Who Killed the Social Media Advertising Boom?

A decade of dizzying growth in social media advertising has come to an abrupt end. Who killed the boom?

Silicon Valley began looking for a culprit this week, and Mark Zuckerberg, founder of Meta, and Sundar Pichai, chief executive of Alphabet, used their conversations with analysts during their companies’ earnings announcements in recent days to point in the direction. of the unmistakable storm clouds that hang over the world economy.

But the most striking signs of weakness are concentrated on social media platforms.

US advertisers are on track to spend $65.3 billion on networks like Facebook, Snap and Twitter this year, up just 3.6% from a year ago. That’s about ten times slower growth than in 2021, according to eMarketer estimates.

The social media slowdown is such that the expected growth rate for the segment in 2022 is almost the same as that of traditional media, such as television and radio, whose audience has been falling for years.

Meanwhile, big advertising groups have been avoiding the digital turmoil: WPP, Omnicom, Publicis and Interpublic have raised their forecasts for the year. “Snap predicted an advertising recession in the first quarter,” said Mark Read, WPP’s chief executive. “We’re still waiting for it to happen.”

So who are the suspects in the social media attack?

Mark Zuckerberg

As frustration grows on Wall Street over Meta’s refusal to reduce investment in the metaverse despite a slowdown in advertising, some investors and analysts see the Facebook founder as the biggest threat to the company’s longevity.

Analysts at MoffettNathanson even compared Meta to the traditional media companies that big tech groups have scrambled over the past ten years. “Again, with each passing quarter, the rumors of Meta’s steady decline in the face of competitors seem more and more credible,” they wrote.

Mark Mahaney, an analyst at Evercore, challenged Meta executives, in their conversation with analysts Wednesday, about the company’s progress in rebuilding ad-targeting tools that have been nearly rendered useless by changes to Apple’s privacy rules. “It had a real financial impact,” he said. “And from what I hear in your statements, I just don’t see this issue as a big investment priority for you.”

Meta executives insisted they had improved their advertising technology. But Zuckerberg himself – as the last of the founders at the head of a major technology company in Silicon Valley, and whose controlling interest in the company ends up insulating him from any investor fury – did not apologize.

“I would just say there’s a difference between something being experimental and not knowing how good that thing is going to be,” he said, adding that “I think those who are patient and invest with us will end up being rewarded.”

the big advertisers

With the economy close to a downturn, inflation soaring and lingering supply chain problems, some big advertisers have decided to take a more prudent approach. Meta’s vice president of finance, David Wehner, told analysts that growth from big advertisers “remains a challenge.”

Advertisers in industries such as financial services and consumer goods are “all having to rethink,” said Phil Smith, director general of the ISBA, the UK advertisers industry association. “Trying to sell certain things at a time like this would be clueless.”

Colgate-Palmolive announced on Friday that it would reduce its marketing spend. But Coca-Cola and Nestlé are doing the opposite. Sir Martin Sorrell, chief executive of S4 Capital, noted that the overall digital advertising market was still expected to grow significantly next year. “Rumors of his death are greatly exaggerated.”

Social media platforms may be feeling the brunt of these cuts because of their advertiser mix. The WPP said digital platforms were more reliant on aggressive campaigns by money-backed venture capital companies that are looking to expand their market share. “A lot of that funding has dried up.”

TikTok

The short videos took social media by surprise. TikTok takes billions of eyes off Instagram and Snapchat. But as consumers’ attention wanes, so does the time available to show them advertising.

Not even TikTok has successfully monetized its advertising, according to employees at the company, which remains in the red. Analysts at eMarketer estimate that the platform will generate about $5 billion in US ad revenue — a fraction of Facebook’s revenue.

But the TikTok threat spooked Facebook and YouTube and caused both companies to scramble their own businesses, which had an impact on ad revenue. YouTube is trying to promote YouTube Shorts, but won’t start monetizing it until early next year.

Meanwhile, Instagram bet on Reels, the short-form video format developed by the company, which greatly upset some of its prominent users. “Stop trying to be TikTok. I just want to see pretty pictures of my friends,” grumbled Kim Kardashian and her younger sister Kylie Jenner.

The TikTok challenge is set to become increasingly difficult. Sarah Simon, a media analyst at Berenberg, said that “there is a lag between usage and monetization, and therefore they are likely to become an even bigger threat next year and beyond.”

apple

Apple Chief Executive Tim Cook insisted this week that its new App Store ad business was “not big compared to others.” However, it’s been growing rapidly, while privacy protections introduced in iOS a year ago took a $10 billion bite into Meta’s revenue.

Just this week, Meta accused Apple of “decreasing others’ income in the digital economy.” […] to grow their own businesses”.

Meta executives insisted, however, in their conversations with analysts on Wednesday, that the threat of Apple’s app tracking changes “diminished” in the third quarter after the company developed new tools to measure ad performance. .

games

With the growth of interactive entertainment over the last decade, game producers have become major advertisers on digital platforms. Mobile game developers have become particularly proficient at calculating the return on every dollar spent on Instagram or YouTube.

But changes to Apple’s privacy regulations have hampered advertisers’ ability to make those calculations, and gamers have started to look away from their screens, two years into the coronavirus pandemic.

In August, Electronic Arts Chief Executive Andrew Wilson pointed to “some slowdown in the broader mobile gaming market.” While gaming has shown resilience in past recessions, this was before free mobile gaming came along.

The impact of this trend is already making itself felt in revenue from Apple’s and Google’s app stores, much of which is driven by social media advertising.

Luca Maestri, Apple’s vice president of finance, described “some sluggishness” in the gaming segment due to “adverse macroeconomic winds”, and he anticipates this will continue. Philipp Schindler, vice president of business at Google, blamed a “decline in user engagement with games” on weaker Play Store sales, which creates “downward pressure on our advertising revenues”.

E-commerce

Retailers, including companies like Walmart and Target, are slowly creating their own digital marketing businesses, following Amazon’s lead. This in practice poses a new competitive threat to social media platforms.

Advertisers suddenly had a choice in how to reach consumers. Search-linked ads and banner ads also have the ability to reach customers closer to the point of purchase, an important factor for some advertisers.

So-called retail media have also been less affected by recent changes to privacy rules, such as those implemented by Apple, as they do not rely on “third-party” data tracking users on the web.

“Some of [dólares publicitários] from Facebook are going to Walmart, Target and obviously Amazon,” said Simon of Berenberg. Amazon this week announced that its ad revenue jumped 25% in the third quarter to $9.5 billion.

Translation by Paulo Migliacci