Advertising in the digital space is down

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Advertising in the digital space is down

Recent quarterly reports from major technology companies have shown a general decrease in ad spending, likely due to a trend of brands and retailers cutting back on digital marketing.

Google’s advertising revenue fell 3.6% to $59 billion from the previous quarter’s $61.23 billion, as reported by tech giant Alphabet last week. Advertising revenue for Facebook parent company Meta fell by 4.2% in the company’s most recent fiscal quarter. Amazon’s advertising business also slowed to a 19% annual growth rate in the most recent quarter from a 32% annual growth rate in the prior quarter.

Even though the ad market as a whole has shrunk, as evidenced by the aforementioned numbers, analysts have told Modern Retail that there is hope for a turnaround. Macroeconomic indicators, such as the employment report, have recently demonstrated some uptick. The United States added 517,000 jobs in January, bringing the unemployment rate down to 3.4%, its lowest level in more than four decades. Earnings reports, however, show that many brands and retailers are still reducing spending on advertising due to the continued impact of inflation on consumer spending.

We are currently witnessing a period of leniency. Andrew Lipsman, principal analyst for retail and e-commerce at Insider Intelligence, said, “Advertisers have been cautious, but there’s potential for rebound here.” However, he continued, “consumer demand is inevitable, and consumer demand ultimately drives advertising.”

According to David Heger, senior equity analyst at Edward Jones, “it feels like we are probably hitting the worst of it right now,” in terms of industries and companies discussing slowdowns in business and rethinking spending. Heger added, “if the economy is starting to improve, then we may see the spending environment come back up a little bit by the second half of the year.”

After looking at data from Meta and Google, Heger concluded that “the online ad market has slowed down quite a bit from where we were during the pandemic.”

Dropping advertising budgets and currency headwinds across all international regions were cited by both Meta and Google as the primary reasons for their revenue declines.

Chief Executive Officer of Google Sundar Pichai

Chief Executive Officer of Google Sundar Pichai said that the company’s advertising revenue was “impacted by pullbacks in advertiser spend and the impact of foreign exchange” during the period under review. Google Advertising’s search and other revenue was down 2% year over year. Ad revenue for YouTube and the Google Network as a whole fell by double digits. Retail and travel brands spent more on Google Search ads, partially offsetting the decrease in ad spending by finance brands.

CFO Susan Li reported that “weak advertising demand… impacted by the uncertain and volatile macroeconomic landscape” continued to weigh on fourth-quarter revenue for Meta.

Li also noted that the decline in Meta’s fourth quarter revenue was driven primarily by brands in the financial services and technology verticals, despite the fact that these segments’ shares of Meta’s overall revenue are still quite small. She also noted the continued decline of advertising expenditures in Meta’s two primary markets: consumer packaged goods (CPG) brands and online retailers.

We may have already experienced the bulk of the decline in Meta’s ad revenue, which can be attributed in part to the fact that year-over-year comparisons are becoming easier for them at an earlier stage. The most detrimental effects of Apple’s tracking transparency initiative have passed, Heger said.

The App Tracking Transparency feature introduced by Apple last year was predicted to cost the company $10 billion, according to Meta executives.

According to Heger from Edward Jones, this means that Meta’s ad revenue may stabilise a little bit sooner than Google’s. Perhaps a quarter or two earlier than for Google, but overall, ad spending is down for everyone in the ecosystem, he added.

Consumer research analyst at Edward Jones Brian Yarbrough remarked that the online retail giant Amazon is “not immune” to these broader headwinds. Despite this, Amazon’s advertising revenue grew, and the company benefited from an increase in the number of people using Amazon itself, rather than Google or another search engine, to find the products they’re looking for.

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The growth rate of Amazon’s advertising revenues has slowed in recent quarters. Amazon has seen some of that already. If businesses reduce their marketing and advertising spending, I do not believe that Amazon will be spared. According to Yarbrough, “I think they’ll all probably see some pressure.”

Even Amazon was showing strong growth rates, but there was a deceleration, so there is that overhang, but it’s very squishy at the moment, said Lipsman of Insider Intelligence.

However, Lipsman pointed out that in a recession, advertisers are more likely to embrace performance advertising because it requires more evidence of a direct correlation between ad spend and business outcomes. Thus, it’s likely that digital advertising platforms like Facebook, Instagram, Amazon, and Google Search will benefit from this shift rather than, say, television.

According to Lipsman, “ad dollars want to gravitate towards certainty,” which means they are increasingly investing in “performance advertising.”

In response, Meta has been reworking its ad products with cutting-edge AI and ML technology in an effort to entice advertisers to increase their budgets.

Meta’s new strategy centres on the Advantage+ shopping campaign tool, an automated advertising product designed to help e-commerce and retail advertisers improve the performance of their campaigns.

Mark Zuckerberg, CEO of Facebook, said that the company’s investments in artificial intelligence paid off in the fourth quarter during an earnings call. Over 20% more conversions were seen by advertisers in the most recent quarter compared to the same period last year. More money is being made back from advertising because of this, he said, and the cost per acquisition is going down.

Facebook and Instagram, Zuckerberg said, will also explore “the monetization opportunity with business messaging.” According to Zuckerberg, “click-to-message ads” are a $10 billion business. According to Li, scalability of onsite conversions through products like lead ads and Shop ads is another opportunity in addition to click-to-message.

“Over the long term, we’re investing heavily in AI to develop and deploy privacy-enhancing technologies and to continue building new tools that will make it easier for advertisers to create and deliver more relevant and engaging ads,” CFO Li said.

Daniel Harrison

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