Who killed the social media ad boom?

A decade-long era of breakneck growth in social media advertising has come to an abrupt halt. Who killed the boom?

As the blame game began in Silicon Valley, Meta founder Mark Zuckerberg and Alphabet chief executive Sundar Pichai used earnings calls this week to point to the unmistakable storm clouds gathering over the global economy.

But the most striking signs of weakness have concentrated on social media platforms.

US advertisers are on track to spend $65.3bn on networks such as Facebook, Snap and Twitter this year, a year-on-year increase of just 3.6 per cent. That is about 10 times slower than in 2021, according to estimates from eMarketer.

The social media slowdown is such that its forecast growth rate for 2022 is almost the same as traditional media such as television and radio, whose audiences have been shrinking for years.

Meanwhile, large ad agency groups have sidestepped the digital turmoil: WPP, Omnicom, Publicis and Interpublic have all raised their forecasts for the year. “Snap called the advertising recession in the first quarter,” said Mark Read, WPP’s chief executive. “We are still waiting for that to happen.”

So who are the suspects in the clobbering of social media?

Big advertisers

With the economy turning, inflation rising and supply chains clogged up, some big advertisers are taking a more prudent approach. Meta’s chief financial officer, David Wehner, told analysts that growth from large advertisers “remains challenged”.

Marketers from financial services to consumer goods are “all having to rethink”, said Phil Smith, director-general of ISBA, the body that represents British advertisers. “There are some things that it would be tone deaf to try to go out and sell right now.”

Colgate-Palmolive said on Friday it would temper its marketing spend. But Coca-Cola and Nestlé are doing the opposite. Sir Martin Sorrell, chief executive of S4 Capital, noted that the overall digital ad market was still expected to grow significantly over the coming year. “Rumours of its demise are much exaggerated.”

Social media platforms may be feeling the brunt of any pullback because of their advertiser mix. Read of WPP said that digital platforms were more reliant on aggressive campaigns by venture capital-funded companies seeking market share. “Quite a lot of that financing has dried up.”

TikTok

Short video has upended social media. TikTok is luring billions of eyeballs away from Instagram and Snapchat. But as consumers’ attention spans shrink, so does the time to serve them advertising.

Not even TikTok has managed to monetise its advertising successfully, according to staff at the lossmaking company. Analysts at eMarketer estimate the platform will generate around $5bn of ad revenue in the US this year — a fraction of Facebook’s turnover.

But the TikTok threat has frightened Facebook and YouTube into disrupting their own businesses, with an impact on ad revenues. YouTube is pushing YouTube Shorts but will only start monetising it early next year.

Instagram meanwhile has bet on Reels, its own short-form video format, much to the annoyance of some prominent users. “Stop trying to be TikTok i just want to see cute photos of my friends,” grumbled Kim Kardashian and her younger sister Kylie Jenner.

The TikTok challenge may only get tougher. Sarah Simon, media analyst at Berenberg, said: “There’s a lag between usage and monetisation so it probably becomes even more of a threat next year and beyond.”

Apple

Apple chief executive Tim Cook insisted this week that its new App Store ads business was “not large relative to others”. Nonetheless, it has grown rapidly at the same time as iOS privacy restrictions introduced last year have taken a $10bn bite out of Meta’s revenues.

Just this week, Meta accused Apple of “undercutting others in the digital economy . . . to grow their own business”.

However, Meta executives insisted on Wednesday’s calls with analysts that the threat from Apple’s app-tracking changes “diminished” in the third quarter, after it developed new tools to measure ad performance.

Gaming

As interactive entertainment boomed over the past decade, games publishers became big advertisers for digital platforms. Mobile games developers became particularly adept at calculating the return on each dollar spent on Instagram or YouTube.

But Apple’s privacy changes upset advertisers’ ability to make those calculations, just as gamers began to look up from their screens after two years of the coronavirus pandemic.

In August, Electronic Arts chief executive Andrew Wilson pointed to “some macro mobile slowdown”. Though games have proven resilient in past recessions, that was before the rise of free-to-play mobile games.

The impact of this trend is already showing up in Apple’s and Google’s app store revenues, much of which is driven by social media advertising.

Apple’s financial chief, Luca Maestri, described “some softness” in gaming due to “macroeconomic headwinds”, which he expected to continue. Philipp Schindler, Google’s chief business officer, blamed a “decline in user engagement in gaming” for weaker Play store sales, creating “downward pressure on our advertising revenues”.

Ecommerce

Retailers, including Walmart and Target, have been quietly building digital marketing businesses of their own, following Amazon’s lead. It has effectively opened a new competitive threat to social media platforms.

Advertisers have suddenly had more choice over how to reach consumers. Search and banner ads are also able to reach customers closer to the point of purchase, an important factor for some marketers.

So-called retail media have also been less affected by recent privacy changes such as those implemented by Apple, since they do not rely on “third-party” data that track users across the web.

“Some of Facebook’s [ad dollars] are going to Walmart, Target and, obviously, Amazon,” said Berenberg’s Simon. Amazon this week said its advertising revenue jumped by 25 per cent in the third quarter to $9.5bn.

Zuckerberg

As frustration grows on Wall Street about Meta’s refusal to reduce investment in the metaverse in the face of an ad slowdown, some investors and analysts see Facebook’s founder as the biggest threat to the company’s longevity.

Analysts at MoffettNathanson even compared Meta to the traditional media companies that Big Tech has disrupted over the past decade. “Again, with each passing quarter, the drumbeat of Meta’s perpetual decline from competition appears more and more believable,” they wrote.

Mark Mahaney, an analyst at Evercore, challenged Meta executives on Wednesday’s call about its progress in rebuilding the ad targeting tools that were hobbled by Apple’s privacy changes. “It had a material financial impact,” he said. “And listening to the call, I just don’t hear it as a major investment priority.”

Meta executives insisted that they had improved its ad tech. But Zuckerberg himself — as the last founder leading a Big Tech company in Silicon Valley, whose controlling shares ultimately insulate him from any investor fury — was unapologetic.

“I’d just say that there’s a difference between something being experimental and not knowing how good it’s going to end up being,” he said, adding: “I think that those who are patient and invest with us will end up being rewarded.”