The digital advertising landscape in 2022 (Part 2)

The digital advertising landscape in 2022 (Part 1)

Google's dominance

Of course, you could easily make the argument that when it comes to digital advertising , there’s Google and everyone else. Google obviously faces competition from Amazon in e-commerce search advertising —only FTC v. Facebook surpasses European Commission v. Google Shopping in terms of overly narrow, reality-ignoring market definitions—but Google dominates in nearly every other vertical. Moreover, that dominance is supported, at least in part, by the same factors that underpin Amazon.

The first is obvious: search advertising works well, and that’s what Google does best.

The second one, about data collection, is more interesting, especially in the context of ATT. Facebook CFO Dave Wehner complained during the company’s most recent earnings call:

We believe the overall adverse impact of iOS on our business in 2022 is approximately $10 billion, so this is a sizable headwind for our business. We are seeing this impact across many verticals. E-commerce was one area where we saw a notable slowdown in growth in the fourth quarter. Similarly, we are seeing challenges in other areas such as gaming. But it’s worth noting that Google is very much in the spotlight when it comes to e-commerce, an area where it sees strength. Given that we know e-commerce is one of the verticals most impacted by iOS restrictions, these restrictions may partially explain the difference between what they see and what we see.

If you look closely, we believe that these restrictions by Apple are intended to free browsers from Apple's requirement that apps provide tracking prompts, which means that search ads have access to much more third-party data for measurement and optimization than an app-based advertising platform like us. So when it comes to leveraging data, you could argue that it's not exactly the same for us. So relative to services like ours, we believe the Google search advertising business may benefit from this because it doesn't face the same restrictions as Apple. Considering that Apple still collects billions of dollars each year from Google search ads, they have an incentive to maintain this policy difference.

It should be noted that Apple has always viewed the browser as an exception to App Store restrictions (not that it had any choice: Apple has no influence over the open web compared to the App Store), so don't take Wehner's conspiracy theories about the iPhone maker's motivations at face value.

At the same time, the broader observation is a wise one: Google essentially has first-party privilege on the iPhone when it comes to data, thanks to being the default search engine on Safari and having its business built on the web. It can show ads to iPhone users on their default browser and track how those ads perform on third-party sites, to a much greater extent than an app like Facebook that directs users to the exact same third-party site can do.

As for ATT, it's worth noting that the only Google segment that didn't meet Wall Street expectations was YouTube. I suspect it's no coincidence that YouTube itself has high app installs, and AT&T's restrictions on what these installed apps can report to Google may be hurting the business a little. At the same time, the same factors that drive advertising toward other parts of Snap's business, and Amazon's advertising, could also benefit Google, including Android.

Facebook's Risks

There’s no doubt that Facebook has been badly hurt, but the company is by no means doomed, in large part because while search is incredibly effective at finding what you want, it still needs to make you aware of things you didn’t know existed. The latter is where Facebook excels, better than any other platform: by knowing who you are and what you’ve liked or purchased in the past, Facebook can serve ads for products or apps you’ve never heard of in your Feed, Stories, or, well, repost them in Reels.

In my opinion, this form of advertising is actually more important than search advertising: yes, in some cases agencies can show content that aligns exactly with what you’re searching for, but search advertising can often feel like raking together organic results that give you what you’re looking for. And Facebook-style display ads are the foundation for a whole new range of pure internet businesses. These niche-focused companies are only possible if the whole world is your market, but they will fail if there is no way to find the customers who are searching for what they have to offer; Facebook ads solve this problem.

But this discovery mechanism depends not only on data; it also depends on attention. That’s the huge challenge TikTok poses: Apple and AT&T may have the biggest financial impact on Facebook, but TikTok and the loss of attention puts Facebook at greater existential risk.

Graphical advertising market

Still, Facebook disappointed investors by forecasting revenue of $27 billion to $29 billion for the quarter. In the three-way advertising market mentioned in this article, Facebook is still the main player, but a dark horse is already emerging. To illustrate this market — but remember that this explanation is an oversimplification given the size and diversity of the opportunity — let’s break the market into four quadrants, with the x-axis defined by apps and (physical and digital) commerce, and the y-axis defined by search and display advertising:

A 2×2 chart with search and display ads on the y-axis and apps and commerce on the y-axis.

In 2016, the market looked like this:

Market quadrant map in 2016, when Google and Facebook each occupied half of the market

Here’s what the market could look like in 2022:

Market quadrant map in 2022, the dominant players are challenged by Amazon and Apple

First, note that a large portion of Google’s market is not represented in this graph, essentially anything other than search for e-commerce. The still-huge brand advertising market is also not included. However, direct response advertising is truly native to the internet, and while Google and Facebook are still important, note the two new entrants that have significant advantages:

Amazon:

When it comes to e-commerce, Amazon's supply and logistics operations are the best, which is used not only to drive Amazon's own first-party retail, but also to drive third-party merchant services. In fact, this is another way to think about how Amazon is immune to AT&T: it’s not that the company doesn’t have a ton of third-party merchants on its platform, but that by taking on the role of aggregator, rather than a platform that brings all those third-party merchants into its own apps and websites, it breaks through the restrictions imposed by Apple. And then it basically makes it so that those third-party merchants have no choice but to buy ads if they want to be noticed by customers.

apple:

Apple launched its App Store advertising business in the fall of 2016, starting with the most obvious place: search. Apple doesn't disclose its advertising revenue, but analysts estimate it at $5 billion a year. Not all of them are search ads — Apple has added ad inventory to the App Store’s Recommended section and in owned-and-operated apps like Apple News — but most of them are search ads; until now, Apple’s inventory has been limited to the top-right corner.

One of the biggest questions about the future advertising landscape is whether Apple will trickle down into the “apps + discovery” quadrant that remains Facebook’s turf. If Apple did this, they would have an unparalleled advantage: remember that Apple has made it clear in its own App Store policies and in its testimony in the Epic case that it considers apps on the App Store to be Apple’s first party (this is how Apple justifies its own anti-referral anti-steering provision, likening website links to placing a logo for someone else in your own store, even if said logo is inside the app and not on the App Store). Therefore, Apple believes that denying Facebook the ability to understand installations and conversions through Facebook ads does not contradict the fact that Apple can fully understand the installation and conversion status of the ads it has placed.

This is not a hypothesis! Apple's Advertising and Privacy page states:

We may use information such as the following to perform targeted segmentation:

Apple News and Stocks: Topics and categories of stories you read and publications you follow, subscribe to, or have notifications enabled for.

• Account Information: Your name, address, age, gender, and devices registered to your Apple ID account. Information such as the name displayed on your Apple ID registration page or the name of your Apple ID account may be used to infer your gender. You can update your account information on the Apple ID website.

• Downloads, Purchases & Subscriptions: The music, movies, books, TV shows, and apps you download, as well as any in-app purchases and subscriptions. We do not allow ad targeting based on specific apps downloaded from the App Store or purchases (including subscriptions) made within specific apps, unless that action is taken by the app developer.

• Apple News and Stocks: Topics and categories of stories you read and publications you follow, subscribe to, or have notifications enabled.

• Ads: Your interactions with ads served by Apple’s advertising platform.

When choosing from multiple ads that may be appropriate to show you, we may use some of the information mentioned above, as well as your App Store search and browsing activity, to decide which ad may be most relevant to you. App Store browsing activity includes the content and apps you tap and view while browsing the App Store. This information is aggregated from across a user base and therefore does not identify you personally. We may also use information stored on your device (such as the apps you frequently open) and local processing to select ads to display.

As you can see, Apple currently does not allow developers to direct downloads or purchases of apps they don’t own, which is what AppLovin does. But that doesn’t mean Apple can’t do it, too; again, the company has made it clear that it considers every app on an iPhone — and especially purchases made there — to be Apple data, and the document makes it very clear that Apple only considers data collection problematic when third parties are involved. To do this, Apple could set up a bidding-based ad network, taking advantage of pre-installation and placing these ads on an Apple-controlled network available to third-party apps. This is basically Facebook on a steroid — although, admittedly, in theory, Apple has never been very good at this sort of thing — but since only Apple can see the data (just like only Facebook can see data from third-party apps), Apple can work its way all the way to monetization.

Needless to say, this would be an example of downright anti-competitive behavior; crushing competitors through platform control and then taking over their businesses is the very thing that antitrust laws are supposed to prevent. But if you look up, Apple has gotten away with its App Store policies for years, while Facebook has been sued for restricting competition, and even though it faces an existential threat from TikTok, who knows, maybe Apple can get away with it this time.

I hinted above at one argument why this might not happen: Apple has tried advertising before and failed miserably. As any Apple fan will tell you, Apple is not about advertising, it's about products. But then again, if you told those same enthusiasts that Apple would face the wrath of developers, antitrust lawsuits, and regulatory roadblocks around the world because it insisted it should take 15-30% of all digital content consumed on the iPhone, they'd probably say that's not going to happen either. It's obvious that the $10 billion in revenue Facebook loses this year will go somewhere else, and the chances of Apple's services story coming to fruition have never felt greater.

There is also a higher-level summary of this discussion; I wrote at the end of my 2020 article “The End of the Beginning”:

In other words, today’s cloud computing and mobile device companies (Amazon, Microsoft, Apple, and Google) may well become the GM, Ford, and Chrysler of the 21st century. In the early days of technology, new challengers emerged every year. Now, the beginning of this era is coming to an end. However, this does not mean that the influence of technology has weakened to a certain extent. In fact, its influence has just begun.

One company was particularly notable by its absence: Facebook. The real power of technology comes from having digital roots in the physical: for Amazon, it’s fulfillment centers and logistics for e-commerce, and data centers for cloud services. For Microsoft, that's its data centers and global sales organization and years of partnerships with nearly every business on the planet. For Apple, that's the iPhone, and for Google, it's Android and its mutually beneficial relationship with Apple (not as reliable as Android, but that's why Google is paid about $15 billion a year - and growing - to maintain its position). Facebook has gained enormous benefits from just one app, but the freedom of action that comes with it means it is dependent on iOS and Android, a dependency that Apple has exploited, if not fully, at least in part.

Most importantly, this is how we understand why we bet on Meta and why it is so important to CEO Zuckerberg. Investors might want the company to focus on what it does best; Zuckerberg wants to build a company that is truly independent of anyone.

Translator: boxi.