Tech giants’ ad revenues hit plateau: Is global recession the only reason?

BY Kanchan Srivastava

The third quarter of the current fiscal has come as a dampener for tech giants like Meta, Google and Snap, as they report dwindling profits mainly due to weak ad sales. 

Facebook’s parent Meta on Thursday posted quarterly earnings of $4.39 billion, almost half from $9.2 billion last year. Total sales, most of which come from ads, were $27.17 billion, down roughly 4% a year ago. Before that, Alphabet-the parent company of Google, the world's largest digital advertising platform by market share, had reported a drastic decline in its overall revenue growth from 41% a year ago to 6%. Ad sales of Google’s streaming video site YouTube declined to $7.07 billion, from $7.2 billion in the prior-year quarter. The company’s search ad sales grew 4% to $39.5 billion. Analysts had expected revenue of $41 billion. Earlier, Google’s small rival Snap Inc's “slowest-ever” revenue growth rate sent inflation fears through the tech sector and temporarily wiped out $40 billion in market capitalization. Microsoft has also reported a 14% drop in profit. The growth rate of Microsoft’s search and news advertising business has been shrinking each quarter of the past year, coinciding with the general downward trajectory of the entire online advertising market.

Reasons aplenty 

The economic downturn coupled with recession fears, surging capital costs, and inflation-driven cost pressures, all variables are cumulatively responsible for the decreasing ad revenue globally, says Shradha Agarwal, Co-founder & CEO- Grapes. 

A few sectors are facing turbulent times, Kumar Awanish, Chief Growth Officer, Cheil India, points out, “For instance, the cryptocurrency sector slashed their ad budget as their wealth was wiped out drastically. Many banks and insurance companies also slowed down ad spending to compete with fintech firms.”

Google executives also admitted in an earnings call that ad spending for insurance, loans, mortgages and crypto and gaming has dipped. 

Meanwhile, several other factors have added to the woes of big tech companies, experts say.  

Plateau was inevitable 

Rahul Vengalil, Executive Director of Everest Solutions, a Rediffusion group company, explains, “The advertising spend forecast for 2022-2027 is a CAGR of 5.2% as per IMARC group. However, ad tech giants grew significantly faster for a very long time. What this means is that money has been moving from TV, Print, OOH, etc to digital and by default to big tech giants. Now, the growth of the giants has hit a plateau. The Daily Active Users (DAU) and Monthly Active Users (MAU) of Meta for example haven't grown over a few quarters now.”

Google’s chief financial officer Ruth Porat also feels that the 3rd quarters of the two years are not comparable and predicts a further slide in the coming quarter. Porat said during an earning call, “The modest growth was because of difficult comparisons to an unusually strong quarter a year earlier — a trend that would continue in the fourth quarter.”

Ecommerce & OTT platforms

New non-direct competition is eating into Google and Meta’s pie, Vengalil points out, adding, “E-commerce portals like Amazon have emerged as big digital ad platforms.”

“The growing adoption of online shopping has come as a shot in the arm for e-commerce giants like Amazon and Flipkart. While both these platforms are logging strong growth in revenue year-on-year, they have also emerged as important platforms for brands and marketers to reach out to their customers,” says Awanish.

Citing the Red Seer report 2022 that states the contribution of e-commerce platforms to the Indian AdTech industry has increased from 15% to 20% over the last two years, Awanish says, “E-commerce platforms in India are now the fastest growing medium for digital ads, faster than even search and social media platforms with a $6-8 billion opportunity by 2030.” 

In India alone, Amazon & Flipkart collectively garnered ad revenue of Rs 3,900 crore in FY21, as per business intelligence platform Tofler data.  

Besides, OTT platforms are also eating into a lot of screen time of the traditional tech giants, leading to the erosion of ad money to these platforms. 

“Advertising is very dynamic in nature and has real-time feedback especially when it comes to digital spends. To overcome the plateau, spending has been on the rise on a quarter by quarter basis with change in platforms of choice,” opines Ahmed Aftab Naqvi, Global CEO & Co-founder, GOZOOP Group. 

Apple privacy policy

Privacy policy changes by Apple Inc., that restricts targeted advertising, are also denting top tech companies in a big way, say experts. 

Meta Founder and CEO Mark Zuckerberg has admitted earlier that Apple iOS privacy changes will cost the company a whopping $10 billion in 2022.

“Apple (iOS 14.5 update released in April 2021) came with an App Tracking Transparency (ATT) that has managed to break the Facebook-Google advertising monopoly in the online search market,” says Awanish.  

According to a report by performance insights platform InMobi's Appsumer, Apple's search ad business gained five percentage points to reach a 15 per cent share, whilst Meta declined four percentage points, still finishing significantly ahead with a 28 per cent share.

New networking apps 

New regional social networking apps like ShareChat, Josh, etc. are denting big tech companies’ revenue consistently, experts say. 

Ad revenue of Mohalla Tech, the owner of Bengaluru-based social media platform ShareChat and short video platform Moj, saw a huge jump of 760% at Rs 76 crore this year from Rs 9 crore in FY21. 

“Advertisers prefer these social networking platforms as they offer better ad recall value due to the higher attention span of consumers on these platforms compared to those on FB or Google. However, these apps are meant for ad awareness only. Unless they innovate and include new ad formats to offer performance as well, their growth will be short-lived,” Awanish says.

Shift in focus 

"Big tech companies have invested heavily into new products that are not giving immediate results, cases in point are Metaverse for Meta and YouTube shorts for Google," says Vengalil. 

Awanish also points out that Meta shifted its focus to WhatsApp Business API, Messenger App and CPE which derailed its revenue growth. 

Fresh challenges & opportunities

"Despite the weakening growth of tech giants, overall digital investments will come out of this without many bruises," noted Vengalil. 

Although Meta and Google will have strong competition in India now as brands will invariably increase the spending on Amazon, Flipkart, and the newer players with more transactional data like Payment, Airtel ads and so on, WhatsApp Business API will be a new revenue stream for Meta, says Vengalil. 

He added, similarly, if GPay can be monetised, that's a new revenue stream for Google ecosystem. Neither snap nor MS has been a big player in the advertising ecosystem and that would be a marginal impact only. 

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