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Facebook's long-term future intact despite ad boycott, analysts say

The advertising boycott launched against Facebook Inc. by a growing list of major brands appears far from over. However, analysts expect little long-term financial impact on the social media platform.

Large advertisers such as The Unilever Group, Verizon Communications Inc., Honda Motor Co. Ltd. and Coca-Cola Consolidated Inc. have temporarily halted advertising spend on Facebook and other social media platforms as part of a broader campaign urging these companies to do more to reduce the spread of harmful content.

Though the boycott has already taken a toll on Facebook's stock price, analysts note that the bulk of Facebook's ad revenue comes from small and medium-sized businesses, suggesting any potential revenue hit will likely be minor. They also highlighted that similar efforts targeting the company in the past failed to gain significant traction and expect the current boycott to resolve itself fairly quickly.

MKM Partners analyst Rohit Kulkarni says the boycott represents a risk of less than 5% to Facebook's top line due to the company's sizable advertising base, which includes a large portion of small businesses and mobile direct-response advertisers. The analyst predicted that Facebook counts more than 160 million registered businesses globally and has 8 million paying advertisers.

He added that top advertisers were already planning to cut ad spending in the second half of the year due to impacts from the coronavirus pandemic, implying a "lower marginal headwind" for Facebook.

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Facebook in 2019 held about 24% of the U.S. digital advertising market, ranking second behind Alphabet Inc., which captured about 43%, and ahead of Inc. at 4.2%, according to Kagan, a media research group within S&P Global Market Intelligence.

Kagan analyst Seth Shafer noted that similar ad boycotts targeting Facebook in recent years have typically been "very short-term in nature" and resulted in a minimal impact on the company's ad revenue.

For instance, in 2018, viral hashtags surfaced online calling for users to delete the Facebook app after revelations surfaced that the now-defunct data analytics firm Cambridge Analytica LLC had improperly accessed millions of users' personal information taken from the social media company's platform.

Mozilla Corp., which operates the popular Firefox web browser, has not advertised on Facebook and its photo-sharing app Instagram LLC since March 2018 when news of the scandal broke.

Even though the Cambridge Analytica debacle sparked a storm of criticism that led to a flurry of global investigations, Facebook still posted a 42% year-over-year jump in advertising revenue in the first full quarter following the incident and an 11% year-over-year increase in monthly and daily active users. Those figures keep climbing.

"It's difficult for brands today to stop advertising on Facebook or other social media platforms for any length of time and still reach the audiences they feel are critical to reach," Shafer said in emailed comments. "These boycotts are usually resolved quickly as both parties have motivation to work through the issues at hand."

The latest boycott was initiated largely in response to Facebook CEO Mark Zuckerberg's hands-off approach to the types of content posted on the platform.

Notably, after Twitter Inc. in May flagged U.S. President Donald Trump's tweets regarding mail-in voting, Zuckerberg contended internet platforms should not be able to decide what counts as truthful information and allowed the same posts to remain on Facebook.

The executive has since altered his position slightly, announcing in a livestream last week that Facebook will start labeling political speech that violates its terms of service, but will not remove such posts.

For his part, J.P. Morgan analyst Doug Anmuth says the ad boycott poses some near-term risks to Facebook's stock given that additional brands are likely to join and some marketers are extending their boycott through the end of the year.

But all things considered, "we do not expect significant risk to numbers for Facebook as many other marketers, especially those direct-response-driven, will take advantage of potentially lower-priced inventory," Anmuth wrote in a report.

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