-George Hadjia
Facebook (FB) has democratised the world of advertising, with many small businesses thriving today as a result of ads they place on FB’s platform. One of the key reasons behind this is the superior ad targeting FB offers, efficiently matching the right ads to the right people. However, recent changes by Apple to their iOS platform will reduce this personalisation of ads and will harm this growth engine for many small businesses. What these changes reveal is the profound, yet often overlooked, impact FB has on society by creating and fostering opportunities for small businesses to efficiently and cheaply get their products discovered by consumers.
Every iPhone has what’s called an IDFA (Identifier for Advertisers). This is a unique code that is tracked when you perform activities across the web and apps. Think of it as a digital paper trail. You may click a FB ad and then be taken to a retailer’s external site. You browse sneakers and then add a pair of shoes to your digital shopping cart. This data is remitted back to Facebook and they know that you performed that particular activity. All of this is because of the IDFA.
Now let’s say that you have the shoes in your digital cart, but fail to buy them. This data too is relayed to FB. They can then insert sneaker ads into your feed that might remind you to go back to that retailer’s website and complete the purchase. Given FB’s unrivalled scale, they have the reach to construct what are called lookalike audiences. These are cohorts that have similar characteristics to that user who clicked on the sneakers, and so they too might be inclined to buy a pair of sneakers. It should be noted that all of this data is fed anonymously into FB’s algorithms and the end result is serving up personalised ads that are relevant and useful to you.
If you’re into fitness you will see fitness-related ads that may introduce you to new products or services that are beneficial to you. If you’re into fashion you will be shown ads that cater towards this specific interest. No two people’s feeds are the same, and similarly, no two people receive the same set of ads. An alternate take of this is thinking of FB as a recommendation engine for products and services that have utility for you.
However, as part of a growing rivalry between Apple and Facebook, Apple is introducing a number of sweeping changes as part of its App Tracking Transparency (ATT) framework. The key change is every app (FB included) will need to show users a rather scary looking prompt asking them to opt-in to having their data tracked. When this change comes into effect (currently slated for “early Spring”, but no exact date has been given), the expectation is for opt-out rates to be very low, perhaps in the 10-20% range. This deprecates the IDFA, meaning that FB can no longer get access to activity that occurs outside of its owned and operated properties such as the Facebook and Instagram apps. In a post-IDFA paradigm, when you click through to an external website to put shoes in a shopping cart, FB no longer gets this data.
Surely this is a huge win for the privacy of internet users, right? While superficially this notion might appear plausible, it’s an incomplete view. While Facebook is without a doubt a polarising platform, and many hold very strong views towards it, the circulating narratives around privacy as they relate to Facebook are typically misinformed. I would go so far as to argue that under this ATT framework that Apple is introducing, society as a whole is worse off.
This must certainly sound counterintuitive: how can a set of changes championing privacy be a net negative to society?
If we fast forward to a post-IDFA world we can think of two main groups who experience changes as a result of the ATT framework: users and advertisers. To the extent that FB loses access to important “event stream” signals around how users behave and monetise on external properties, FB will serve them less personalised ads. While the impact will not be this extreme, imagine a world where you’re browsing your Facebook newsfeed and all the ads are completely unrelated to your interests. Again, to be clear, this is not what is about to happen, but rather is an extreme example to illustrate the jarring, annoying impact of being served ads we don’t want. The alternate of being served relevant ads, as mentioned above, is clearly beneficial to the overall user experience.
Now let’s consider the impact of these changes on advertisers. FB, via its sophisticated targeting, has democratised advertising. Previously, only large brands with enormous ad budgets could afford expensive TV or radio ad campaigns. This was a significant barrier to entry to starting a brand and reaching consumers. Through FB’s reach and targeting, it eliminated these barriers and facilitated the creation of many challenger brands who were now able to reach relevant consumers on this newly-levelled playing field. What these ATT privacy changes threaten to do is to re-establish these barriers, and cause the advertising landscape to regress to the old days where advertising was available not to the masses, but to a select few. For those of us who love these niche, smaller brands with authentic stories, the ATT changes could throttle their growth and for some this shifting ad landscape will pose an existential problem.
We believe that many ad industry players will experience some turbulence over coming quarters as these changes are digested. The industry will likely find solutions and workarounds once the ATT changes are implemented. We believe these ad targeting headwinds have been well-telegraphed by FB management, and the price of the stock offers a sufficient margin of safety to justify us continuing to hold a position in the name. In fact, a second order consequence is that the ATT framework will act as an accelerant for adoption of Facebook and Instagram Shops, as merchants look for new ways to acquire customers and more accurate attribution data. Over years this could be a powerful tailwind for Facebook. In the meantime it will be interesting to see how these developments will unfold and impact the ad ecosystem.
Montaka owns shares in Apple and Facebook.
George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.
