Facebook (NASDAQ:FB) has already seen a partial exodus of large companies this year. The #StopHateforProfit boycott that began in July and attracted big-name brands like Clorox, Verizon, and Coca-Cola put a dent in Facebook's revenue growth in the third quarter. It also delivered a noticeable lift for rivals like Pinterest (NYSE:PINS) and Snap (NYSE:SNAP).
Now, it seems like a similar movement is afoot among small businesses.
Small- and medium-sized businesses (SMBs), which make up the bulk of ad spending on Facebook, aren't moving away from Facebook as a political statement (as many of those who signed on to the boycott have). Instead, they're fleeing because of clunky execution by Facebook's artificial intelligence screeners. These algorithms are too often banning advertisers that haven't actually done anything wrong (flagging an ordinary image as nudity, for instance) and effectively locking them out of advertising on Facebook and preventing them from running their businesses.
The algorithms are using AI minus the I
Facebook CEO Mark Zuckerberg has long touted the advantages and the potential of artificial intelligence. More than any other solution, he's bet on AI as a way of solving key challenges the company faces around censorship, hate speech, and political misinformation which have long dogged the company.
However, it now seems like those AI products aren't quite ready for primetime. Facebook's own messaging boards are filled with complaints from advertisers about being blocked from posting ads. One poster said her business manager told her that the tool to post Facebook ads had been banned for 10 days without a clear explanation. Other users dismissed Facebook for having "virtually non-existent customer service." The problem seemed especially bad in the run-up to the election as Facebook's attention focused on political misinformation. One poster said: "Situation right now is that a lot of accounts are randomly banned, and Facebook are putting all efforts on the election."
It seems that Zuckerberg's faith in AI as the solution to its problems has been misguided. With at least 7 million advertisers on its platform, it may be difficult for Facebook to serve all of them with human customer service, but the company is clearly failing a significant number of its customers. One digital ad agency executive who believed these issues could be costing Facebook billions of dollars told me that these kinds of problems are leading companies to diversify away from Facebook to peers like Pinterest and Snapchat. Though their ad products may not be as sophisticated, they have more of a human touch and don't have the same issues with AI, banning ad campaigns, or poor customer service.
A golden opportunity
While Facebook saw relatively weak revenue growth in the third quarter, both Pinterest and Snapchat experienced strong rebounds and saw their stocks surge on the reports. At Pinterest, revenue jumped 58% in the third quarter, much better than the company's guidance of mid-30% growth. Pinterest management forecast a 60% top-line jump in the fourth quarter, a bullish sign for the company's momentum. At Snap, revenue growth rebounded to 52% in the third quarter, but the company declined to give guidance for the fourth quarter.
On Pinterest's third-quarter earnings call, management noted solid growth from SMBs with the help of improved ad products and that it had capitalized on new interest from advertisers from earlier in the pandemic. Snap did not address any influx of small businesses advertisers, but management pointed to product improvements around its Android integration and user-focused product improvements like Lens Studio, which allows users to post using augmented reality.
With the AI issues, Facebook is now facing an exodus from both its largest advertisers over the political boycott and the SMBs that make up the core of its business. The challenges that small advertisers are facing, in particular, amount to unforced errors on the part of Facebook, and that creates opportunities for rivals like Pinterest and Snap. Both companies are growing their user bases faster than Facebook, and are quickly improving their ad products just as advertisers are eager to diversify away from Facebook, the dominant force in social media.
Complaints about Facebook's AI among advertisers are nothing new and date back at least to the Cambridge Analytica scandal that followed the 2016 election which led Facebook to tighten its ad protocols. Zuckerberg also seems committed to artificial intelligence as a solution, even if his own customers are clearly unhappy with it.
Combined, these factors look set to drive long-term momentum for both Pinterest and Snap, as advertisers are clearly hungry for options and Facebook seems unwilling or unable to change. The recent blowout quarterly results could just be the start of a trend.