How the Massive Advertising Shift Affects Facebook, Snapchat and Twitter

Jhe digital advertising landscape has changed dramatically over the past year. In this video clip from “The Virtual Opportunities Show” on Motley Fool Live, recorded on May 24Fool.com contributors Demitri Kalogeropoulos and Travis Hoium discuss some of the interesting advertising trends in today’s digital marketplace and how they’re affecting some big companies.

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Demitri Kalogeropoulos:Roku (NASDAQ: ROKU) took a huge hit,” says Fourth Horseman, “Today there’s really just as much danger to their ad revenue as there is to social media advertisers like Instantaneous (NYSE: SNAP)“Travis, what do you think?

Travis Houm: I think stepping back and thinking about what’s going on in advertising is really important right now. I heard an interview with Eric Seufert, who’s been in the advertising space for a really long time, working with buyers, so companies that place ads on Snapchat and Facebook. [a part of Meta Platforms (NASDAQ: FB)] and things like that.

I think the way to think about it is that there are two types of advertising in today’s digital marketplace. There is direct advertising. This is where you put an ad and want someone to take direct action. You want them to go buy a shirt or download an app or something. Want to measure how many times I showed this ad? How many times has someone clicked on it? Who did I show it to?

This is what Facebook has done very well for a very long time. App Tracking Transparency Changes That Apple (NASDAQ:AAPL) implemented last year really broke some ties there, because it broke the ads you serve, who you serve them to. But they no longer allow you to follow someone on the internet. Shopify (NYSE: SHOP) is impacted by this.

It starts with a company like Snap or Facebook or even Google [a part of Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL)]. But once you go to the Shopify site or Unity (NYSE:U), would be another example. They can’t track you by going to Shopify and seeing that you clicked on the ad, did you actually buy the shirt or not? That’s what broke the system.

The other advertising is brand advertising. It’s the Coca Cola (NYSE:KO), awareness ads just happening. That’s usually what we see on TV, it’s brand advertising, because you’re not usually making a direct purchase from something you see in a TV ad.

This is the dynamic we have to think about in the digital advertising space right now. Facebook has been talking about this for a while because I think they’re probably the most advanced in understanding how their ad market works. They’re also very heavily impacted by direct response activity, especially on something like Instagram, you’re shown a retail ad and they want you to make a purchase right away.

Snap, on the other hand, is primarily brand advertising. What we’ve seen over the last few months is in this interview I listened to with Eric Seufert was really interesting because it goes through the internal dynamics that have happened in companies like Facebook and Snap and how it there’s basically a delay between ATT coming out in , I think it was about a year ago now.

It takes a bit of time to access people’s phones. People have to sign up, then they have to say no, don’t follow me, when they update their Facebook app or their Snapchat app. Then there is another lag because these algorithms are judging your actions and trying to predict things on a rolling 30 and 90 day basis.

The algorithm then doesn’t stop until, say, it drops. This data and information that you had in April, something broke in the process. But you didn’t really see the full impact on that until the fall. Well, what happens in the fall? In the fall, brand advertising resumes because it is the holiday season. Now retailers and all the companies I want you to go shopping for gifts for the holidays are starting to ramp up their spending.

Then some direct-to-consumer spending disappears from the market, but it is immediately replaced by branded spending. You don’t really see the real impact of the ATT changes until the first quarter of 2022. I think that’s what we’re seeing right now, it’s the fallout from a lot of these changes that took place there almost a year ago at this point and companies not really getting it.

I want to be fair in saying that the impacts we’re seeing aren’t companies saying, hey, our revenue was $1 billion and now it’s going to be $500 million. It’s more like we think we’re going to grow 20%, but we’re only going to grow 10%. There’s still a lot of advertising going on, but the granular data isn’t there for direct-response advertising like it was a year ago because of the ATT changes.

Now, on top of that, you have companies cutting back on spending because there’s potentially a recession already underway right now. I think that’s what we’re seeing from Snap’s numbers is that they’ve probably seen, if we read between the lines a little bit, a lot of their brand partners are saying, hey, we’re going to reduce our expenses, and it started happening maybe a month or maybe two months ago.

It wasn’t like they planned this in December. It’s really been the last few months that companies have started to tighten up a bit. Where can they cut? Well, they can cut their ad spend a bit. That’s the dynamic that I think is important to untangle because a lot of companies are saying their growth rate is going to slow or there’s pressure in ad spend.

But understanding what exactly that means and what kind of ads they were showing and what markets they were in. I think it was interesting. They dove into Unity in particular, and how Unity was in an almost worse position than most other companies because they relied on app store data to learn about what people are doing in apps , on the type of in-app purchases they make. There are ways to adapt to it in the future. But in the short term, there are a lot of headwinds.

There are a lot of dynamics that I think are important in understanding what’s going on below the surface and how some of these changes Apple made a year ago, Google is making them now. The advertising market will change over time and we are only just beginning to see the impact.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Suzanne Frey, an executive at Alphabet, is a board member of The Motley Fool. Demitri Kalogeropoulos holds positions at Apple, Meta Platforms, Inc. and Shopify. Travis Hoium has positions in Apple, Shopify, Snap Inc. and Unity Software Inc. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Apple, Meta Platforms, Inc., Roku, Shopify and Unity Software Inc. The Motley Fool recommends the following options: Shopify January 2023 $1140 Long Calls, Apple March 2023 Long Calls $120, Shopify January 2023 Short Calls $1160, and Shopify Short Calls $1160 $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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