Apple has dealt a $10 billion dollar blow to their unspoken nemesis, Meta.
On the Meta Q4 earnings call, CFO Dave Wehner said that the impact of Apple iOS changes would result in up to $10 billion in revenue loss. The iOS changes he referred to are Apple's App Tracking Transparency (ATT) framework that requires apps to gather user permission to access their unique device identifier for advertising (IDFA).
Users on iOS are unsurprisingly not choosing to allow Meta and its advertisers to track them across apps. As a result, Meta's advertising business will experience severe financial pain.
Metaverse, not now
Coincidentally, $10 billion is how much Meta lost this year in their quest to build out their metaverse business division. The Meta Q4 earnings release revealed for the first time the Reality Labs business segment that includes Oculus and other metaverse-focused efforts.
It turns out that building the Metaverse ain’t cheap. Reality Labs has lost money at an accelerating pace since 2019:
- 2019: Net loss of $4.5 billion on $501 million in revenue
- 2020: Net loss of $6.62 billion on $1.14 billion in revenue
- 2021: Net loss of $10.19 billion on $2.27 billion in revenue
So investors effectively saw an extra $20 billion in revenue erased from thin air this year between headwinds from Apple and their self-imposed metaverse ambitions.
No investor wants to see these financial trends, especially when they drive the future growth prospects of the entire company.
When Facebook changed its name to Meta, it essentially went all-in on the Metaverse. They wanted to distance themselves from the tainted Facebook image and focus on becoming a platform not subject to the whims of a hostile platform operator like Apple.
They also needed to find a new area for user growth because their social media well is running dry.
Facebook is losing users
So the core initiative of the company is losing money faster than ever, but at least they are still growing in social media — right? Not so fast.
Facebook lost users for the first time this quarter. The app where your uncle posts conspiracy theories lost around 500,000 users between Q3 and Q4 2021, ending an 18-year streak of user growth.
Half a million users may not seem like a big deal compared to the reported 1.929 billion daily active users, but it is quite a black eye for a company driven by growth and metrics.
Meta stock sunk like a rock following the earnings announcement — shares in the company dropped 26%, eviscerating $230 billion of market value. Meta’s drop in market cap was the worst one-day drop in the value of any U.S. company ever.
Despite Mark Zuckerberg‘s plan to develop the Metaverse, Meta is still very dependent on advertising revenue to fuel company growth. Apple has tied Meta's hands behind its back, and Meta is feeling the restrictions of operating on a platform they do not control more than ever.
Snap finds a way
Snap and all other social media stocks became collateral damage following Meta earnings. SNAP stock dropped 23.6% as investors feared similar news of mega revenue loss from Meta’s contemporaries.
But Snap shocked everyone when they released earnings one day after Meta — not only did they hit quarterly profitability for the first time, but they also brushed Apple ATT aside like a mild nuisance.
Revenue increased 42% year over year to reach $1.3 billion in Q4. Snap also posted three consecutive years of accelerating daily active user growth (22% this year alone). They grew DAUs to 319 million in Q4, adding 54 million snap chatters or a 20% increase over Q4 last year.
On their earnings call, an investor asked Snap how they managed to navigate IDFA-related headwinds that impacted their peers (*cough* Meta *cough*).
Snap CFO, Derek Anderson, responded that they began working on solutions to the problem more than a year ago. Entering Q4, 75% of Snapchat's direct response advertisers had already enabled Apple SKAdnetwork or Snap Advanced Conversions.
Now let's unpack that a bit.
Snapchat had a plan in place to combat the changes Apple ATT inflicts. Without an IDFA, you can throw out many of the conventions used to target and measure advertising. If a user chooses not to share their IDFA with you, then under the pre-existing digital advertising paradigm you cannot:
- Individually bucket them into groups for advanced audience targeting
- Conduct retargeting
- Track conversions and other user-level metrics
One solution to this multi-faceted conundrum is Apple SKAdnetwork, a solution created by Apple that allows advertisers to track app installs and other conversion events. If you want to learn more about SKAdNetwork, I wrote an explainer detailing how it works.
Snap Advanced Conversions
The second solution Snap mentioned is more interesting because it has not received much attention. It is called Advanced Conversions, and when I first read about it, the first thing that came to mind was that it sounds like a data clean room.
Advanced Conversions takes two data sets: impression data from Snap and conversion data from the advertiser and removes all user-level identifiers like IDFA (if available), email, phone number, etc., and then provides aggregated conversion data.
- An advertiser runs an ad on Snapchat to gain installs for their iOS app.
- A user clicks the ad and installs the app.
- ATT prompt is shown in the advertiser’s app, and the user asks the app not to track them.
- The user eventually registers (using email) with the advertiser app and buys something.
- Advertiser sends install and purchase conversion data (including email) to Snap.
- Snap obfuscates email address (presumably through hashing) but matches the obfuscated email with a registered Snap user and registers conversions for the ad.
- Snap adds an install conversion and a purchase event conversion to aggregated reporting metrics.
So Snap will never know which Snapchat user converted. Snap combines the two datasets but keeps identifiers outside their purview.
The advertiser will not see identifiers from Snap, but they will still know how many install and purchase conversions they received in aggregate. Snap can complete this process without an IDFA and adhere to Apple's rules.
Snap shifts advertiser goals
Snap also pushed advertisers to adapt to Apple's new world order by shifting focus to mid-funnel goals (clicks and installs) and away from goals toward the lower end of the funnel (purchases).
They admitted that advertisers measuring the bottom of the funnel are more affected than the rest:
Our advertising partners, who prefer to leverage lower-funnel goals, such as in-app purchases, have been most impacted by these changes
Before ATT, iOS advertisers could attribute exact dollar amounts that converted users spend in their app to measure return on ad spend (ROAS). This metric allows advertisers to understand how much they earn in return for every dollar spent on advertising.
It sounds like Snap advertisers are grasping that higher level funnel measurement is the best they can achieve, and they have adapted to the changes accordingly.
Snap vs. Meta
The takeaway from Snap earnings vs. Meta earnings is that Snap has their shit together around the Apple App Tracking Transparency framework.
Meanwhile, Meta Chief Operating Officer, Sheryl Sandberg, said Meta is working on solutions to adapt:
we're working on measurement, we're rolling out new [solutions] to help businesses continue to measure campaigns using Apple's SKAdNetwork, API, and Meta's aggregated events measurement and conversion modeling.
Meta does have a similar solution to Snap Advanced Conversions, called Aggregated Event Measurement. But the language used by Sandberg does not convey the same confidence or uptake in aggregate measurement or SKAdNetwork as Snap.
Snap earnings demonstrated that their solutions for the problems of ATT are ready and implemented. Advertisers have adopted aggregate reporting and have reoriented their goals accordingly.
In contrast, Meta’s solutions are a work in progress. The respective Q1 guidance of each company reflects the success (Snap) and failure (Meta) of each company's response to ATT.
However, when comparing Snap and Meta, it is vital to remember that Meta is a much larger business than Snap.
A dingy can pivot on a dime, but a cargo ship might take a bit to change course. Meta and Snap operate on two very different orders of magnitude, as reflected in their daily active users (DAU) and revenue.
- Meta: 2.82 billion on average for December 2021
- Snap: 319 million in Q4 2021
- Meta: $33.67 billion
- Snap: $1.3 billion
Meta is simply operating on a much larger scale than Snap, and implementing changes at scale takes time, and advertising must also contend with the entire company shifting focus towards the metaverse.
Meta must also cope with their potential user pool dwindling.
The company did grow users modestly across its family of apps, inching from 2.81 billion to 2.82 billion across Instagram, WhatsApp, Messenger, and Facebook — but it is not the eye-popping growth the company has brought in recent years.
The lack of growth is even more threatening when compared against growth from Snap or even the rapid rise of TikTok, experiencing 59.8% user growth in 2020 and 40.8% growth in 2021.
Meta may have reached peak market saturation with their family of apps, placing even more pressure to accelerate its quest towards the Metaverse.
With no more users to bring onto social media, Mark Zuckerberg decided to will a metaverse full of new users into existence.
Life beyond ATT
It will take a few years to see if Meta can execute and achieve its grand designs. But meanwhile, they still need to create the revenue necessary to fund their colossal company pivot.
Snap proved that life exists beyond Apple ATT, and Meta can follow the same path and batten down the hatches to prevent additional advertising revenue leaks. Meta needs to embrace aggregated conversion reporting and refocus advertiser goals towards mid-funnel actions.
Combating the predicted $10 billion loss could quell negative investor sentiment in the next year, but user growth will remain an issue. Competitors like Snap and TikTok have way more room to grow their user base, but Meta needs to squeeze more revenue from existing users by combatting ATT in the short term to increase shareholder value.
Maintaining the core advertising business will give Meta the capital runway necessary to develop its nascent Reality Labs business. Unlike its competitors, who can still expand their user counts in social media, the long-term success of Meta is now intrinsically linked to user growth attributed to the Metaverse.