Clothing designer Alex Crane used to rely on precisely targeted online ads to get the word out to potential customers, but a giant snag emerged this year.
Apple
rolled out changes to its tracking technology, saying that would enhance users’ privacy.
Now, Crane says, it has become almost impossible to track the return on each dollar he spends on
Facebook
and Instagram–the two largest drivers of traffic to his site. Crane’s business hasn’t seen a dip in revenue, but managing its spending on the platforms has become far less precise.
“It’s more like we’re spending this lump sum on Facebook,” Crane said. “It’s a lot closer to traditional ads.”
How the change will affect Facebook and its rivals isn’t clear—even for ad executives, media buyers, and Wall Street analysts—but big-picture data is about to emerge. Facebook’s earnings, and those from other online-ad companies could show whether warnings of seismic changes to the industry have hit or missed the mark.
Twitter
and Snap will offer the first look as they report after the close Thursday, and Facebook is set to release earnings after the closing bell on July 28.
Despite Crane’s mixed experience—he said it was still early to make a definitive call on advertising on Facebook—a new world order of digital advertising doesn’t appear to be in the making, interviews with ad executives and analysts indicate. Ad platforms such as Facebook (ticker: FB), Alphabet’s (GOOGL) Google, and Twitter’s ad businesses will likely feel little, if any, blowback, over the long run, they say.
“Even if those companies suffer some signal loss because they can’t track you as thoroughly as they did in the past, where else are you going to go to spend your money and get a return?” said
Aaron Goldman,
chief marketing officer at Mediaocean, a company that specializes in digital media buying on behalf of clients. “Everyone has to play by the same rules.”
The change itself, at least, is straightforward. In April, Apple began requiring online companies to ask permission to track users’ activity beyond a single app as it rolled out a new version of its iOS mobile operating system. According to data from Branch, an ad-measurement business, at least three quarters of iPhone users have installed a version of Apple’s software that includes a permission prompt. Most of those people are telling apps they don’t wish to be tracked.
“It’s top of mind in every single senior leadership call I have,” said Ryanne Laredo, chief customer officer at the social media advertising technology provider Smartly.io. “It’s a very dynamic situation.”
So far this year, the tracking change has arisen 93 times on corporate earnings calls, nearly double the total in all of 2020, according to Sentieo data. Several analysts told Barron’s that in recent weeks, the Apple tracking change came up on nearly every call they held with investors to discuss the coming earnings. Advertisers, too, are asking a lot of questions.
Facebook could be the most significantly affected Big Tech company. Finance chief
David Wehner
called Apple’s tracking changes “manageable” but noted that it will be a “headwind for the remainder of the year.”
For advertisers, one of the most noticeable changes in recent weeks and months has been rising ad prices, according to several executives and media buyers overseeing digital ad spending. The shift is likely because of both rising demand, due to a recovering economy, and the changes Apple has made to tracking.
Social-media ad prices have gained 14% in the second quarter, compared with earlier this year, according to Chris Costello, senior director of marketing research at Skai, a digital ad-buying and data business. But none of the advertising executives Barron’s talked with said clients had reduced their Facebook ad budgets as a result. Crane, the clothing designer, hadn’t reduced his budget either.
It is also possible the Apple changes could affect Twitter, Snap, or even the likes of Google, though a Google spokeswoman said that the company no longer uses tracking that would require it to display a tracking prompt on its apps.
“The honest answer that anybody should give you is that the impact is not clear,” said Evercore ISI analyst
Mark Mahaney.
He pointed out that rather than damaging companies such as Facebook, the changes could have the opposite effect, making the big platforms more powerful because they already have so much user data that doesn’t rely on behavior outside their apps.
“I think it’s going to impact the revenue growth rates for internet advertising companies by a point or two for about two quarters,” Mahaney said. “That’s the materiality of the impact.”
Even for investors with detailed financial models, judging the impact on earnings will be a challenge. During the comparable quarter last year, concern over how badly the pandemic would damage the economy pushed advertisers to choke off digital ad spending. Last year’s decline will make it that much harder for investors to isolate Apple’s effect on ad businesses.
“The numbers are going to look very strong in the second quarter, no matter what,” BMO Capital Markets analyst
Daniel Salmon
said.
At the moment, Wall Street is expecting outsize growth. Consensus estimates for Facebook’s revenue, for example, are for year-over-year growth of 49% to $27.9 billion. That would be the sharpest increase in revenue in more than three years. Even Twitter, which has struggled to expand its lucrative U.S. user base, is expected to increase revenue 56% to $1.1 billion, after a 19% decline in last year’s second quarter.
Salmon said that when his team started to dig into the effects of Apple’s tracking changes, it appeared as though it would potentially trigger an Underperform rating on Facebook stock. But as Facebook started to change how it approached the issue in December—educating its advertisers and trying to get ahead of the shift—Salmon rethought his potential rating.
“Ultimately it turned into an Outperform,” Salmon said.
Write to Max A. Cherney at max.cherney@barrons.com
