Digital advertising - low entry barrier, low exit barrier

Facebook and Google could potentially lose $44 billion in ad revenue in 2020 due to Covid-19. That is a sizeable ~4% of their combined market cap as on March 27, 2020, and even if we adjust for the recent market crash, it still forms ~3% of their combined peak market cap of the last 6 months. It shows us that in unpredictable and uncertain times such as these, the first plug pulled out is from digital marketing, since it is not a long contract typically and hence investment in this form of advertising is fairly liquid. This relative ease of retraction from digital advertising makes it clear that it is less immune to such shocks than traditional advertising. 

There is a long-term lesson to be taken away from this. To safeguard themselves from such shocks in the future, they will need to diversify their current business model, have more sticky revenue streams such as premium services membership (LinkedIn). For Amazon, the hit has been relatively mild, because the company’s advertising is mostly related to product searches. For Facebook and Google this could also mean diversification of advertising categories. Currently these platforms concentrate more heavily on travel, leisure, entertainment, and other extremely discretionary items that serve no advertising purpose at such a time. In the long-term, these companies can also monetize the current services that are seeing increased user engagement right now, as this will provide not only additional revenues all the time but also a hedge during a downturn like this.