The coronavirus crisis has played to the strengths of tech companies: People are staying indoors, increasingly using the internet and streaming more video than ever.
It’s clear that the tech giants are well positioned to make it through the crisis relatively intact. “Alphabet [Google’s parent], Facebook and Amazon will be just fine,” says Tal Chalozin, co-founder and chief technical officer of ad-tech company Innovid.
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The crisis stands to make the most powerful tech companies even stronger, as they have business models built for digital marketplaces and the cash reserves to withstand an economic downturn, Chalozin says, adding, “It definitely is going to make the bigger players bigger.”
That’s not to say a recession precipitated by COVID-19 will be good for any business. Double-digit unemployment in the U.S. will weigh on consumer spending (and by extension advertising) across the board.
And Big Tech isn’t immune from the fallout. In reporting first-quarter 2020 earnings, Google and Facebook saw ad spending fall off a cliff in March, but both companies said that the numbers stabilized going into April. Apple’s hardware sales for the first three months of 2020 were down — but the services business, which includes App Store sales, surged to an all-time high of $13.3 billion for the period, up 17%.
Amazon sales boomed in the first quarter to an eye-popping $75.4 billion, up 26% year over year, on overwhelming demand from stay-at-home customers. At the same time, the crisis is taking a big toll on the bottom line. CEO Jeff Bezos said Amazon will spend roughly its first-quarter operating profit of $4 billion — or more — on costs related to COVID-19 in the second quarter.
“The current crisis is demonstrating the adaptability and durability of Amazon’s business as never before,” Bezos said in prepared remarks addressing the first-quarter results, “but it’s also the hardest time we’ve ever faced.”
Whereas companies in Hollywood and other industry sectors are slashing staff or furloughing employees, tech players say they are still hiring through 2020, though at a slower pace than previously projected. “With our strong financial position and the important social value our services provide, we’re planning to hire at least 10,000 more people in product and engineering roles this year,” Facebook chief Mark Zuckerberg told analysts last week.
The ad businesses of Facebook, Google and Amazon will definitely weather the storm — and not all of their competitors will, says Nicole Perrin, principal analyst at market research firm eMarketer. The pullback will only get worse in the near term, she predicts. For example, video ad spending could decline as much as 21% year over year in the second quarter, according to her forecasts. That could mean more M&A in the sector. “Overall, it points to probably more consolidation in the digital ad market later this year or into 2021,” she says.
Meanwhile, digital entertainment is getting a massive adrenaline shot because of the health crisis, with virtually all theaters shut down nationwide. Netflix reeled in a record 15.7 million subscribers in the first quarter, though execs believe the torrid pace won’t continue through the rest of 2020. On another front, Universal’s direct-to-streaming “Trolls World Tour” in its first three weeks of release pulled in almost $100 million — a record for a digital-only movie — and those transactions went through platforms owned by Apple, Amazon, Google and NBCUniversal’s Fandango along with those of pay-TV operators.
“At this moment in time, Netflix and large streaming services are much better positioned than film production companies,” says Michelle Wroan, KPMG’s media industry leader in the U.S. “The eyeballs are in the home.”
It remains to be seen in the post-COVID-19 reality who the winners and losers will be. Wroan believes theaters and live events will rebound eventually. “Humans are social beings,” she says. “There’s pent-up demand to be social” — by which she means in real life, not on Facebook.
On the other hand, the pandemic is training consumers to satisfy their entertainment diets without setting foot outside the house. That bodes well for traditional media companies that have shifted to direct-to-streaming models, and not a moment too soon amid life in quarantine. Disney already has a hit in Disney Plus, and WarnerMedia hopes HBO Max will make a splash later this month.
Says Innovid’s Chalozin, “I’m betting a lot of these behaviors will not go back.”
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