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Facebook and Google got hit hard by the coronavirus, but their massive ad businesses will come out stronger in the end

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  • Facebook and Google's first-quarter revenue took a hit from advertisers pulling spend amid the coronavirus, but ad buyers say they'll come out stronger long term.
  • Facebook reported $17.74 billion in first-quarter revenue, up 18% year-over-year, but average ad prices dropped 16% in the quarter.
  • Google reported $33.7 billion in advertising revenue during the first quarter and was particularly hit by brand advertising dollars in categories like travel.
  • Ad buyers have said that post-pandemic, people will have shifted more of their behavior online and more dollars may move to performance-based platforms, which will benefit the tech giants.
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Facebook and Google took a short-term hit as small businesses cut spending due to the coronavirus, but they'll come out of the pandemic stronger than other digital players, according to media buyers.
Facebook and Google's first-quarter earnings this week provided some of the first signs of the pandemic's impact on the two largest advertising companies.
Facebook reported $17.74 billion in first-quarter revenue, up 18% year-over-year, while the average ad price dropped 16% during the quarter. With more money being pumped into performance-based categories like gaming, Facebook looks poised to weather coronavirus better than other ad companies.
Google's parent company Alphabet also reported increases in ad revenue. The company made $33.7 billion from advertising during the first quarter and saw a particular hit from drops in brand campaigns on YouTube in categories like travel. Direct response-focused advertising saw growth throughout the entire quarter, Google CFO Ruth Porat said during the earnings conference call.
Michael Levine, Pivotal Research Group senior analyst, wrote in a note to investors that Facebook's performance was better than expected. The firm had previously warned in March that Google's revenue could be cut by 15% to 20% while Facebook could lose 20% to 25% of revenue in 2021, as small businesses account for more than 10 million advertisers for each company.
"The degree of negativity we had begun hearing in March lead us to be far more negative than early April indications have suggested, and in particular around the strength in DTC e-commerce and gaming," Levine wrote. "Given the Covid-19 shelter in place lock-down and significant declines in media pricing, it has been a bonanza for these two categories."

Facebook and Google are positioned to cash in on consumers' new behavior

It's easy for brands to pull digital spending as opposed to TV advertising, which can take time to pull airings and negotiated contracts.
But Harris Diamond, chairman and CEO of McCann Worldgroup, has said Facebook and Google would ultimately come out stronger in the long run because homebound consumers are getting more comfortable with shopping online, benefiting platforms that drive conversions.
And when advertising comes back, the players that already dominate performance-based advertising will benefit, Mike Mothner, founder and CEO of digital agency Wpromote, has said.

Facebook and Google rely on thousands of small advertisers directly impacted by coronavirus

Facebook and Google are big immediate risks of coronavirus because their businesses rely on thousands of small business and direct-to-consumer advertisers that are pausing or cutting ad spend.
Even as the government moves forward with stimulus programs, small businesses and agencies have struggled to receive money. In the March note, Pivotal Group's Levine warned that even if small businesses do get money, it may not return to Facebook and Google.
"We think this represents a massive tail risk to the economy, and most certainly to the SMB base at Google and Facebook," he wrote. "If you choose to keep your store open and employees in their jobs, we would think that variable marketing will be one of the first to go."
Direct-to-consumer brands' efforts to slash ad budgets will also hit Facebook and Google hard.
On March 24, Facebook warned in a blog post that spikes in WhatsApp and Messenger usage would also impact its advertising business. Unlike the feed and stories features in Facebook and Instagram where ad load is high, ad load is lower in messaging apps.
"We don't monetize many of the services where we're seeing increased engagement, and we've seen a weakening in our ads business in countries taking aggressive actions to reduce the spread of COVID-19," VP of analytics, Alex Schultz, and Jay Parikh, VP of engineering, wrote in the blog post.

Ad performance and prices are down

According to data from digital ad agency Tinuiti, there has been a dip in ad performance because of news about the coronavirus. For example, after Washington State confirmed the first death from coronavirus on February 29, people started stocking up on essential items, leading to more clicks on ads but less conversions.
Between February 25 and March 17, Tinuiti saw conversion ratios — which measures how many clicks on ad campaigns generate sales — on Facebook and Instagram drop from 14% to 4%. Conversions on Google search ads dropped slightly from roughly 8% to 6%.
Tinuiti's data also shows that ad prices have decreased.
Despite the drop in ad performance and costs, Craig Atkinson, chief client officer at Tinuiti, said that the changes will not affect long-term spend with Facebook and Google, along with Amazon.
"I expect that you will see that the triopoly will take the lions' share, but I don't see that eroding or giantly growing," he said.

Big Fortune 500 brands might take a lesson from small marketers

Despite the coronavirus hit, Facebook and Google's ad businesses could benefit in the long term from a focus on performance-driven advertising.
Big brands impacted by coronavirus aren't currently running ads on Facebook, but other advertisers like on-demand movie streaming services and fitness brands have been promoting at-home products for consumers stuck at home.
Wpromote's Mothner has said that he expects big brands that stopped advertising to take cues from performance-based marketers that spend heavily on the platforms because of high conversion and low acquisition costs.
He said that his agency was working with a large packaged goods maker on a forthcoming direct-to-consumer product and that the coronavirus will likely speed up its rollout because the virus is training consumers to shop online.
"If small businesses don't make it, those are net-lost dollars, and you could argue that could hurt Facebook and Google more than a TV network that has big brands," he said. "That said, I think we would need to see this go on for a long time."
SEE ALSO: The coronavirus is upending advertising. Top marketers at Toyota, Burger King, and Hippo reveal how they're changing their ad strategies to keep up.
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* This article was originally published here

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