Facebook's 3 Biggest Challenges in 2020

Political and regulatory pressures, content moderation and developing fresh revenue sources are some of the key hurdles facing Facebook next year.
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Facebook CEO Mark Zuckerberg said it himself: 2020 is going to be a tough year for the company.

Zuckerberg said as much on Facebook (FB) - Get Report third quarter earnings call, when he told investors that over the next year, with the 2020 Presidential race ramping up, Facebook could be “at the center of the debate” any time there’s a partisan political conflict, potentially generating renewed criticism and even further investigations of the company. Facebook shares are up 49% so far this year.

Political matters aren’t the only challenge facing Facebook in 2020 however. Below are some of the key themes to watch next year.

1. New Revenue Sources

Facebook’s core newsfeed isn’t the crown jewel of its portfolio anymore, at least where its next wave of growth is concerned. Instagram and Stories, and even WhatsApp, are looking a lot more interesting these days to many growth-seeking investors.

Accordingly, Facebook’s advertising products are evolving. Stories have evolved into a popular medium for sharing content among friends, both on Facebook and Instagram, and advertisers are beginning to better understand how to monetize these emerging forms of communication on Facebook. Interest in Stories will likely remain high next year, and Facebook will need to meet investor expectations on that front.

Although it's nascent, there is hope among investors that shopping and commerce will turn into a meaningful source of revenue, particularly on Instagram and WhatsApp. Analysts have noted that Instagram, as a visual-first medium that's increasingly popular among advertisers, is a natural fit for shopping. In November, Facebook rolled out Facebook Pay, a PayPal-esque peer-to-peer payments system  that, if widely adopted, could make shopping through Facebook easier -- and potentially boost monetization potential across all of Facebook, Instagram, and WhatsApp. 

2. Problem Content

Ever since Cambridge Analytica, Facebook has taken pains to inform people how its processes for purging fishy accounts, apps and other types of problematic content are improving. Recently, it said in a blog post that it removed 3.2 billion fake accounts in Q2 and Q3. It also broke out for the first time its content moderation efforts on Instagram versus core Facebook, saying that it deleted millions of pieces of content depicting child abuse and self-harm.

Progress on content moderation is a good thing, but it also doesn’t come cheap. Facebook spends in the ballpark of $5 billion per year on safety, security and content moderation efforts, and that cost isn’t likely to come down significantly anytime soon. On its third quarter earnings call, Zuckerberg told investors that "I don't foresee any time in the near future that AI is going to make it so that the cost comes down...there's just so much content flowing through the system that we do need a lot of people looking at this. And I don't think that's going to change anytime soon."

Relying on humans for content moderation comes with its own host of problems. Months ago, an investigation by The Verge into poor working conditions of Facebook contractors who moderate content sparked a stiff backlash. It’s also an imperfect system, a game of whack-a-mole that will likely remain a liability for Facebook well into the future.

3. Regulatory Headaches

Facebook’s Libra project was supposed to represent its next big innovation in financial services. Instead, it became a flash point for long-simmering ire towards the company for privacy-related infractions, political advertising, content moderation issues, and even its spotty record on civil rights. In two separate hearings, one with Facebook executive David Marcus and the other with CEO Mark Zuckberberg, lawmakers vented their frustrations with the social media firm’s impact on society.

It’s uncertain what form Libra will take when, or if, it launches as initially planned in 2020. If it does launch, it’ll likely be a drastically scaled-down version of Facebook’s original vision of a global digital currency with a large network of partners; after being told by lawmakers they could bear liability for problems with Libra, several major partners, such as PayPal (PYPL) - Get Report and Mastercard (MA) - Get Report, withdrew their participation.

Beyond just Libra, however, regulators in the U.S. and elsewhere are keeping their eyes on Facebook. Facebook is one of several big tech companies facing an antitrust review by the DOJ, FTC and nearly all state attorneys general, likely focusing on its data practices, acquisitions, and product development. In Europe, it faces potentially even greater pressures, including scrutiny into hate speech, stiff potential penalties for GDPR violations, and a new antitrust probe by the European Commission. Next year, it will have to reassure investors that regulatory pressures won’t negatively impact its long-term prospects. 

Facebook and MasterCard are holdings in Jim Cramer’s Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.