Not long ago, with the release of the fourth quarter earnings report, Facebook's stock price plummeted 26%, and the market value evaporated by $240 billion (about 1.5 trillion yuan), setting a record for the largest decline in the history of a public company in the United States.
While Facebook is still very profitable, with Q4 revenue up 20% year-on-year, it's clear that investors lack confidence in Facebook's future. This lack of optimism stems from the lack of user growth, the impact of Apple's privacy policy, and the currently very vague metaverse. To some extent, when Facebook explored the business model of "data-centric targeted advertising" and killed all parties around the world, it was already doomed to today's situation.
As a long-time observer of the Internet industry, Ben Thompson paints a picture of the digital advertising market in 2022 from the perspective of Digital Advertising, Facebook's core business, including the industry's long-standing leaders: Facebook, Google, Amazon, and the biggest dark horse: Apple.
Direct response and collapse of the funnel model
Fast forward to 2015, and Ben Thompson made a prediction that the digital advertising market had settled and Google and Facebook had won:
Six of these companies (Google, Facebook, Yahoo, Twitter, LinkedIn, and Yelp) grew 19 percent from 2014. While the overall growth rate of the latter four companies fell by 53%, Google and Facebook together grew by more than 31%.
There's a reason for that, because the advertising industry is a zero-sum game. The long-term shift from print, radio, television to digitalization has enabled these digital advertising companies to rise. Digitalization is the best embodiment of "aggregation theory". Winner-take-all is key to that theory, and Facebook and Google are literally taking it all.
And so it is: Yahoo has gone down; LinkedIn acquired by Microsoft a few months later; and the shares of YELP and Twitter have nearly doubled since then, but their earnings pale in comparison to those of Google and Facebook:
However, the above chart only lasted until the Q4 earnings report. Here's Facebook's latest earnings statement:
Previously, Ben painted an ideal picture of a traditional marketing funnel, as well as a picture of google and Facebook's advertising product system.
Through each part of the funnel, Facebook helps businesses convert users directly: from Instagram video ads to build awareness, through retargeting (through the analysis of existing users' behavior, re-serving ads that match better matches), and finally through dynamic product ads on Facebook (and, in the near future, direct user relationships through Messenger, loyalty).
The same goes for Google: build awareness through YouTube, facilitate decision-making with DoubleClick, transform through AdSense.
Internet advertising "funnel" schematic diagram |stratechery.com
There is a misunderstanding here. In the traditional marketing funnel, different parts of a user cycle can occur in different scenarios. You might see ads on TV, coupons in newspapers, and end up buying items at the mall. Each exposure can be a separate advertising event, but the end user picks up the item and puts it in the shopping cart.
On the internet, however, the process is increasingly compressed into a single event: you see an ad on Instagram, you click on it to find out more information; then you log in to an online store, and a few days later the courier appears on your doorstep.
For non-physical apps, the loop is even more compact: you see an ad, click Install, and a few seconds later you're playing a game. Of course, things like retargeting or data collection can happen in the middle. But large-scale Internet advertising, especially Facebook, is almost always a direct response.
Direct response can form a highly resilient business model.
John Wanamaker, the father of the department store, famously said, "I know that half of what I invest in advertising is useless, but the problem is that I don't know which half." Therefore, the traditional advertising industry is more of a scale business, all companies want to reach as many consumers as possible, all companies want to benefit from scale, because they can not accurately target, who will pay for their advertising.
The situation has changed in the digital age, where direct response advertising ROI (return on investment ratio) is much more quantifiable than traditional advertising. By tracking user behavior, advertisers can directly spend money on specific customers or transaction value. And that's what Facebook is best at.
But the problem with Facebook is — Apple.
(In 2020, Apple's iOS 14.5 update explicitly changed the process of advertisers "numbering" users' phones from default to requiring user consent, and the survey found that only 20%-30% of users worldwide agree to authorize.) ）
The latter's privacy policy, the ATT (Transparency in Application Tracking) policy, cuts off the link between e-commerce sellers, app developers and Facebook, through which Facebook achieves high ROI.
While Facebook is better equipped than any other company to build a replacement, it's important that data tracking has become invisible. This change from certainty to non-certainty, given, brings permanent harm to advertising.
Amazon Advertising IPO
The Facebook model has been successful because it can turn behavior tracking into targeted ads: Facebook knows the people who can convert when they see an ad, and it can easily find other similar people and show them similar ads while continuously optimizing the accuracy of targeted ads.
But Google search has an inherent advantage: Google doesn't need to figure out what you're interested in, because you've already told it through search. If you search for "San Francisco hotels," the likelihood that you'll want to find a hotel in San Francisco is pretty high. The same is true for life insurance, auto repair, or e-commerce.
Google isn't the only search engine that makes effective use of e-commerce to make money.
This quarter, Amazon reported advertising revenue for the first time, reaching $9.7 billion, up 32% year-over-year. While that's a fraction of Google's $61.2 billion or Facebook's $32.6 billion last quarter, it's far more than people expected — several times snap's $1.3 billion revenue.
Amazon's advertising business has three major advantages over Facebook.
Search ads are the best and most profitable form of advertising. Because the more sure you're showing ads to a person who is willing to pay, the more advertisers will be willing to bid for that ad slot. And even compared to the best targeted ads, the text in the search box is much more accurate.
Amazon has no data limits. Amazon can collect user data as much as it wants, and use that data as much as it wants when selling ads. That's because all of Amazon's data collection, ad targeting, and user conversions happen on the same platform — amazon websites or apps. ATT only restricts third-party data sharing, which means it doesn't affect Amazon at all.
Amazon benefits from the ATT spillover. That's not to say that ATT has no impact on Amazon, but Facebook, which is dominated by direct response ads, is the one that is most affected. If you're an e-commerce seller and because of ATT, your Facebook ads on Shopify suddenly don't perform well, then the natural reaction is to move product and ad spend to Amazon.
Google's dominance
Google clearly faces competition from Amazon and the European Commission's lawsuit against Google Shopping when it comes to e-commerce search advertising, but Google dominates almost every other area.
In addition, Amazon's advantage, to some extent, is also Google's advantage.
The first is obvious: search ads work well, and Google is the best at that.
Second, it is more interesting about data collection, especially in the context of ATT. Google is both safari's default search engine and web-based business, so it basically has the first-party privileges of the iPhone when it comes to data. It can display ads to iPhone users on the default browser and track the performance of those ads on third-party websites to a greater extent, without having to direct users to the exact same third-party website as apps like Facebook do.
Facebook's risk
There is no doubt that Facebook's losses are quite heavy, but that doesn't mean the company is going out of business. Because while for the most part, the search is the most accurate for what you're looking for, the other scenario is that you may not know what you like. That's what Facebook does better than any of its competitors: to target display ads by understanding who you are, what you've liked or bought in the past.
In my opinion, this is actually a more important form of advertising than search advertising: search engines are like a precisely targeted target that will give you what you want no matter what. But ads like Facebook are the foundation for building a whole new kind of online business. Companies that focus on niches can only exist if the whole world is your market. But if they can't find customers who happen to need them, they'll fail. Facebook's ads solve these problems.
However, this discovery mechanism relies not only on data, but also on attention. Apple's ATT may have had the biggest financial impact on Facebook, but the loss of user attention and TikTok are Facebook's bigger crisis.
Advertising market map
Despite investor disappointment with Facebook, the company's revenue for the quarter was $27 billion to $29 billion.
In the advertising market in 2022, Facebook is still a major player. To illustrate this market, a greatly simplified axis can be used, with Commerce and Apps at both ends of the horizontal axis and Search and Display at both ends of the vertical axis:
Here's what the advertising market looked like in 2016:
Here's what the advertising market looks like in 2022:
First of all, this chart doesn't include a large part of Google's market, because Google is basically everything to search for, except for e-commerce. This chart also does not include the still huge brand advertising market, direct response advertising is the real Internet native advertising form.
While Google and Facebook are the two dominant players in this advertising market, be aware of the other two new entrants, Amazon and Apple, who have a huge advantage.
Amazon has the best fulfillment and logistics capabilities in e-commerce. It not only uses these capabilities to drive its own first-party retail business, but also third-party business services.
In fact, it's another way of thinking about how Amazon can isolate ATT: It's not because there aren't a lot of third-party merchants on Amazon's platform, but because Amazon has taken on the role of an aggregator, not a platform. It can go beyond apple-enforced restrictions and integrate all third-party merchants into its apps and websites. Then, if these third-party merchants want to get the customer's attention, they actually have no choice but to buy ads.
Apple launched its App Store advertising business in the fall of 2016, starting with the most obvious: search. Apple didn't disclose its advertising revenue, but some analysts estimate its annual revenue at $5 billion.
One of the biggest questions about the future of advertising is whether Apple will make it into the App-Display quadrant — which is where Facebook lies. If Apple does, they will have an invincible advantage: Apple's ads and privacy pages make it clear that it treats every app on the iPhone — especially in-app purchases — as Apple's own data. Apple only believes there is a problem with data collection if a third party is involved.
As a result, Apple can build an auction-based ad network that monetizes on a per-install basis and then serve those ads to third-party apps in the Apple ecosystem. Basically, it would be a better version of Facebook. Although apple has never been good at doing this kind of thing in theory, the damn thing is that only Apple itself can see this data.
Facebook, absent because of technology
Ben predicted in an article two years ago that today's cloud computing and mobile device companies — Amazon, Microsoft, Apple, and Google — are likely to be 21st-century General Motors, Ford, and Chrysler. The age of technology, in which new challengers emerge every year, is over, but that doesn't mean that the impact of technology has diminished in some way: in fact, it means that the impact has only just begun.
But there's one company that stands out for its absence, and that's Facebook.
The real power of technology comes from rooting digitalization at the physical level:
For Amazon, it is its logistics and fulfillment center, its data center in the cloud;
For Microsoft, it's its global sales organization, its data centers, and its years of partnership with almost every business on the planet.
For Apple, it's the iPhone. For Google, it's Android and its mutually beneficial relationship with Apple. This relationship is not as secure as Android's, which is why Google pays about $15 billion a year (and is growing) to maintain its position.
But Facebook makes huge profits from just one app. This benefit means you have to rely on iOS and Android. Apple, on the other hand, has begun to exploit this dependency.