The last two years have been a hell of a ride for online advertisers. Unprecedented times during the COVID and post-COVID era created a new reality for advertisers online. Led by initial market fear that this was the end, one of the biggest rallies for online businesses in modern history, the last 2 years had everything. Hitting record-high numbers during the stimulus era and peak COVID times then after that, a cooldown period where demand from consumers slowed down dramatically but the cost to advertise remained very high. The math is simple.
This led to a disappointing finish for many online industries for the year 2022.
And now the future again seems unclear for advertisers & online businesses.
You don’t have to always speculate, you can look for signs outside of the advertising marketplace to try to get a sense of what is going on, and in recent months, it’s been clearer than before. Tech stocks have been falling like shooting stars for leading companies like Facebook, Google, Snapchat, and many others. Those who will disagree with me here will say that these stock companies are losing value because of the macro stock market effects and they are decreasing because they were overinflated. Without objecting to that argument, it’s important to look at their actual quarterly reports and remember that most of their revenue is coming from advertisers and their reports don’t look good at all. Revenue is dropping, profitability is declining, as well and it’s all coming from advertisers who are pulling back their ad spend and, even worse, are planning to cut more in the future. The question is whether that will bring down the cost per advertising, which will enable small businesses to re-enter the online competitive marketing space, or is it a sign of what’s likely to come next – a period of uncertainty and slow, or limited, growth for advertisers.
Although the future is uncertain, based on more than a decade and a half of online advertising, here is what I predict 2023 will look like for online advertisers and what direction I believe advertising platforms will take:
Slow start in 2023.
Everyone is looking for good news, but I think that when looking at the macro side of things, it’s going to be hard to find it. Especially in the first half of 2023. Tech companies are not only lowering their revenue expectations, but they are also laying off a LOT of people. Cutting off a part of the workforce for companies is not something unordinary, but it’s not something that’s historically been associated with the tech industry. That’s because they are not like traditional industrial companies which have a massive workforce. They are usually more compatible and tend to hold a much smaller workforce. So to learn that even those companies are planning massive layoffs worries me a lot. Remember that they don’t share everything that they know, only what they are obligated to do. They can also manipulate the information that they share publicly to make it look better than the reality of things, or at least not much worse. I also believe that when they have bad news to share, they will always try to hide that information for as much time as they possibly can to protect their stock price and market value. But I think that if they are cutting their expenses and are planning more cuts down the line, it should be an early indicator that they plan to make less money.
That’s obviously because they expect advertisers to invest less money into ads and we all know how this starts, no one knows where it ends. I think that for a change in direction to happen when suddenly they will show positive signs of growth and a dramatic revenue increase coming from advertisers, something disruptive needs to happen within the advertising ecosystem. What I expect to happen is over the next few months the cost to advertise online will continue to slowly drop, as many businesses will shut down or reduce their advertising spending and that will be a result of a drop in the performance that their ads are producing. A simple supply and demand concept between consumer spending versus advertising spending will pull down the cost per advertising and the efficiency of what advertisers are able to produce from those ads.
If this sounds a little confusing, consider this analogy:
You have a pool of fish that up until 2020, was pretty crowded by fishermen. You had a large amount of fish but it seems like the number of fishermen that were trying to fish from the same pool was pretty large considering the amount of available fish. Then in March 2020 when the world was giving out free money, they not only added tons of new fish to the pool – the fish was also fattier and much bigger which means that every fish that was fished was worth a lot more.
That made the fishermen bring more resources and more fishermen also wanted to capitalize on the opportunity. Then, slowly, supply exceeded demand and the number of available fish per fisherman started decreasing. It was getting more costly to fish and the numbers kept decreasing. Until some fishermen started cutting back on their resources and fishing time. The ones who stayed felt a little relief because things were looking a little better for them but still not ideal. This continues to happen and more fishermen are likely to invest less and look for other pools until a balance will be reached where supply will meet demand and the number of fishermen will be determined by the amount of fish each one catches effectively. That pool in 2023 is likely to look kind of like it did at the end of 2022 until something changes. What can change? Fishermen figure out a better and more effective way to fish by using better tools, or new technology, and pushing out more traditional fishermen. Alternatively, something within the ecosystem of the fishes could change like a new breed is created or the reproduction of the fish dramatically changes because of an external factor like the weather or biology. If neither of the examples above will either impact the supply or demand, things are likely to stay the same while reaching for balance after the craziest era in the 21st century.
Yes! It’s Not IOS 14!
I know what you are thinking, Apple is to blame for all of this right? If you are not aware of the Apple Privacy Update saga, you can read more information about it here. To summarize in a sentence, Apple released an update to all of its users that requires other apps to limit what they track and to get consent from users before tracking and using their data. Facebook led the war against Apple and said that it will first and foremost hurt small businesses. To think that they ever cared about small businesses is beyond hilarious. In any case, social media platforms led by Facebook have convinced and made advertisers believe that the root of their poor advertising performance is because of Apple’s updates and Apple is the one to blame. Not only is it complete nonsense, but it puts the blame on Apple instead of on the social media companies who knew years before the update that it would take place, yet did very little to change the way their platforms work because they were worried about the short term effects on their stock price or company value. The main argument behind their claims is that they won’t have transparency on what users do off their app and won’t be able to verify what actions users do online and won’t be able to serve them relevant ads. That will hurt their advertising efficiency and advertising will become less relevant etc… But what most people don’t realize is that these advertising platforms are already using heavily modeled prediction reports which means that in many cases their results are estimated based on statistics and are not actually verified. They are estimated at a very high accuracy rate which shouldn’t concern advertisers much because all that it means is that they are very good at predicting whether or not an action has happened (such as a purchase or sign-up) without being able to verify it. Imagine you click on an ad on Facebook and two days later you make a purchase on a different website. If prior to the Apple IOS update Facebook could throw in tracking cookies into your browser to tell them when that happened, now they just do it without the tracking cookies just based on their prediction modeling since they have millions of data points, they are able to predict when an event like that will happen.
In my opinion, what this war was really about was the fact that these companies were limited by the amount of data they can attribute. In simple terms, Apple updates limited the amount of data companies like Facebook could track for a given user. If Facebook could track less, they could also report fewer results even though they can model much of it. If Facebook can take less credit for the results that it delivered to advertisers, advertisers will think it’s less effective and will spend less and this was really what Facebook was afraid of. Not that the actual performance will be impacted, but the actual results that will be reported to advertisers. They changed their attribution (reporting window) to only count conversions that happened after 7 days that originated from a click and 1 day after you “viewed” the ad.
Prior to the Apple update, Facebook was tracking conversions 28 days after a click or a view unless users changed it. This was the default setting. It was wild, as long as an ad appeared in your news-feed, Whether you clicked or not, Facebook would take the credit if within 28 days you made a conversion (sale, sign up, etc.). And now all this would change and dramatically impact the reports they deliver to their advertisers. And that’s the real reason, in my opinion, why Facebook fought this war and made so much effort in convincing advertisers that Apple is the answer to all of its problems.
Remember they had years to prepare for this update and didn’t plan to leave it up to Apple to give them mercy, they had it planned out and they built a strong alternative that could still deliver the same or similar efficiency for their advertisers, the only problem was they couldn’t report back the same great results that they previously did and that had a dramatic impact on their advertising platform.
More focus on automation and efficiency:
One way that the major social media and advertising companies plan to change course is by taking more control from advertisers and automating more of the ad process. Examples include the Performance Max campaign launched by Google Ads is essentially one dynamic ad across all Google, YouTube, and search partner ads – one type of ad that does all the heavy lifting and takes out all the guesswork. TikTok launched Shopping Ads and Facebook also recently launched Advantage Shopping+, where you basically dump all your existing creatives into one bucket and Facebook uses its machine learning capabilities to deliver these ads to new customers more effectively than if you were managing them individually under separate campaigns. They promote these formats aggressively and they do have a point when they say that a machine will do a better job in finding the right audience and delivering the exact number of ads for each audience than a human will do, but remember always try to read between the lines– in most cases, more automation means less transparency and control. On the Performance Max ad format by Google, you can’t verify where a conversion took place and for which keyword, and on Facebook Advantage+ you can’t set demographics or exclude specific audiences. Their argument is that fewer restrictions and more automation will lead to more efficiency, but their definition of efficiency could be different than yours. Their objective is to deliver and report as many results as possible so you can spend more money, your objective is to keep as much profits as possible. Automations and smarter campaigns are great, but it’s important to be aware of the cost and the potential drawbacks that these innovations come with.
More and more ad inventory:
What’s the best way to fight inflation? More and more supply. If the cost of avocados is $1 each, what would happen if we import millions of avocados at the same time to add to the existing inventory? The price will tank because avocados ripen quickly and because the market will be overinflated with avocados, the price will drop. Advertising platforms understand this concept very well and they know that if advertisers are currently not meeting their objectives with the current ad market, one way to help them achieve better results is to open up more inventory, a lot more inventory. More ad placements will mean that advertisers can get more inventory and pay less each time their ad has been served. That’s why Google expanded its ad reach with YouTube Shorts, Facebook adds more ads to Reels, and Tiktok is expanding its ad network and all platforms are trying to find the sweet spot with the maximum amount of ads they can serve to users, without impacting the amount of time a user spends on their platform per day. If they can create more ad spend for the same amount of users, they can lower the cost to advertise and be more attractive to advertisers who abandoned the ship or dramatically lowered spending by allowing them to get back in.
After the tumultuous two years involving a pandemic and its after effects, 2023 has advertising platforms across the board facing a delicate balancing act between consumer outreach, attracting advertisers to their specific platforms, and keeping these advertisers with their platforms.