, all the assurances of regulation — whether self-imposed or by legislation — could be immolated with another Cambridge Analytica-like data snafu. And with its digital tentacles extending into even more directions, there is that possibility, say tech experts.  

Facebook “does not have the best track record of handling personal information and data,” KC Estenson, CEO of GoNoodle, a maker of online entertainment for kids, told MarketWatch.

Meanwhile, there remains the obstacle of Apple’s imminent privacy update to iOS 14, will make it easier for iPhone and iPad users to block companies like Facebook from tracking their activity to target ads. The impasse highlights a broader industry debate on the handling of personal data.

In August, Facebook warned Apple’s update could result in a more than 50% drop in the social-networking giant’s Audience Network advertising business, which accounts for less than 10% of total net revenue. Facebook later cautioned in January that the privacy changes could begin to affect Facebook’s business late in the calendar first quarter.

By mid-March, however, Zuckerberg explained in a Clubhouse chat that the change could benefit Facebook if more businesses decide to sell goods directly through Facebook and Instagram.

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