In June, Apple (NASDAQ: AAPL) announced that it would require users to opt in to ad tracking features for each app on iOS 14. The ad immediately generated complaints from advertisers who want to track ad performance and from publishers who say the change would significantly reduce their ad revenue.
In response, Apple postponed the introduction of the feature when it launched iOS 14 in September. However, it still plans to add the feature next year – and online advertising giants like Facebook (NASDAQ: FB) and Alphabetin (NASDAQ: GOOG) (NASDAQ: GOOGL) Google should be concerned.
The escalation of Apple’s war against Facebook and Google
Apple CEO Tim Cook has repeatedly criticized Facebook and Google for their data collection practices in recent years. Apple has also replaced some of Google’s services, such as Maps, with its own competing services.
Image source: Apple.
In 2015, Apple started allowing developers to produce third-party ad blocking extensions for Safari on iOS, and subsequently launched several ad campaigns promoting the privacy-oriented features of the iPhone. Adding acceptance requirements for targeted ads on iOS 14 represents an extension of this strategy.
Apple is challenging Facebook, Google and other targeted advertisers for three main reasons. First, Apple doesn’t generate any significant ad revenue, so it can afford to promote iOS as a privacy-oriented operating system. Doing so is also a good PR, especially since Facebook and Google are repeatedly vilified for their privacy, fake news and hate speech issues.
Second, Google is Apple’s main competitor in the smartphone market. Google’s Android operating system runs on 85% of the world’s smartphones, according to IDC, while iOS controls the remaining 15%. Therefore, it stands to reason that Apple will stop Google from expanding its data collection ecosystem on its iOS devices.
Finally, Apple’s greatest strength is its walled garden. IOS only works on iPhones and iPads, and these devices are strongly linked to the App Store and subscription services. Facebook and Google compete with Apple in other markets, such as streaming media, virtual assistants and smart home devices, and both profit from showing ads targeted to iOS users. Cutting those profits would be a smart strategic move.
Could the update hurt Facebook and Google?
Facebook generates almost 99% of its revenue from online ads. These ads are displayed mainly on its main Facebook platform, Instagram, and on its Audience Network, which displays ads on third-party websites and applications.
Image source: Apple.
Facebook says that, during internal testing, Audience Network publisher revenue fell by more than 50% “when personalization was removed from mobile app ad install campaigns”. He also warns that the impact may “be much greater” and that he is still working on short- and long-term solutions to contain the coup.
That statement, along with Facebook’s recent full-page ads stating that it is “taking on Apple by small businesses everywhere,” strongly suggests that the social networking giant is concerned.
Alphabet generated 80% of its revenue from Google’s advertising business in the first nine months of 2020. This expanding business includes its search ads, image ads on websites and apps, and YouTube ads.
Unlike Facebook, Google has not offered any internal projection on how much the iOS 14 update could impact its core advertising business. Nor did it buy full-page ads in the newspaper and declare war on Apple.
Instead, Google appears to be defying Apple’s criticism of stricter privacy controls for Android devices. These updates can placate Android users, but they do not address the potential impact of the iOS 14 update.
In addition, 56% of marketers in a recent AppsFlyer survey believed they would be negatively affected by the iOS 14 update. A third of respondents also planned to cut their marketing spend – presumably on affected advertising platforms like Facebook and Google – on response to these changes.
Facebook and Google should be concerned
Apple controls only 15% of the global smartphone market, but its market share is much higher in most developed countries. It controls almost half of the market in the United States and Japan and almost a third of the market in Europe.
These higher-income markets generate much higher average revenue per user for Facebook and Google than developing and emerging markets. However, that revenue could fall if Apple allows its users to opt out of targeted advertising campaigns.
Revenue growth for Facebook and Google has already slowed during the COVID-19 crisis as marketers bought fewer ads. Most analysts expect ad sales to accelerate after the pandemic passes – but Apple’s upcoming iOS 14 changes could generate unpredictable headwinds in the coming year.
Apple is unlikely to push Facebook and Google away, as both companies can still display untargeted ads on iOS, but it could certainly hurt the two tech giants. Looking ahead, Facebook and Google investors must carefully monitor these future changes to assess the damage.