What the results from the online companies tell us about the future direction of online advertising

We are entering the final stretches of the calendar Q3 results season and it seems there is so much to write about. One thought was to write about the strong bounceback of WPP’s trading update, which has led it to leapfrog the holding groups' pack in the Q3 organic growth rate table (memo to Mark Read: I will come back to that). Another was to join the veritable list of commentators talking about the metaverse. I have my own views on that but that is for another time. 

However, probably the major long-term story coming from the results is that we are finally getting some insight into the impact of Apple’s IDFA changes on the online advertising platforms (please note, none of this offers investment advice).

For a few quarters, there has been a phoney war going on, with platforms suggesting the changes will make a difference at some point but then going on to report impressive advertising numbers.

That stopped in Q3, as things got serious. Snap plunged more than 30% after missing revenue expectations for Q3 and, more importantly, giving weak Q4 top-line guidance as it outlined how the IDFA changes were making a significant impact. Facebook’s Q3 numbers were decidedly mixed and, while it did not suffer the same share price fate as Snap, it is clear it is being hurt. 

Both companies tried to blame the macro-economic environment as a major factor in their muted Q3 performance and weak outlook. However, that defence has been somewhat undermined by the results from other online companies. Twitter beat revenue expectations and said that the fallout from Apple’s iOS changes was “modest”.

Alphabet (Google) beat consensus expectations on its Q3 revenues and earnings and suggested again, like Twitter, that the consequences were not significant, highlighting only the effect on YouTube’s direct response revenues.

Neither said the macro-economic environment was affecting them significantly. Backing up their case is that the results from the agency holding groups have generally been strong and in three cases (WPP, Interpublic and Publicis) full-year guidance was raised. The macro defence looks to be leaky.  

What seems to be happening is that the brunt of the IDFA changes is actually very targeted, predominantly affecting those platforms that are both mainly direct response and SME focused.

Brand advertising does not look to be altered by the changes and there is an argument for saying larger advertisers are adopting a wait and see attitude. If this is correct, then what is likely to become more relevant – particularly for investors – is differentiating between the tech companies based on what they do and where they are exposed. That should start to feed in to valuations.

A second, more important point is whether these effects are temporary or permanent. One quarter does not a summer (or winter) make but the signals so far are that they are likely to be more permanent than temporary.

Both Snap and Facebook highlighted how they were trying to come up with measures that would overcome the consequences of IDFA. However, while Facebook at least was confident it could resolve the issues around measurement fairly quickly, a resolution to the targeting issues was likely to take much longer. The latter will not be resolved soon. 

What could be the nightmare situation is what Snap alluded to (but Facebook didn’t) in its conference call, namely that the iOS 14.5 changes were likely to be followed by further changes when Apple rolls out iOS 15.

The risk is that Apple’s continual implementation of new changes makes it harder for platforms such as Snap and Facebook to develop a stable, long-term solution (as any solution is immediately superseded by changes in another rollout) and, eventually, advertisers lose faith and shift revenues elsewhere.  

I think that there is a high probability this is Apple’s aim. While Apple has undoubtedly benefitted in terms of greater advertising revenues since the changes have been launched, my view has been that they were devised in part, at least (and probably more), as a deliberate attempt to weaken Facebook’s (with Snap as collateral damage) business by stripping it of the revenues it needs to survive.

The reasons Apple might target Facebook would be another article in itself but the fact that other online players such as Google and Twitter have seen limited effects does tend to suggest a more targeted attack. If that is correct, then Apple’s continual employment of changes will be very deliberate and designed to cause maximum impact.

Can Facebook and Snap come back? If the above interpretation is correct, it will be an uphill struggle as Apple will continue with its creeping barrage of changes that constantly puts the platforms off balance. 

Snap probably has the greater hurdles because, put bluntly, it is probably not seen as “must have” by advertisers when it comes to scale, whereas Facebook is. It is also easier for advertisers to continue with Facebook if they were forced to choose, plus Facebook has its own trove of data.

Ironically, the growing rise of data walled gardens, with advertisers and retailers building up their own data sources, may offer some relief if the platforms can forge closer bilateral links with such parties but it will be a long, hard road. 

One final thing to add. I am launching my paid subscription platform this week, so please check it out. I will still very much be writing for Campaign, which I thoroughly enjoy, but the service will have in-depth analysis of what is happening, future trends and the numbers. Thank you all in advance.  

Ian Whittaker is founder and managing director of Liberty Sky Advisors. He is writing a regular column for Campaign about the advertising landscape from a financial standpoint. For further insights and articles, subscribe at www.ianwhittakermedia.com