How Facebook’s newsfeed change is stoking uncertainty about its future

For Facebook Inc. and its wildly successful social-media network, the changes it announced to its news feed on Thursday could have sweeping implications.

Announced in a blog, Facebook’s objective is to give posts from users’s friends and family—personal connections—a higher priority than content produced by the news media, viral videos and other non-personal connections such as for-and-nonprofit corporate pages.

The changes by the Menlo Park, Calif.-based organization led by CEO Mark Zuckerberg are a direct response to criticisms that it helped to spread counterfeit facts, notably during the 2016 U.S. presidential election between now-President Donald Trump and Hillary Clinton.

Facebook disclosed last September that operatives from Russia, aiming to influence the Trump-Clinton election, bought ads on its platform.

Altering the software code behind the news feed, arguably the most significant changes made at Facebook since it went public in 2012, will affect users in a number of ways too, a fact that Facebook executives say is likely to lead to less time spent on the platform.

“I want to be clear: by making these changes, I expect the time people spend on Facebook and some measures of engagement will go down,” Zuckerberg wrote. “But I also expect the time you do spend on Facebook will be more valuable. And if we do the right thing, I believe that will be good for our community and our business over the long term too.”

With a plethora of media platforms and devices such as TV competing for eyeballs, the time spent using Facebook is roughly equal to the amount of advertising the maker can sell, which in turn correlates with its revenue.

So far, Wall Street hasn’t loved the newsfeed changes, at least based on the recent stock slide.

After Facebook’s announcement late Thursday, investors sent FB, -4.47%  its stock shed 4.5% to $179.37 the following session. Still, even with Friday’s downturn, Facebook’s shares over the past 12 months boast a gain of 40%, compared with the benchmark S&P 500 index’s SPX, +0.67%  advance of 22.5% over the same period, according to FactSet data.

But the broad overhaul of how it presents news and other information could be a more persistent drag on the outlook and revenues for the Silicon Valley media giant, some market strategists said.

“This clearly sounds negative for 2018 revenue growth at first glance, full stop, but the magnitude is unclear,” wrote Barclays analyst Ross Sandler in a note to clients Friday.

Fake news

Ultimately, Zuckerberg is trying to combat the dissemination of deliberately fabricated information by foreign governments, and address the assessment by some that it has become a haven for propaganda.

Former Facebook executive Chamath Palihapitiya has been vocal in his view of what he describes as the social network’s role in fanning the flames of division in society. He points to a feedback loop of information in Facebook’s news dissemination tools that can reinforce biases rather than bringing people together. “The short-term, dopamine-driven feedback loops that we have created are destroying how society works. No civil discourse, no cooperation, misinformation, mistruth.”

Executives from Facebook, Google GOOG, +1.51% GOOGL, +1.67%  and Twitter testified on Capitol Hill last autumn, acknowledging their roles in Russian election meddling.

Zuckerberg has seemingly taken the criticisms to heart.

“The changes to news feed are consistent with Mark’s comments on the earnings call about handling fake news on Facebook,” said Needham & Co. analyst Laura Martin in a telephone interview. “Changes to the news feed are the next logical step.

“It’s smart from a regulatory point of view—the company is already spending a lot of money on humans looking at fake news. The regulatory impact is positive,” she said.

Competitive outlook

Still, even before the announced changes, ad inventory growth was on a downtrend, Sandler wrote.

Daniel Ives, head of technology research at GBH Insights also says Zuckerberg & Co’s shift fosters near-term uncertainty, with the possibility—not certainty—that Twitter Inc. TWTR, +4.35%  may benefit from shifting ad dollars.

“It’s a drastic change, and caught people off guard,” said Ives in a telephone interview. “But Facebook is always two steps ahead of where we think they are and it’s a shift that could drive longer term engagement.”

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Read: Facebook reveals big changes that will put friends ahead of business

Yet because demand for Facebook ads is strong, in large part because the company has made significant strides in its ability to work with advertising clients to improve the effectiveness of each dollar spent, a reduction of available ad space will likely result in that space becoming more valuable, thus growing or holding the top line.

“Facebook is an auction,” Needham’s Martin said. “If time spent falls, that implies fewer ad units, which implies a higher price per ad unit.”

It’s also possible that Facebook could turn to its other business units such as Instagram and chat services Messenger and WhatsApp to increase the amount of inventory, wrote Barclays’s Sandler. While he cautioned investors on the implications of the news feed changes, his note says that increasing inventory could reduce the impact on 2018 ad growth to “low single digits.”

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Regardless of ad inventory compression or expansion, the newsfeed changes also correlate with targeting metrics that Facebook has introduced in the past year. One, called “dwell,” or the amount of time users hover over posts in the news feed that they are reading and watching, is especially important.

Christopher Olenik, Chief Executive of Agency 2.0, told MarketWatch in a telephone interview that he saw a link between some of the new metrics, such as dwell time available to advertisers, and the changes announced Thursday. “I think there’s a connection between those two,” he said, referring to dwell time.

The changes will benefit companies and advertisers creating high-quality content to engage Facebook’s audience, he says, versus using automated tools to broadcast messages and other methods that may not be as enticing for Facebook users.

Moreover, Facebook has been fighting to eliminate spam, says Olenik.

“At any point you can scroll through your feed and see bad content,” said Olenik. “It’s engagement bait, and click bait. That’s what Facebook is fighting and they’re trying to get back to where they started: more person to person.”

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