Call it the “Apple problem.”
But beyond the top-line growth deceleration, where years ago that metric had been up triple-digit percentage points (and the compound annual growth rate, or CAGR, had been 50%), lies a deeper set of pressures that served to send the shares crashing roughly 40% Friday (July 22).
Yes, the company has decided to cut spending. Yes, the digital advertising market is seeing competition. But the steep drop, and the tens of billions of dollars in lost market cap that Bloomberg estimated had been seen in sympathy across platforms speaks to something larger.
The key is that Apple has changed its privacy policies, and as a result, users can deny permission to be tracked.
Platform Policy Changes
Indeed, as management noted in the Snap investor letter released Thursday after the market closed, “platform policy changes have upended more than a decade of advertising industry standards, and macroeconomic challenges have disrupted many of the industry segments that have been most critical to the growing demand for our advertising solutions. We are also seeing increasing competition for advertising dollars that are now growing more slowly.”
And during the question-and-answer session with analysts, Snap Chief Financial Officer Derek Andersen said “the deceleration began with the platform policy changes implemented in Q3 of last year.” The changes are impacting the traditional models that are “used to drive the direct response to advertising business, as well as the tools used to measure the returns from that direct response advertising.”
Last year, Apple introduced its App Tracking Transparency system that lets users have the choice as to whether third-party apps can track them. The changes wrought to the iOS have helped to disrupt at least some of the activity seen with Snap’s advertising partners.
Making it harder for advertisers to target users means they might pull back ad spending in a hugely inflationary environment such as the one we’re seeing today. Indeed, management said on the most recent Snap call that advertisers’ budgets and bids have been trending lower.
Snap, for its part, has been trying to monetize its model in different ways, with a nod to its direct response business, including first- and third-party measurement solutions. The company also is striving to improve ranking and optimization.
But it will take time, as the Andersen said, because “in terms of monetization, we face a number of very large and very sophisticated competitors. So today, we’re seeing the overall advertising pie grow at a slower rate.”
In the meantime, Apple is in the midst of restructuring its services to amp up its presence in advertising.
The headwinds grow, and for the platforms, the “Apple problem” grows too.