Apple robbed the mob’s bank, part 2

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Yesterday, Evercore ISI analyst Amit Daryanani issued an outperform rating for Apple’s stock, claiming that its advertising business is poised to grow to as much as $20BN in annual revenue by 2025, up from what he estimates is $2BN today.Daryanani notes that while $20BN is small relative to Apple’s overall revenue, it could represent roughly 17% of its services revenue, which is an eminently important growth vector for the company, and 9% of its earnings-per-share given the high margin of advertising businesses.

Back in May, exactly two weeks after Apple released iOS 14.5, the OS update that made compliance with its App Tracking Transparency (ATT) privacy policy mandatory for apps, I published a piece titled Apple robbed the mob’s bank. In the piece, I postulate that Apple’s intention with ATT is primarily to steal advertising market share from Facebook, a company so unsympathetic and generally disreputable that its protestations of ATT on the grounds that it would harm small businesses were dismissed as, at best, sad and insincere. From the article:

In bolstering its ads business while severely handicapping other advertising platforms — but especially Facebook — with the introduction of a privacy policy that effectively breaks the mechanic that those platforms use to target ads, Apple has taken money from a party that is so unsympathetic that it can’t appeal to a greater authority for redress. Apple has brazenly, in broad daylight, stormed into the Bank of Facebook, looted its most precious resource, and, camouflaged under the noble cause of giving privacy controls to the consumer, fled the scene.

The point of the piece is that, while protecting user privacy might have been a minor motivating factor for Apple in urging its ATT policy forward, other, commercial factors — such as enhancing the importance of the App Store as a content discovery mechanism relative to app install ads, or of growing its Apple Search Ads advertising business — were paramount. Apple was able to successfully implement ATT and achieve a blatant market grab because the general public and the technology press alike simply couldn’t muster the graciousness of spirit needed to stand up for Facebook. Apple robbed the mob’s bank.

This was obvious to practitioners and close observers last year. But the mobile advertising space is mostly abstruse and esoteric, and few people outside of the direct vicinity of ATT’s impact zone understood just how foundationally ATT would transform the mobile ecosystem. And because Apple slow-rolled iOS 14.5 (and then iOS 14.6) adoption, ATT only reached a majority of iOS devices in early June, just ahead of WWDC.

But although ATT was only relevant for the last three weeks of Q2, the severity of its burden was revealed during earnings season. Zynga’s stock dropped by roughly 20% after it announced earnings on the revelation that its user acquisition costs had soared on iOS as a result of ATT:

At the same time, the adoption of Apple’s privacy changes resulted in a higher cost to acquire new players…In response, we scaled back our UA spend to maintain targeted returns, resulting in fewer players installing our games during this period…From an advertising perspective, given the broader adoption of Apple’s privacy changes which occurred at the end of June, we expect short-term pressure on advertising revenue and bookings to be more pronounced in Q3 than in Q2.

Facebook’s stock was down 5% after the company acknowledged the barriers to growth that ATT would have on its business. From its earnings call:

In the third and fourth quarters of 2021, we expect year-over-year total revenue growth rates to decelerate significantly on a sequential basis as we lap periods of increasingly strong growth…We continue to expect increasing ad targeting headwinds in 2021 from regulatory and platform changes, notably the recent iOS updates, which we expect to have a more significant impact in the third quarter compared to the second quarter…But look, this has been very challenging for advertisers to navigate, and we’re working with them to help them navigate these changes.

In IDFA deprecation: winners and losers, I gauged the impact of IDFA deprecation on content companies publishing within the “High IAP Monetization Games” and “Ad Monetized Games” as Extreme. Alternatively, I gauged the impact on what I called “Broker Ad Networks,” or ad networks that do not sell owned-and-operated inventory, as Minimal. Zynga fits neatly into the first two categories, but what about the latter? Unity, Applovin, and ironSource — all of which went public within the last twelve months — reported very strong earnings in Q2 despite ATT. Why was that the case?

As I point out in the aforelinked article, broker networks didn’t utilize the IDFA to anywhere near the same extent as did Facebook, so the deprecation of the IDFA doesn’t deprive them of nearly as much value in terms of advertising targeting and measurement. But another reason that Facebook is disproportionately impacted by the deprecation of the IDFA relative to other ad tech companies is that Apple has yet to police the practice of fingerprinting, which is expicitly banned by ATT and which allows various ad tech platforms to attribute users to campaigns on a granular basis. Facebook can’t fingerprint because of the scrutiny it is under, but other entities within the ad tech ecosystem can.

Apple’s intentions with ATT were clear to the practitioners and commentators that follow mobile most closely, especially given that ATT doesn’t impede the ability of Apple’s own ad network to target users based on behavioral profiling. But now that mainstream, generalist analysts have woken up to the enormous absolute dollar opportunity that Apple faces as a result of ATT, it’s time to recognize definitively that ATT was not primarily intended to buttress consumer privacy. If that was true, Apple would police fingerprinting.

In reality, ATT was an ingenious strategy to promote the role of the App Store in discovery ahead of impending potential regulation that might force it to accommodate alternative app stores. And critically, ATT was an attempt to siphon advertising market share away from Facebook. Put another way: Apple robbed the mob’s bank.

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