How Advertising’s Massive Shift Affects Facebook, Snapchat, and Twitter

The digital advertising landscape changed dramatically in the last year. In this video clip from “The Virtual Opportunities Show” on Motley Fool Live, recorded on May 24, Fool.com contributors Demitri Kalogeropoulos and Travis Hoium discuss some of the interesting ad trends in today’s digital market and how they’re affecting some major companies.

Demitri Kalogeropoulos:Roku (ROKU 4.34%) took a massive hit,” Fourth Horseman says, “Today is there really as big a danger to their advertising revenue as there is in the social media advertisers like Snap (SNAP 0.86%)?” Travis, what do you think about that?

Travis Hoium: I think taking a step back and thinking about what’s going on in advertising is really important right now. I heard an interview with Eric Seufert, who has been in the advertising space for a really long time, working with buyers so the companies that are placing ads on Snapchat and Facebook [a part of Meta Platforms (FB 0.72%)] and things like that.

I think the way to think about it is there’s two kinds of advertising in today’s digital market. There’s direct response advertising. This is where you put an ad up and you want somebody to take a direct action. You want them to go buy a shirt or download an app or something like that. You want to measure how many times did I show this ad? How many times did somebody click on it? Who was I showing it to?

This is what Facebook did really well for a really long time. The app tracking transparency changes that Apple (AAPL 1.76%) implemented last year really broke some of the ties there because it broke what ads you’re showing, who you are showing it to. But they don’t allow you to track somebody across the internet anymore. Shopify (SHOP 5.58%) is being impacted by this.

It starts with a company like Snap or Facebook or even Google [a part of Alphabet (GOOG 0.19%)(GOOGL 0.28%)]. But then once you go to Shopify’s site or Unity (U 3.50%), would be another example. They can’t track you going into Shopify and seeing you clicked on the advert, did you actually buy the shirt or not? That’s what broke in the system.

The other advertising is brand advertising. This is the Coca-Cola (KO 0.60%), the just awareness ads that are going on. This is typically what we see in TV, is brand advertising because you’re not typically making a direct purchase from something that you see in an ad on TV.

This is the dynamic that we have to think about in the digital ad space right now. Facebook has been talking about this for a while because I think they are probably the most advanced in understanding how their advertising market works. They are also very heavily impacted by the direct-response business, specifically on something like Instagram, you’re shown a retail ad and they want you to make a purchase right now.

Snap, on the other hand, is primarily brand advertising. What we’ve seen over the last few months is in this interview that I listened to with Eric Seufert was really interesting because it goes through the internal dynamics that happened at companies like Facebook and Snap and how there’s basically a delay between ATT comes out in, I think it was about a year ago now.

It takes a little while to get onto people’s phones. People have to opt-in then they have to say no, don’t track me, when they update their Facebook app or their Snapchat app. Then there’s another delay because these algorithms are judging what your actions are and trying to predict things based on a 30-day and 90-day rolling basis.

The algorithm then doesn’t break until let’s say fall. This data and info that you had in April, something broke in the process. But you didn’t really see the full impact on that until fall. Well, what happens in fall? In the fall, the brand advertising picks up because it’s holiday season. Now, retailers and all companies that I want you to go buy presents for the holidays they start ramping up their spending.

Then you basically have some of the direct-to-consumer spending fall out of the market, but it immediately gets replaced by brand spending. You don’t see the real impact of ATT changes really until first quarter of 2022. I think that’s what we’re seeing right now, is the fallout of a lot of these changes that took place almost a year ago at this point and companies not really understanding.

I want to be fair to say that the impacts that we’re seeing are not companies saying, hey, our revenue was a billion dollars and now it’s going to be $500 million. It’s more like we thought we were going to grow 20%, but we’re only going to grow 10%. There is still a lot of advertising going on, but the granular data is not there to do direct response advertising in the way that it was a year ago because of the ATT changes.

Now layer on top of that, you have companies pulling back spending because there’s potentially a recession already happening right now. I think that’s what we’re seeing from Snap’s numbers is they probably saw, if we’re reading between the lines a little bit, a lot of their brand partners go, hey, we’re going to cut back on our spending, and it started happening maybe a month ago or maybe two months ago.

It wasn’t like they projected this in December. It was really over the last few months that companies just started to tighten a little bit. Where can they cut? Well, they can cut back on their ad spending a little bit. That’s the dynamic that I think it’s important to tease out because a lot of companies are saying their growth rates are going to slow down or are there seeing pressure in ad spending.

But understanding what exactly that means and what kind of ads they were serving and what markets they were in. I think it was interesting. They dove into Unity specifically, and how Unity was in almost a worse position than most other companies because they relied on data from the App Store to feed into what people are doing in apps, what sort of in-app purchases they’re making. There are ways that they’ll be able to adjust to that in the future. But short-term, there is a lot of headwinds.

A lot of dynamics that I think it’s important to understand what’s going on underneath the surface and how some of these changes that Apple made a year ago, Google’s making them now. The advertising market is going to change over time and we’re just starting to see the impact of that.


https://www.fool.com/investing/2022/06/04/how-advertisings-massive-shift-affects-facebook-sn/

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