The future of digital advertising

The future of digital advertising has been an important topic for investors over the last two years. Five of the top ten largest companies in the world, Apple, Microsoft, Amazon, Alphabet and Meta, all have exposure to this important industry.  The share prices of some of these companies declined precipitously in 2022 but have had a significant recovery this year.  After years of robust health, digital advertising has been hit by a number of short-term factors but reports of its death are an exaggeration…

Boom and bust

At the start of the Covid pandemic, there were concerns that advertising demand would decline significantly because strict stay-at-home regulations meant that companies could not sell anything and would have no need to advertise. This concern quickly reversed as e-commerce became the primary retail outlet and advertising dollars shifted online.

Digital advertising soared because it allowed companies to reach their customers at different points in their consideration of purchase decisions.  In addition, unlike analogue advertising, where the saying goes that ‘half is wasted but advertisers do not know which half’, digital advertising offered unprecedented quantitative attribution measurement to measure the impacts and returns on the investment. The two largest companies Alphabet (the parent company of Google) and Meta (the parent company of Facebook and Instagram) reported revenue growth of 39% and 36%, respectively, in 2021. From a lower base and providing access to the customer not when they are searching on Google or engaging with social media on Facebook or Instagram but at the actual point of sale, Amazon also reported very strong advertising growth of 58% in 2021.

These companies, along with the broader technology sector, rapidly expanded their hiring during the pandemic to capitalise on this sudden growth and invest in their businesses. However, at the same time, a confluence of factors came together to hit digital advertising.  Apple’s IDFA changes affected the ability to track and measure advert performance and reach on iOS.  Caution about the health of the economy led companies to pull back their advertising.  Difficult comparisons because of the lapping of strong growth led to a decline in reported growth numbers. The shift towards short-form video and lower monetization formats and further growth of TikTok and other advertising outlets such as Netflix and Walmart created extra inventory.

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