Facebook (NASDAQ:FB) was already facing difficulties from reduced marketing budgets as a result of COVID-19 before large public companies started announcing that they would pause advertising on Facebook in support of the Stop Hate for Profit campaign, which criticizes Facebook for not doing enough to stop hate speech on its site. 

Most of Facebook's revenue comes from small businesses. Still, large corporations made up nearly 25% of annual revenue for the company in fiscal 2019. Understandably, Facebook is not taking the changes lightly. It set up a meeting with the leaders of the boycott, which CEO Mark Zuckerberg and Chief Operating Officer Sheryl Sandberg attended, to work toward a solution. When companies such as Starbucks, Coca Cola, and most recently Disney stop advertising on your site, it is in your interest to listen to their concerns. However, there may be a hidden reason why these companies are reducing advertising on Facebook.

An employee working at Facebook.

Major corporations are pausing spending on Facebook. Image source: Facebook.

Regulatory changes might be one reason for reduced spending on Facebook

Major corporations find it profitable to advertise on Facebook. The ability to access its more than 2 billion monthly active users is enticing for companies looking to reach a broad audience. What's more, Facebook offers marketers tools to target their ads. For instance, a marketer can choose to target 18- to 24-year-olds living in California who have expressed an interest in skydiving. That ability creates savings and efficiency in marketing budgets, increasing the return on investment of each dollar in the ad budget.

While advertisers may not like the way Facebook monitors the content on its site, this is not a new development. What did change is advertisers' ability to target their ads in California. In response to the California Consumer Protection Act (CCPA) kicking in on July 1, Facebook implemented a feature called Limited Data Use, which limits marketers' ability to track user behavior of California residents. Already, brands are seeing a reduction in conversion rates in California of 84% relative to other states. Coincidentally or not, the announcements of reduced spending started coming out soon after July 1.

The CCPA changes how an organization deals with consumers' data in California. Additionally, it gives the people of California the right to opt-out of specific data-collecting and data-sharing policies. California is a lucrative market for advertisers, with its wealthy coastal cities and a population of nearly 40 million people. Uncertainty regarding the achievable targeting in such a large market may be giving marketers pause.

What this means for investors 

Admittedly, this may not be the leading reason advertisers are reducing spending, but it could represent an additional push on top of the already decreasing marketing budgets as a result of COVID-19 and the movement of the Stop Hate for Profit campaign. 

Still, investors should be aware that the CCPA went into effect July 1, and that it is adding to the already volatile situation at Facebook. Pullbacks from large corporations are a cause for concern for investors in this information technology stock, regardless of the reason.