The online-ad industry is being shaken up

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For digitalad sellers, 2021 was always going to be a hard act to follow. As work, play and shopping shifted online during the covid-19 pandemic, internet advertising boomed. In America spending rose by 38%, to $211bn, compared with average annual growth of 21% in the preceding five years, according to eMarketer, a research firm. Smaller social-media firms such as Pinterest and Snap at times hit triple-digit year-on-year quarterly revenue growth. Even giants such as Alphabet (Google’s parent company) and Meta (Facebook’s and Instagram’s), which receive a third and a fifth of the world’s digital-ad dollars, respectively, clocked rates of 50%.

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The contrast with 2022 is stark. On July 21st Snap reported that its sales grew by 13%, year on year, in the second quarter, its most anaemic ever. In a letter to investors, the firm confessed that so far this quarter revenue was “approximately flat”. The market was spooked, and the company’s share price fell by almost 40%. The next day Twitter, which also depends on advertising, reported that its revenue had fallen slightly in the three months to June, compared with last year.

That triggered concern about the health of online advertising, dragging down the share prices of the industry’s titans. On July 26th Alphabet duly disclosed Snap-like quarterly sales growth of 13%, down from 62% in the same period last year. That was less terrible than expected (its market value rose by 8% on the news) but still pretty bad (it remains a bit below what it had been before the Snap bombshell). A day later Meta said that its revenue declined for the first time, by 1% year on year.

Upstart challengers like Snap are the most exposed. When marketing budgets get trimmed, advertisers tend to stick to what they know, says Mark Shmulik of Bernstein, a broker. And they know Google search much better than they do Snap’s experiments with augmented reality. The big firms also boast larger and more diverse sets of customers; Meta serves 10m advertisers globally, compared with Snap’s estimated 1m or less. That insulates them somewhat from softening demand.

Somewhat, but not fully. Last year’s covid-boosted baseline is not the only thing weighing on the digital-ad market. Ad-sellers are feeling the delayed effect of Apple’s change last year to the privacy settings on iPhones, which stops advertisers from tracking people’s behaviour on its devices, and thus from measuring the effectiveness of digital ads. Snap cited the Apple policy as a reason for recent weak results. Meta estimates that the change will shave $10bn, or 8%, from its revenue this year.

Both Alphabet and Meta are also facing fiercer competition. TikTok, a Chinese-owned short-video platform beloved of Western teenagers, is taking eyeballs from American social media, and ad revenue with them. Perhaps more concerning, previously ad-incurious tech titans are also getting in on the action. In the past couple of years Amazon has built the world’s fourth-biggest online-ad business. Apple has a small but growing ad operation. And Microsoft has just been named as Netflix’s partner in the video-streaming giant’s new ad-supported offering.

Another reason for the big ad-sellers’ slowdown is similarly structural. For years they shrugged off blips in the broader economy, as many customers came to see online ads as a virtual shopfront that needed to be maintained even in tough times—often at the expense of other ad spending. That has left ever fewer non-digital ad dollars available to be diverted online. In a pinch, advertisers may now therefore need to take an axe to their digital billboards.

The pain isn’t felt equally. Google, whose search ads rely less on the sort of tracking Apple has curbed, may have benefited from Meta’s misery, helping offset some of the slowdown. On July 27th Spotify bucked the trend among challenger platforms, reporting unexpectedly healthy ad revenues from its music-streaming service, which helped buoy its share price by 12%. Even so, the business cycle may be catching up with big tech.

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