Snap stunned Wall Street with its latest results.
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Apple
‘s push to protect consumer privacy by limiting targeted advertising on mobile devices, announced more than a year ago, is finally hitting home for both ad-reliant online businesses and the companies that use those ads to drive sales.
Advertisers that rely on mobile are scrambling for alternative ways to reach consumers. And online businesses are feeling the effects where they hurt the most—on the bottom line. How widespread the damage will be should become clearer next week, when Facebook (ticker: FB), Twitter (TWTR), and Alphabet (GOOG) all report September quarter results.
Apple’s move is a potential game-changer in the world of targeted advertising, which has long been one of the backbones of the internet’s economy. The company’s decision means advertisers — from luxury retailers to auto makers to financial services — cannot tell whether an Apple user has seen an ad. While targeted ads can still take place on Android devices, many companies place particular value on reaching Apple’s customers.
Data from the mobile-app research firm Flurry indicates that only 15% of U.S. consumers opt into tracking when offered the choice—no surprise, given that the only advantage for consumers is that the ads they see are more targeted. In August, Flurry noted that at least 80% of iOS devices had been updated to versions of the software with the new tougher ad standard.
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The issue came into focus late Thursday, when the social network Snap (SNAP) stunned Wall Street with disappointing third-quarter financial results and an outlook for the fourth quarter that fell well short of expectations. The company placed part of the blame on supply-chain troubles—companies struggling to meet current demand aren’t inclined to spend money on direct-response ads to generate orders they can’t fill.
But Snap also outlined the impact from Apple’s changes in the privacy rules. Apple’s latest iOS operating system warns users that an app is trying to track their behavior across apps, website and devices and gives them an easy way to block that activity. That is making it a lot harder for advertisers to target the audiences they want and measure the effectiveness of their ads.
Needham analyst Laura Martin noted that Snap generates 100% of its revenue from mobile devices, and that half of that is for direct-response advertising, intended to spur consumer purchases. Ads on Apple devices account for about 70% of Snap’s revenues, she estimates.
Martin and other analysts point out that Facebook’s advertising business looks a lot like Snap’s in its reliance on ads on mobile devices. Facebook stock fell 5.7% Friday, ahead of the company’s earnings report on Monday, cutting the social network’s valuation by more than $50 billion. Snap shares plummeted 25%.
But the ramifications of Apple’s changes go well beyond those companies. “The changes “will be disruptive – in some cases very disruptive – to both ‘Net advertising platforms and to a very large number of internet advertisers, especially direct response mobile marketers,” Evercore ISI analyst Mark Mahaney said in a research note Friday.
As Snap explained in detail on its earnings call on Thursday, Apple’s privacy push affects the online ad market in multiple ways. Apple’s changes have “upended many of the industry norms and advertiser behaviors that were built on IDFA, Apple’s unique device identifier for advertising, over the past decade, which now require a double opt-in by users in order to access directly,” Snap CEO Evan Spiegel said on the call.
Spiegel noted that Apple rolled out a proprietary solution known as SKAdNetwork, or SKAN, to allow app-based advertisers to continue measuring their advertising on iOS. But he says Apple’s new approach isn’t as effective as the company had hoped, and doesn’t work as a stand-alone option.
MoffettNathanson analyst Michael Nathanson said in a research note that Facebook has been the most vocal of the social media companies in warning about how Apple’s move could hurt its business from Apple’s policy change. Facebook CFO Dave Wehner said one quarter ago that the impact would be higher in the third quarter than the second. Earlier this year, the company launched a campaign to defend targeted advertising, placing full-page ads in major newspapers, in part to motivate consumers to agree to opt-in to tracking.
The Snap news has triggered a broad selloff in both social networking stocks and providers of digital advertising tools. Snap’s comments about the drop in ad budgets by supply-constrained direct response advertisers might be just as important as the Apple issue.
In addition to the declines in Snap and Facebook stock, Twitter fell 4.1% and Alphabet lost 3.1%, though they appear to have less exposure. Twitter is more reliant on brand advertising than the kind of direct-response ads that drive Facebook and Snap. And the search advertising on Google aren’t reliant on Apple tracing data because search queries themselves allow for targeted ads that don’t rely on personal information.
Advertising infrastructure players are getting hit hard, with Trade Desk (TTD) off 6.7%, Magnite (MGNI) down 9.4%, and PubMatic (PUBM) 8.9% lower. The downdraft has also hit Roku (ROKU), off 3.7%, which is highly reliant on targeted advertising, but doesn’t depend on Apple’s platform.
Amazon .
com (AMZN) stock was down about 2.6% ahead of its earnings report next week. Although concerns about shortages remain an issue for the company, and could hurt its own ad business, there is a potential offset. Direct-response advertisers who have counted on Facebook and Snap could shift more dollars to Amazon ads, where they won’t be reliant on Apple’s ad platform for targeting.
Write to Eric J. Savitz at [email protected]
