Facebook sales warning shows world is still not very digital

The COVID-19 pandemic is exposing the vulnerability of US tech giants to an economic slowdown. Just a day after Twitter issued a profit warning, Facebook has informed investors of a "weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19."

As with Twitter, the slump is certainly not for lack of consumer interest in online services. Somewhat unsurprisingly, usage has exploded as country-wide lockdowns and social-distancing measures have driven people toward social-networking sites. In countries hardest hit by the virus, messaging traffic is up 50% in the last month, said Facebook in a blog post. In Italy, where the outbreak is at its worst, the time spent on Facebook apps has risen 70% since the crisis began. The usage of group calling has soared 1,000% in Italy in the last month.

Facebook's sales problem is twofold: First, it does not "monetize" many of these services, including the messaging applications that have taken off in countries under lockdown; second, and more importantly, it derives advertising revenues from companies that have been hurt badly by the COVID-19 pandemic. The eyeballs are there, but the advertisers are unwilling.

For some organizations, there is no obvious answer to the loss of business sparked by COVID-19. An airline can hardly adapt to a more online world, charging customers for virtual flights to the imaginary destinations of their choice. The same goes for hotels and organizations in the hospitality industry. Cinema chains, gyms and certain other types of businesses also look endangered in a world of deserted streets and bustling homes.

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But elsewhere, the advertising slump highlighted by Twitter and now Facebook is a sign of the soft analog underbelly that hinders many businesses. Thanks to online channels, consumers do not have to leave their homes to buy smartphones, books, clothes, groceries and a cornucopia of other household items. Yet companies are still overly reliant on the high-street store, including even tech giants like Apple and telecom operators such as BT.

Is it realistic to think an increase in online sales can offset a brick-and-mortar decline? If household incomes do not change, and people are still allowed outdoors for some daily exercise, there is no reason why expenditure should drop significantly. In fact, some of the money saved on trips to cinemas, theaters, sports events and restaurants will be redirected into goods and services used in the home, whether a Netflix subscription or a new garden hoe.

Unfortunately, as the high street goes into hibernation, a rise in unemployment will squeeze disposable income. The digital world will not be able to provide alternative jobs for all these people, despite what apologists for technology and automation have argued. Post-COVID-19, a new obsession with hygiene will accelerate the demise of the traditional town center. Fast-food outlets will re-open, but they will rely on fewer customer-facing employees and more self-service displays. The traditional British pub, where germs congregate as enthusiastically as drinkers, may need to consider the self-service beer tap.

For good or ill, COVID-19 will transform the business environment, finishing off aged and decrepit firms and spurring healthier ones to increase their investments in automation and e-commerce. Wells Fargo has cut its Facebook revenue forecast for this year but still expects the social networking giant to post growth. The more successful companies are at digital transformation, the better off Facebook will be.

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— Iain Morris, International Editor, Light Reading

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