How the ad spend crash is impacting tech giants
The tech giants are scrambling to find silver linings in disappointing Q2 results this week. As the world’s largest digital platforms, they serve as bellwethers for the health of the advertising industry, and the brands they work for. The Drum explores how they’ve been hit.
The global ad spend slowdown is impacting the tech giants, with most warning of further headwinds in the near future / Christine Roy
With a busy slate of earnings this week, the dire news came thick and fast with the world’s biggest tech companies warning of significant advertising headwinds for months; their results this week demonstrate those headwinds have begun blowing in earnest.
Amazon reported its Q2 results today, which managed to outperform expectations – perhaps in part due to the overall weakness in the tech and advertising sectors. Despite reporting its second quarterly loss in a row, its shares rose following the report. The e-commerce giant, in contrast to Alphabet’s results, which demonstrated a regression to the mean following the pandemic, managed to keep its e-commerce and advertising operations afloat – if slowing down in line with wider trends.
Its chief executive officer Andy Jassy said: “Despite continued inflationary pressures in fuel, energy and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfillment network.”
The reaction to Amazon’s performance is based in part on expectations of strong performance in the near future. It has a number of key dates on the horizon, including a number of Prime Days.
Insider Intelligence principal analyst Andrew Lipsman says: “Amazon managed pretty well through the second quarter despite tough macro conditions and added costs weighing on its bottom line. It wasn’t a rosy quarter by any stretch, as the e-commerce business struggles to return to positive growth, and the high-margin AWS and ads businesses continue to decelerate. But Amazon comfortably cleared the lowered hurdle while guiding to a much stronger back half of the year.
“The next two quarters feature Prime Day events that should recharge e-commerce momentum, with the added benefit of comparing against the absence of Q3 and Q4 Prime Days in 2021. This will boost growth and reduce membership churn, while giving a jolt to the advertising business that’s increasingly responsible for Amazon’s bottom line. It looks like Amazon is finally primed to turn the corner after a rocky couple of quarters.”
Hugh Fletcher, global marketing director at Wunderman Thompson Commerce, is surprised by Amazon’s results “given the general slowdown in spending we’ve been seeing.” He suggests it “comes down to its ubiquity as a tech and retail powerhouse.”
Apple, too, recorded better-than-expected results – though largely as a result of its hardware activities. Its services side outperformed but also saw a period of destabilized activity, with its chief executive officer Tim Cook saying: “There were some services that were impacted. Digital advertising was impacted by the macroeconomic environment.”
Despite that, its services side – which includes Apple Music and iCloud – delivered $20bn in revenue for the quarter.
In terms of overall slowing ad spend, other analysts noted that the slide was likely to flatten into the back half of the year. Fahim Naim is head of Amazon at Advantage Unified Commerce. He says: “Brands will be allocating more spend to Amazon than they have been. It’s been a progression for brands over the last 12 to 18 months, particularly after the Apple iOS 14.5 updates and also increasing costs on Meta and Google and with brands trying TikTok, but this has not been scalable for many brands.”
“So I do expect a reasonable increase in year-on-year advertising. Brands are looking to reallocate spend to more efficient platforms,” he adds. ”Amazon’s becoming more and more attractive for brands that are squeezed in profitability, particularly ones that are direct-to-consumer (DTC) or are looking at online channels.”
That change in the allocation of ad spend for smaller brands might be behind the poor performance of the other tech giants, with Facebook in particular seeing a slowdown in spend from its core contingent of advertisers. As John Stoneman, senior vice-president of global demand at TripleLift, notes, the tech giants with greater exposure to smaller brands pulling ad spend are most at risk.
“It’s not surprising to experience tightening margins during times of economic uncertainty, but that doesn’t mean brands are reining in their marketing efforts. Companies such as Unilever, for example, are continuing to invest ad dollars in their brands amid rising prices. If we can take away any lesson from previous periods of decline, such as the pandemic, it is that the ad market is resilient enough to recover much faster than we expect.”
Alphabet’s results demonstrated slowing growth for some of its flagship products, including YouTube ads and its Search capabilities. YouTube advertising was expected to deliver around $7.52bn, but ended up returning $7.34bn to the parent company’s coffers.
Meta was similarly seen as having missed its advertising targets by a significant margin. It reported its first-ever drop in revenue, which it attributed to foreign exchange issues and – crucially – slowing advertising demand among its core markets. Its Q2 results release stated: “We expect third-quarter 2022 total revenue to be in the range of $26-28.5bn. This outlook reflects a continuation of the weak advertising demand environment we experienced throughout the second quarter, which we believe is being driven by broader macroeconomic uncertainty.”
Snap, too, reported an overall lack of demand for its core advertising products. It stated that overall “demand growth on our advertising platform has slowed significantly,” which it blamed on uncertainty in the financial markets in high-value verticals. As a result, its chief executive officer Evan Spiegel said: “While the continued growth of our community increases the long-term opportunity for our business, our financial results for Q2 do not reflect our ambition.”
Twitter, impacted by uncertainty surrounding Elon Musk’s botched takeover, also noted that its underlying advertising revenue was affected by a slowdown in demand. Its overall revenue for the three months to June 30 was £986m, representing a decline of 1% ($270m) in the same period last year. It said “advertising industry headwinds associated with the macroenvironment” was one cause of its cash-flow problem.