INTRODUCTION:
The announcement that Facebook is killing off web supply on Audience Network is actually quite important. This is because the story is changing. You can expect a lot of questions on the next earnings call in regards to this announcement.
To be clear, for Facebook, web supply is not as important as mobile supply. Right now only web supply has been affected. This article suggests that mobile supply could be next. If so, then the story will change quite a bit for Facebook — and Twitter. Google is also in this camp, but Google has search and is more protected and diversified. Due to Google’s strength in AI, a pullback would be welcomed. Smaller companies like Criteo will also be affected.
For Facebook and Twitter, if mobile supply is cut off, we could see a lower average revenue per user become the norm across these platforms.
I would never suggest someone sell a winning position, however, if you’re in Twitter or Facebook, then be mindful of any drawdowns between now and January of 2022 for these less diversified ad companies (compared to Google). Twitter is up 20% this year, so feel free to ride that wave, but have a mental stop and understand the difference between a story or product that has changed compared to undulating market sentiment.
If the ad-tech industry changes how mobile supply operates on the back end, funds and institutions will know first. Funds have full-time analysts to track this. I agree with the Pivotal Research analyst who grew bearish after the Chrome browser changes and Apple’s iOS 13 changes … investors are growing complacent because they have seen some strong earnings reports despite data privacy headwinds. That quote from Pivotal matches my understanding of the situation.
We first covered this in the Google 2019 PDF in July. I also covered this for MarketWatch a few months later in October. However, this has taken time to evolve (hence the market’s complacency).
The real tourniquet on data collection is not coming from regulations, rather it’s coming from the browsers and mobile operating systems, which I describe below.
What is Changing: Browsers Now, Mobile OSs Likely to Follow
Although many consider Cambridge Analytica a temporary issue, the advertising industry would say the privacy changes that began with the GDPR, or the General Data Protection Regulations, had serious side effects. These privacy rules were a decade in the making, and were enacted by the European Union about two months after Cambridge Analytica broke. There was quite a bit of speculation by the Wall Street Journal and others that the GDPR would actually make Google and Facebook stronger (which is not true).
The GDPR’s biggest accomplishment was to put in context the issues around tracking people and collecting data across apps or websites where no relationship exists. Having these standards allowed others outside of the EU to follow.
The main set of regulations that followed the GDPR is the California Consumer Privacy Act (CCPA). The CCPA was put on the 2018 ballot and passed, and is now currently in effect as of January 1st, 2020.
Browsers
Apple has been whittling away at data tracking on the Safari browser since 2017. I covered this in-depth back in July for our premium members.
Apple’s initial release of Intelligent Tracking Prevention had little effect on Google but did have an effect on publishers. Google stated at CES 2019 that publishers were seeing half the CPM value as a result of ITP’s impact (CPMs is a common way to pay for advertising and is based on cost per 1,000 impressions).
Apple then released ITP 2.1 in an attempt to stop Google and Facebook’s tracking methods, and furthered the attempt with ITP 2.2. The subsequent releases shortened the amount of time a cookie could be stored to 24 hours to prevent loopholes unique to Google and Facebook.
As covered in the PDF, there have been rumors for some time that Google planned to follow in Apple’s footsteps. Adweek reported on this in April of 2019. We now have confirmation that Google will be following in Apple’s footsteps by 2022 by eliminating third-party cookie tracking with the Chrome browser.
Mobile Operating Systems
The main takeaway from this write-up is to keep an eye on changes in mobile operating systems. The browsers are not as primed for data collection as the mobile device. The main impact will be at the mobile device level.
The second change was to cut off apps like Facebook Messenger and Whatsapp from using a loop hole that allows them to continue tracking user activity even when the app is closed.
Ad industry professionals are speculating that Audience Network on mobile may not survive future iOS privacy changes. Facebook, Twitter and others may be forced to shut down their ad exchanges on mobile through a slow squeeze. If this happens, we are dealing with an important change in the story for Facebook and Twitter.
Regarding Snap, TTD, Rubicon and Pinterest …
Before I go into more depth on Facebook and Twitter, I want to cover a few of the other stocks we’ve actually initiated coverage on – Snap, TTD, RUBI, and PINS.
Regarding Snap:
These changes are connected to the reason I pulled out of my Snap recommendation. Snap’s big growth potential was based on launching an Audience Network of their own. This was looking less and less likely. Without this, growth for Snap will be slower than what I would need to recommend a real growth opportunity. They’ll probably nudge up in monthly active users quarter-over-quarter but I don’t see a new trajectory like I did from the filter changes in Q2 2019 or from the highly anticipated Audience Network (that is probably now defunct).
Regarding Pinterest:
Facebook has been very restless since the privacy concerns. We saw the company attempt a blockchain project, which I felt strongly would not succeed the week it was announced.
They also attempted a dating offshoot, which is unlikely to convert users from well-established Match/Tinder. Then there was Lasso based off TikTok. They’re also aiming for a WePay feature in Whatsapp. Now they are going after Pinterest with Hobbi.
Just remember, acquisitions are more successful than an upstart for bigger tech companies (Instagram, Whatsapp). The Facebook social platform is a phenomenal success but there is basically no track record of launching something new and converting users for nearly 15 years.
Regarding Pinterest, I wouldn’t over-react to another one of Facebook’s announcements. I would expect there to be many more pivot attempts from them in the future. Pinterest has a strong foundation and is ran by a very solid founder/CEO.
Ideally, the browser and OS changes shift ad dollars away from Facebook – this is a very real possibility. If so, Pinterest’s ad model is well situated for the future of AI and product discoverability.
Quick note on The Trade Desk and Rubicon/Telaria:
There are two reasons to drop cookies or pixels on browsers and/or track app activity through mobile software.
1) The first is for attribution, which allows the advertiser to know an ad was seen or an ad video was completed.
2) The second is a bit more nefarious, which is to actually track your activity and create behavioral profiles for advertisers to target. This more nefarious data collection is the culprit prompting changes across browsers and mobile operating systems.
TTD and Rubicon are not deep in the business of data collection (#2) because they do not have the conflict of interest of also being a large publisher with 2 billion users (Facebook) or 400 million users (Twitter). They are in the business of ad serving and attribution (#1). There are retargeting ad exchanges, like Criteo, who have seen major declines in stock price.
In addition, attribution (#1) will need to be resolved for everyone’s sake because publishers still need to make money. The Apple ecosystem is based on millions of app publishers making money. Online activity – and many websites — are also supported by ads. Attribution is not a privacy concern and it doesn’t lead to privacy issues when done correctly.
In other words, TTD and Rubicon’s core business model is not reliant on data collection because they are not heavy retargeting companies. Therefore, I don’t see the story changing right now for those companies. They do need attribution but the whole ecosystem will need this. I’ll be listening for TTD’s answers to these questions on the earnings call but I expect them to echo something similar to what I’ve described. If they say something else, then I’ll circle back.
Similar to Pinterest, I’m curious to see if the changes will divert ad dollars away from FB and towards TTD and RUBI as the backend changes should level the playing field.
More on Audience Network, MoPub and AdMob …
First and foremost, it’s important to understand that the more data you have, the more your revenue grows exponentially. There is nothing linear about data (or data science or data mining).
Google, Facebook and Twitter were uniquely positioned in the early days of native apps and mobile browsers because they were the first to build and own large audiences.
Due to this positioning, the bright idea occurred to these companies to acquire or build ad exchanges. Basically, they figured out that ad exchanges are able to insert code across a lot of websites and apps, which in turn, pumps a lot of data.
The ad exchanges are called AdMob (Google), MoPub (Twitter) and Audience Network (Facebook). The purpose of this was to collect data from as many sources as possible to pump their ARPU on the social platforms they own.
Maybe think of Google, Twitter and Facebook’s ad exchanges as the gasoline in a Ferrari. The gas isn’t worth much compared to the vehicle, but in turn, the vehicle doesn’t go very far without the gas. Data fuels the machine. It’s not worth discussing the value of the gas, which in this case, might be $40.
Facebook says Audience Network pulls in about $3 billion. That’s irrelevant because it’s pumping data for higher ARPUs on their own platform. This is why Facebook makes much higher ARPU than other sites.
Twitter’s MoPub also has software inside many apps that Twitter does not own. The purpose is to collect data, that in turn, leads to higher CPMs/ARPU on Twitter because they now have more data and better targeting than the competitors.
To illustrate, when you close your Facebook app, and you open a Bloomberg or Fidelity app, Facebook now knows you’re a stock investor and can send you a Charles Schwab ad. This information is then sold to advertisers on the Facebook feed. The software that tracks your activity outside of Facebook is Audience Network but the revenue is reflected on Facebook’s ARPU.
Facebook’s social feed does not have as much valuable data as you might think. It’s your cross activity that compounds into perfect behavioral profiles. Facebook may know you went to the Bahamas based on your last social media update, but did you fly first class? How often do you check stock trading apps while on vacation – once per week or five times per day? Do dine out or get delivery in your hotel room?
Tracking activity with Audience Network helps them determine if they should show you a Mercedes Benz ad on Facebook, whereas your posts on Facebook are not enough to tell them your income bracket and spending patterns. Or maybe they’ll show you a Grubhub ad if you ordered in.
This is a fairly challenging concept for people outside the ad industry to understand. The Facebook bulls continually revert back to thinking Facebook’s revenue comes only from the Facebook app, Instagram, Whatsapp. They’ll cite Audience Network generates $3 billion, etcetera.
Google is more protected with search and their response was more muted on the recent earnings call. Facebook’s was a bit more cautionary. I’ve included clips below.
RECENT EARNINGS CALLS:
Google had the following to say in the recent earnings call:
- On page 30 of Alphabet’s most recent annual report, the company reflected slowing growth across “Google Network Members’ properties”
“Our Google Network Members’ properties revenues increased $1,537 million from 2018 to 2019. The growth was primarily driven by strength in both AdManager (included in what was previously referred to as programmatic advertising buying) and AdMob, partially offset by the general strengthening of the U.S. dollar compared to certain foreign currencies.
Our Google Network Members’ properties revenues increased $2,394 million from 2017 to 2018, primarily driven by strength in both AdMob and AdManager, offset by a decline in our traditional AdSense businesses. Additionally, the growth was favorably affected by the general weakening of the U.S. dollar compared to certain foreign currencies. “
Source: ABC.XYZ/InvestorABC.XYZ/Investor
On the earnings call, an analyst from BMO Capital Markets asked about Chrome changes. Sundar PIchai anwered the following:
“And so we are engaged in these issues, and we anticipate and structurally work on them early on. So it’s how we broadly approach these things. And so there’s nothing notable to call out, other than there will be continued changes in these ecosystems, and our ability to anticipate and adapt is key to the years ahead.
Facebook had the following to say in the recent earnings call:
Dave Wehner, on the Q4 2019 Facebook earnings call:
“We expect our year-over-year total reported revenue growth rate in Q1 to decelerate by a low-to-mid single digit percentage point as compared to our Q4 growth rate. Factors driving this deceleration include the maturity of our business, as well as the increasing impact from global privacy regulation and other ad targeting related headwinds. While we have experienced some modest impact from these headwinds to date, the majority of the impact lies in front of us.”
Analyst Brian Nowak of Morgan Stanley asked Wehner to expand on the comments above:
“Yes, we are seeing headwinds in terms of targeting and measurement, but as I noted, the majority that impact lies in front of us. Just as a reminder we utilize signals from user activity on third-party websites and services in order to deliver relevant and effective ads to our users, and in that regard, there are sort three overlying factors that I’d point to, and I spoke to these on prior calls as well.
First the recent regulatory initiatives like GDPR and now CCPA have impacted, and we expect will continue to impact our ability to use such signals.
Secondly mobile operating systems and browser providers, such as Apple and Google, have announced product changes and future plans that will limit our ability to use those signals, and then finally, we’ve made our own product changes that gives users the ability to limit our use of such data signals to improve ads and other experiences, and there I’d point to something like the rollout of Off Facebook Activity controls, and that’s at 100 percent today.
So each of these factors limits our ability to target and measure the effectiveness of ads on our platform and that can negatively impact our advertising revenue growth. Both Mark and Sheryl talked about importance of ad targeting for small businesses, and I think it’s important to note that the regulatory and platform changes will have a disproportionate impact on the ability of small businesses to use ads to grow and thrive.”