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The Economist: Why the online advertising industry is shaking up

2022-09-17 21:50:44Biznes SHKRUAR NGA REDAKSIA VOX
The Economist: Why the online advertising industry is shaking up
A perennial boom is giving way to more uncertain times

For digital ad sellers, success in 2021 was hard to come by. As work, play and shopping moved online during the Covid-19 pandemic, online advertising also flourished, writes The Economist.

In America, spending rose 38% to $211 billion, compared with an average annual growth of 21% in the previous five years, according to eMarketer, a research firm.

Smaller social media firms, such as Pinterest and Snapchat, have posted triple-digit quarterly revenue growth on a year-over-year basis. Even giants like Alphabet (Google's parent company) and Meta (Facebook and Instagram), which pull in a third and a fifth of the world's digital ad revenue respectively, reached rates of 50%.

The contrast with 2022 is strong. On July 21, Snapchat reported that sales rose 13% year-over-year in the second quarter, its weakest year on record. In a letter to investors, the firm admitted that so far this quarter's revenue was "roughly flat." The market was shocked and the company's share price fell by almost 40%.

The next day, Twitter, which also depends on advertising, reported that its revenue had fallen slightly in the three months to June compared with a year earlier.

That sparked concerns about online advertising revenue, dragging down the share prices of industry titans. On July 26, Alphabet experienced quarterly sales growth of 13%, up from 62% in the same period last year. This was less bad than expected (its market value increased by 8%), but still not high growth. A day later, Meta said its revenue fell for the first time, by 1% on an annual basis.

New challengers like Snapchat are more vulnerable. When marketing budgets are cut, advertisers usually stick to what they know, says Mark Shmulik of the firm Bernstein. And they know Google search far more than Snapchat experiments with virtual reality.

Large firms also boast larger and more diverse client groups; Meta serves 10 million advertisers globally, compared to the 1 million or less Snapchat attracts. This insulates them somewhat from softening demand.

Somewhat, but not completely. The base level boosted by Covid-19 last year isn't the only thing weighing on the digital advertising market. Ad sellers are feeling the lingering effect of Apple's change last year to iPhone privacy settings, which prevents advertisers from tracking people's behavior on their devices and measuring the effectiveness of digital ads.

Snapchat cited Apple's policy as a reason for recent poor results. Meta estimates the change will cut $10 billion, or 8%, of revenue this year.

Alphabet and Meta are also facing tough competition. TikTok, the Chinese-owned short-form video platform beloved by Western teenagers, is targeting American social media and boosting ad revenue. Tech titans that were previously on the sidelines are also taking part in this trend.

In the past two years, Amazon has built the world's fourth largest online advertising business. Apple has a small but growing advertising operation. And Microsoft has just been named as Netflix's partner in the streaming giant's new ad-supported video offering.

Another reason for the slowdown of the big advertising sellers is the structural side. For years, they dodged headwinds in the broader economy, as many customers saw online advertising as a virtual store that kept them open during tough times — often at the expense of spending on other types of advertising.

This has left fewer and fewer dollars available for non-digital advertising. Therefore, advertisers may now need to make new calculations on their digital boards.

The pain is not spread everywhere equally. Google, whose search ads are less dependent on the kind of tracking Apple has stopped, may have benefited from Meta's predicament, and that has compensated for some of the slowdown.

On July 27, Spotify reported unexpectedly strong ad revenue from its music streaming service, which helped boost its stock price by 12%. However, the business cycle will soon affect the big tech companies as well.


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