Over the past decade, there have been two more or less universally accepted truths about digital advertising. First, the fast-growing industry was largely independent of the business cycle. Second, it was dominated by the duopoly of Google (in search ads) and Meta (in social media), which a jealous rival has likened to John Rockefeller’s influence on oil in the 19th century.
These two truths are now being challenged simultaneously. As China’s economy slows and the West heads into recession, companies everywhere are squeezing marketing budgets. Until recently, that would have meant cutting back on non-digital ads but maintaining or even increasing online spend. With most advertising dollars now going online, this strategy is getting out of hand.
This past quarter, Meta reported its first year-over-year revenue decline. Snap, a smaller competitor, is laying off a fifth of its workforce.
For Meta and Google’s parent company Alphabet, the cyclical issue may not be the worst of it. In the past, they may have hoped to offset the slower growth of the digital advertising pie by grabbing a bigger slice of it. No longer. Although the two are expected to rake in around US$300 billion (NZ$508 billion) in combined revenue this year, sales of their four main western competitors will be nearly a quarter as much.
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That may not sound like much, but it is still a cause for concern for incumbents. Five years ago, most of these competitors were barely in the advertising business. As digital advertising enters a transformational phase, challengers appear well positioned to increase their profits.
The loudest newcomer in the digital advertising scene is TikTok. In the five years since its launch, the short-video app has drained ad dollars from Facebook and Instagram, Meta’s two largest sites. So much so that the two social networks are reinventing themselves in the image of their Chinese-owned rival. TikTok’s global revenue will surpass $11 billion this year and double by 2024, predicts eMarketer, an analyst firm.
The TikTok threat is well known — not least Meta’s boss Mark Zuckerberg, who mentioned the “unique” competitor five times on a recent conference call. But Meta and Google have more to worry about closer to home, where a trio of American tech firms are loading more and more ads around their core businesses.
Chief among them is Amazon, which is expected to capture nearly 7% of global digital ad revenue this year, up from less than 1% just six years ago. The company only started reporting details of its ads business in February, when it announced 2021 sales of $31 billion. As Benedict Evans, a tech analyst, points out, that’s about as much as ad sales for the entire global newspaper industry.
Amazon executives now speak of advertising as one of the company’s three “engines” alongside retail and cloud computing.
Next is Microsoft, which is expected to quietly account for more than 2% of global sales this year — slightly more than TikTok. Its search engine Bing has only a small share of the search market, but this market is gigantic. Microsoft’s social network LinkedIn is unspectacular, but its business-to-business ads allow the company to monetize time users spend on it about four times faster than Facebook, estimates eMarketer’s Andrew Lipsman. It generates more revenue than some mid-tier networks, including Snapchat and Snap’s Twitter.
The most surprising new Adman is Apple. The iPhone manufacturer used to rail against intrusive digital advertising. Now it sells a lot of its own ads. As smartphone sales stagnate, the company is looking for new ways to monetize the $1.8 billion devices, from smartphones to smart headphones, that it already has in circulation. So far it only tries to do ads and does not report any sales figures. But Bloomberg recently reported that Apple’s ads business is already generating $4 billion in revenue annually, making it about as big an ad platform as Twitter. Apple executives think there’s a lot more to come.
You may well be right. Changes are imminent in the digital advertising industry that accommodate the big tech challengers. Apple itself is partly responsible for what may be the most momentous development. App Tracking Transparency (ATT) rules introduced last year have made it significantly more difficult for advertisers to follow users across the web in order to serve them interest-based ads. The EU law on digital services, presented earlier this year, goes in the same direction. America is considering its own similar laws.
The crackdown on tracking has been particularly harsh on platforms that serve display ads that target consumers based on their interests, as opposed to things they were actively searching for. Meta, whose social networks specialize in such ads, said in February that ATT will save $10 billion from its ad business this year. It is trying to develop other ways of identifying consumer interests. Smaller platforms also rely on display advertising, but their job is harder without meta’s deep pockets. At least, that’s how investors see it: Snap’s market value has plummeted 83%, or $97 billion, over the past 12 months.
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Amazon, Apple, and Microsoft, on the other hand, are insulated against anti-tracking initiatives. They mainly rely on their own “first party” data. Amazon’s ads are based on what users are searching for on their site: type “socks” into the search bar and you’ll see sponsored promotions for just that. Microsoft’s Bing is similarly immune.
LinkedIn is less likely to be, although Microsoft could theoretically use data from Bing to optimize the ads shown to LinkedIn users (not at the moment, although it has looked into it).
Ads on Apple’s App Store follow the same principle as Amazon: search for TikTok, for example, and you might see an ad for a competing app like Pinterest.
Apple is rumored to be preparing to launch ads in its Maps app to promote local businesses. By switching to payment transactions, it could learn something about the shopping habits of customers. None of this would require tracking as all behavior takes place on Apple’s platform.
The other big coming shift in advertising is the shift in television from broadcast and cable to internet-connected televisions capable of delivering targeted advertising.
Amazon has already shown ads alongside sports on its Prime Video streaming service. Apple has done the same with Apple TV+, and may yet introduce an ad-supported subscription tier, as rivals Netflix and Disney+ will soon do.
Microsoft doesn’t have a TV offering, but its acquisition of Xandr, an ad-tech company, earlier this year has enabled it to advertise to other streamers. In July, Netflix chose Microsoft for its forthcoming advertising deal – to the disappointment of Google, which had been bidding for the deal, and to some surprise at Microsoft itself.
Digital advertising is spreading to other markets where the new challengers are well positioned. Audio is undergoing a similar digitization as video as listening shifts to streamed music and podcasts. This presents an opportunity for Amazon and Apple, both of which offer audio streaming services and make smart speakers.
Both also have voice-activated assistants, Alexa and Siri, that can bark out promotions just as easily as they can take orders. Amazon sees Alexa as both a future seller and a servant.
Meanwhile, Microsoft’s upcoming acquisition of Activision Blizzard, a video game giant, is poised to become a powerful force in this fast-growing and increasingly ad-supported industry. The Xbox console is already showing some ads on the user’s on-screen “dashboard” and will reportedly soon offer developers more help selling in-game ads. Activision’s entities include King, maker of Candy Crush; Last year, King made $2.6 billion in revenue from ads and in-game purchases by its quarter billion players.
As digital advertising penetrates more and more sectors of the economy, “a new order will emerge,” Lipsman believes. He believes that Amazon may overtake Meta in total advertising revenue within five years. Google, with its healthy search ads and extensive YouTube video and audio services, is better positioned to take advantage of the changes to come. Still, it will become more competitive in the future.
The established digital advertising duo might have hoped that their empire would only expand as more and more advertising went online. Instead, it looks like new competitors are about to enter their business.
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