July 8, 2020 / 8:58 PM / a month ago

Breakingviews - Facebook’s new best friends are a weakening link

A 3D-printed Facebook logo is seen placed on a keyboard in this illustration taken March 25, 2020. REUTERS/Dado Ruvic/Illustration

SAN FRANCISCO/NEW YORK (Reuters Breakingviews) - Facebook’s new best friends are becoming a weakening link at the worst time. Small firms account for a large chunk of the social network’s $70 billion in annual advertising revenue. The pandemic has also made them more dependent on the platform just as big companies from Ford Motor to Unilever boycott it. But these minnows could flounder just when Chief Executive Mark Zuckerberg needs them most.

Facebook is in damage-control mode after hundreds of businesses said they would stop marketing on the platform. Civil-rights groups called for the boycott in June after the $686 billion firm refused to take down hateful content. Some of them, including the Anti-Defamation League, met virtually with Zuckerberg on Tuesday, describing the online confab as disappointing and lacking in commitments.

But small businesses make up between 55% and 65% of Facebook’s total advertising revenue, according to Pivotal Research. Stay-at-home orders shut down local stores but accelerated e-commerce plans. That’s evident in Shopify’s market value. The firm builds online stores for small and medium-size businesses and is now worth $119 billion thanks to a 150% jump in its stock so far this year, compared to a 3% decline in the S&P 500 Index. 

To help such outlets promote themselves on its platform, Facebook kicked in $100 million in cash grants or ad credits. In May, it set up Facebook Shops, which allows small businesses to establish an online shop on the social network or its photo-sharing unit Instagram.

A jump in coronavirus infections in the United States, which accounts for almost half of Facebook’s revenue, poses a threat to both sides. Businesses have been ordered to shut down again in Florida, Texas and elsewhere. While e-commerce can help bring in revenue, the cost of going into and out of rolling lockdowns can outweigh that. U.S. Chapter 11 filings rose by nearly 50% in May and almost 45% in June compared to the same period a year ago, according to the American Bankruptcy Institute.

Analysts still expect Facebook’s overall revenue to grow by 8% this year, according to Refinitiv data. Its 3 billion monthly active users for its family of platforms, including messaging service WhatsApp, remain a draw for advertisers. The worse small businesses’ cash-flow crunch becomes, the bigger the hit in store for Facebook.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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