Companies advertaising

For digital-advertising vendors, 2021 was always going to be an uphill task. With work, play and shopping online during the COVID-19 pandemic, Internet advertising boomed. According to eMarketer, a research firm, spending in the US grew by 38% to $211bn, compared to an average annual increase of 21% over the past five years.

Smaller social-media firms like Pinterest and Snap at times posted triple-digit year-over-year quarterly revenue growth. Even giants such as Alphabet (Google’s parent company) and Meta (Facebook and Instagram), which account for a third and a fifth of the world’s digital-advertising dollar, respectively, achieved a rate of 50%.

Contrast with 2022. On July 21, Snap reported that its sales increased 13% year over year, in the second quarter, making it its most anemic ever. In a letter to investors, the firm acknowledged that revenue was “nearly flat” so far this quarter. The market was shaken, and the company’s stock price had fallen by nearly 40%. The next day Twitter, which also relies on advertising, reported that its revenue had fallen slightly in the three months to June compared to the previous year.

This raised concerns about the health of online companies advertising, causing the share prices of industry titans to plummet. On July 26, Alphabet duly disclosed 13% growth in Snap-like quarterly sales, up from 62% in the same period last year. It was less terrifying than expected (its market cap rose 8% on the news) but still far worse (it’s down a bit from before the Snap bombings). A day later Meta said its revenue had declined 1% year over year for the first time ever.

Companies advertaising upstart challengers like Snap are the most exposed. When marketing budgets are cut, advertisers stick to what they know, says Mark Schmulik of Bernstein, a broker. And they know Google search a lot better than Snap’s experiments with augmented reality.

Larger firms also boast larger and more diverse sets of customers; Meta serves 10 million advertisers globally, compared to Snap’s estimated 1m or less. This sets them apart somewhat from the softness in demand.

To some extent, but not completely. Last year’s COVID-boosted baseline isn’t the only thing hitting the digital-ad market. Ad-sellers are feeling the delayed impact of a change to privacy settings on Apple’s iPhones last year, which prevents advertisers from tracking people’s behavior on their devices, and thus from measuring the effectiveness of digital ads .

Snap cited Apple policy for the weak recent results. Meta estimates that this change will cut $10bn, or 8%, from its revenue this year.

Both Alphabet and Meta are also facing stiff competition. TikTok, a Chinese-owned short-video platform beloved by Western teens, is drawing attention from American social media and their accompanying ad revenue. Perhaps more concerning, the previously ad-curious tech titans are also getting in on the action. Amazon has built up the world’s fourth largest online-advertising business over the years. Apple has a small but growing advertising operation. And Microsoft has been named as Netflix’s partner in the video-streaming giant’s new ad-supported offering.

Another reason for the slowdown in big ad-sellers is equally 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 advertising spend. This has made ever less non-digital advertising dollars available to be diverted online. In a pinch, advertisers may now need to ax their digital billboards.

The pain is not felt equally. Google, whose search ads rely less on the type of tracking Apple halted, could benefit from the misery of meta, helping to offset some of the slowdown. On July 27, Spotify bucked the trend among challenger platforms, reporting unexpectedly healthy advertising revenue from its music-streaming service, boosting its share price by 12%. Still, the business cycle can catch up with big tech.