Google could lose $17 billion in revenue over the next 12 months. Facebook has perhaps $8 billion at risk. The cause, according to mobile marketing professionals?
Apple’s new privacy changes.
Last year Apple announced that the Identifier For Advertisers (IDFA) would become explicitly opt-in in its next mobile operating system update, iOS 14. The IDFA helps advertisers measure ad effectiveness as well as track devices and people. In September, Apple delayed execution of that change until early 2021. But the change is coming, and most in the industry think it’s coming soon.
What that means is greater user privacy.
And what that means for Facebook and Google is impaired advertising efficiency. Unless huge numbers of consumers opt in to tracking, ads will no longer be as personalizable to our unique history, interests, and activity as they could in the past.
In fact, Facebook itself estimated personalization accounts for 50% of the value of its advertising.
Now mobile advertising expert Eric Seufert, who formerly led user acquisition for Angry Birds and other apps, has estimated the privacy cost of Apple’s change. He estimates some people will opt in to tracking: likely around 20%. (Facebook has stated it will ask for permission to track; Google has not yet revealed how it will proceed.) For the other 80% of people, however, advertising will lose some of the efficiency that personalization has delivered. Facebook and Google can recover some efficiency by better contextual targeting, he says, but not all of it.
(Personalized targeting picks ads to show you based on your history and activity; contextual targeting selects ads based on on the content and focus of the app or website which you are using.)
“I believe that Apple’s upcoming iOS privacy changes will significantly harm Facebook’s revenue, causing a roughly 7% revenue impairment in Q2 2021 in the base case scenario,” Seufert writes. “Subsequent quarters will also face revenue losses.”
While modeling out a best case scenario results in only a 2% revenue impairment and a worst case shows almost 14% impairment, it’s entirely possible that Google and Facebook won’t be able to recover a significant amount of efficiency in ad targeting.
At 10% impairment, the numbers don’t look pretty:
- Google averaged $43 billion of revenue over the last four quarters
- Annualized, that’s $169 billion
- At 10%, Google loses almost $17 billion in revenue
For Facebook, the numbers are similar but just a bit smaller:
- Facebook averaged $20 billion in revenue per quarter over the last four
- Annualized, that’s $80 billion
- At 10%, Facebook loses about $8 billion in revenue over the next 12 months
Of course, both companies are growing, and Covid-19 has actually accelerated some of the businesses that buy ads on their platforms, so those revenue numbers could be low, and the impact could be greater.
It’s also important to note that on-platform ads (Facebook-delivered ads in the Facebook app; Google ads on the Google website) can still use all the data Facebook or Google have, respectively. It’s primarily ads on third-party apps and websites that are impacted, although Apple’s tracking changes also affect how much data from those third-party properties makes it back to the ad networks.
Ultimately, however, it’s clear that Apple’s privacy changes have the potential to significantly harm major ad network revenues for years to come.
What could mitigate these losses?
- More people could opt in to tracking by Facebook and Google.
- Google and Facebook (and other ad networks) could get much better at contextual targeting that does not require tracking people and devices around the internet.
- Google could refuse to abide by Apple’s rules. Facebook, which has seen its Facebook Gaming app refused by Apple multiple times, has announced it will abide by Apple’s new platform privacy rules, but Google has kept very quiet on how it will respond to Apple’s changes.
- Ad prices could drop due to lower efficiency, but advertisers could use the opportunity to simply advertise more, making up the difference.
Seufert thinks that #4 is unlikely, because some of the highest-spending industries absolutely rely on tight targeting and delivery of ad messages. Facebook’s largest verticals are e-commerce, retail, and CPG, and Facebook COO Sheryl Sandberg said in an earnings call recently that “these businesses rely on personalized advertising to reach potential customers and grow.”
Others seem to agree.
“It’s fair to expect a significant lack of efficiency in all ad network auctions as Apple push out their proposed privacy changes,” says Paul Bowen, general manager of AlgoLift, which automates mobile user acquisition and was recently acquired by Vungle, a mobile-focused ad network, adding that he expects innovative solutions from his company and others to improve the situation.
Others think that while Facebook and other big players will have revenue risk in the short term, they’ll figure it out in the long term.
Even if it’s not easy.
“I believe it is highly likely that Facebook will recover short term revenue losses over the next several years, as they have the reach to adapt to the new paradigm,” says Brett Bauer, CEO and co-founder of Appfluencer, an ad campaign management tool. “The trust that Facebook has following the election may be negatively impacted from all parties, and as a result the opt in rate will be lower than expected, which would have a more negative impact on revenue.”
Ultimately, of course, time will tell.
I’ve reached out to both Facebook and Google for comment, and will update if they respond.