The online advertising market is in decline, dragging the tech giants down with it

Markets / July 29, 2022 / Admin / 0

“We appear to have entered an economic downturn that will have a broad impact on the digital advertising industry,” Meta CEO Mark Zuckerberg told analysts on Wednesday at the start of the company’s earnings call. “It’s always difficult to predict the depth or duration of these cycles, but I would say the situation looks worse than a quarter ago.”

Meta (Facebook), Twitter (TWTR), Instantaneous (INSTANTANEOUS), Google (GOOGL), Apple (AAPL) and Microsoft (MSFT) all indicated that reduced advertising budgets – due to the recent market downturn and economic uncertainty – weighed on their revenues in the prior quarter and would likely continue to be a challenge in future quarters. Spotify (PLACE) also said it saw a “slowdown” in its ad business starting in the last two weeks of June.

Even those who held dominant market positions were not immune. Google’s core advertising business grew just 11.6% year-over-year, compared with an increase of nearly 69% in the same period last year. Meta, the parent company of Facebook and Instagram, posted its first year-over-year quarterly revenue decline in its history as a public company. (Advertising accounts for the vast majority of Meta’s revenue.)

Those who rely much less on advertising have also felt the pinch. Microsoft said it suffered $100 million in revenue in the second quarter due to a reduction in advertising spend. Apple CEO Tim Cook told analysts Thursday that “digital advertising was clearly impacted by the macroeconomic environment in the June quarter,” weighing on its services revenue.

Shares of Meta were down about 7% since the start of this week on Friday morning. Snap shares fell more than 25% after reporting earnings last week.

“Today’s results reflect very well the impact of a challenging economic environment that is hurting nearly every tech mega-company,” Haris Anwar, senior analyst at Investing.com, said in a statement.

This is a stark reversal for the online advertising industry. After a brief dip at the start of the pandemic, advertisers began pumping money into online ads to reach consumers who were spending more time plugged into screens. This time last year, Meta and Snap both reported that quarterly sales had doubled from a year earlier, and Google’s were up 62%.

But the world is a very different place now. Russia’s months-long war in Ukraine has caused some uncertainty among advertisers, and many tech companies have responded to the attack by cutting off the ability for Russian-based companies to advertise on their platforms.

More recently, soaring inflation, a market slowdown and fears of a recession have prompted companies to cut advertising budgets, the tech giants said in their earnings reports this week. Many companies, including in the tech industry, have recently slowed hiring and investment amid economic uncertainty.

The very nature of how some online advertising campaigns are executed has made the pain immediate. Snap’s chief financial officer, Derek Anderson, noted during the company’s earnings call last week that “ad spend – particularly direct-response advertising at auction – is one of the very few elements in the structure. costs of a business that they can reduce immediately in response to pressure” on other parts of their business.

These macroeconomic challenges are expected to carry over into the remainder of this year. Meta said Wednesday it expects current-quarter revenue to be between $26 billion and $28.5 billion, which would mark a second decline in quarterly year-over-year revenue. Although Snap declined to provide financial guidance due to the uncertain environment, it said third-quarter revenue so far was flat compared to a year earlier.

The slowdown also comes after Apple’s app tracking changes, which took effect in the second half of last year, had already weighed on some tech giants’ businesses. Apple has introduced a feature that allows users to opt out of certain app tracking, removing some crucial data that social media platforms use to target ads. The change hurt the ad businesses of Meta, Twitter and Snap, as well as smaller players such as Pinterest. Meta’s ad revenue alone suffered a $10 billion hit from last year’s privacy update, and Snap’s Anderson said last week that the changes “upended a decade of advertising industry standards”.

And while Google benefits from its own third-party data, YouTube’s advertising business hasn’t been entirely spared.

“Right now it’s basically a perfect storm for digital advertising,” said DA Davidson analyst Tom Forte. For businesses that rely on advertising, “there is a high risk to your revenue.”

— CNN’s Rishi Iyengar contributed to this report.

dragging the tech giants down with it - CNN, Technology, The online advertising market is in decline