The online advertising industry is turned upside down

FWhere digitala d sellers, 2021 was always going to be a tough act to follow. As work, play and shopping have moved online during the covid-19 pandemic, internet advertising has exploded. In America, spending rose 38% to $211 billion, compared to an average annual growth of 21% over the previous five years, according to eMarketer, a research firm. Smaller social media companies such as Pinterest and Snap have seen triple-digit quarterly year-over-year revenue growth at times. Even giants such as Alphabet (Google’s parent company) and Meta (Facebook and Instagram), which receive one-third and one-fifth of the world’s digital advertising dollars respectively, have seen rates of 50%.

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The contrast with 2022 is striking. On July 21, Snap announced that its sales rose 13%, year-over-year, in the second quarter, its most anemic on record. In a letter to investors, the company confessed that so far, revenue this quarter was “approximately stable”. The market was spooked and the company’s stock price fell almost 40%. The following day, Twitter, which also relies on advertising, reported that its revenue fell slightly in the three months to June, compared to a year ago.

This has raised concerns about the health of online advertising, driving down the stock prices of industry titans. On July 26, Alphabet duly disclosed Snap-like’s quarterly sales growth of 13%, up from 62% in the same period last year. It was less terrible than expected (its market value rose 8% on the news) but still pretty bad (it’s still a bit below where it was before the Snap bomb). A day later, Meta said its revenue had fallen for the first time, by 1% year-on-year.

Upstart challengers like Snap are most at risk. When marketing budgets are tight, advertisers tend to stick to what they know, says Bernstein’s Mark Shmulik, a broker. And they know Google Search much better than Snap’s experiences with augmented reality. Large companies also have larger and more diverse sets of customers; Meta serves 10 million advertisers worldwide, compared to Snap’s 1 million or less. This insulates them somewhat from weakening demand.

A little, but not completely. Last year’s covid-boosted baseline isn’t the only thing weighing on the digital advertising market. Ad sellers are feeling the lagging effect of Apple’s change to privacy settings on iPhones last year, which prevents advertisers from tracking people’s behavior on its devices, and therefore measuring the effectiveness of digital ads . Snap cited Apple policy as the reason for recent weak results. Meta estimates the change will cut $10 billion, or 8%, from its revenue this year.

Alphabet and Meta also face stiffer competition. TikTok, a Chinese-owned short-video platform popular with Western teens, is drawing attention to US social media and ad revenue with it. Perhaps more worryingly, previously incurious tech titans are also getting in on the action. Over the past two years, Amazon has built the fourth largest online advertising company in the world. Apple has a small but growing advertising operation. And Microsoft has just been named Netflix’s partner in the video streaming giant’s new ad-supported offering.

Another reason for the slowdown of large ad sellers is also structural. For years they ignored the problems of the wider economy, as many customers came to see online advertisements as a virtual storefront that had to be maintained even in difficult times, often at the expense of others. advertising expenses. This has left fewer and fewer non-digital advertising dollars available to be diverted online. In a pinch, therefore, advertisers may now have to put a damper on their digital billboards.

The pain is not felt in the same way. Google, whose search ads are less dependent on the kind of tracking that Apple has curbed, may have benefited from Meta’s misery, helping to offset some of the slowdown. On July 27, Spotify bucked the trend among competing platforms, seeing surprisingly healthy advertising revenue from its music streaming service, which helped push its share price up 12%. Even so, the business cycle could catch up with big tech.

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