Facebook could get stronger after Apple’s iOS privacy change

Apple (NASDAQ: AAPL) is working on a new privacy feature for iOS 14 called App Tracking Transparency. The feature will be available to everyone with the release of iOS 14.5 this spring.

Few companies have been more frankly about the changes than Facebook (NASDAQ: FB). The company warned that “the impact of platform changes, especially iOS 14” will act as “a significant headwind of ad targeting” when releasing its fourth quarter results.

But CEO Mark Zuckerberg has started to embrace Apple’s upcoming changes. In fact, he recently said that the new privacy feature could strengthen his position with businesses and advertisers.

Facebook CEO Mark Zuckerberg at the 2019 F8 Developer Conference. Image source: Facebook.

What exactly is changing?

Apple’s new feature will prevent apps and websites from collecting and sharing an identifier called IDFA (The Identifier for Advertisers). This will prevent Facebook from using what are called “post-display conversions” to get the full picture of an ad’s effectiveness.

If a person sees an ad on Facebook but doesn’t take action immediately, that doesn’t mean the ad was completely ineffective. That same person can search the web for that product later and buy it. But with Apple’s update, Facebook will never know, and neither will its advertisers.

Today, when a person makes a purchase on a retail website or app, that retailer can share the IDFA with Facebook. Facebook can then check if that same IDFA has seen an ad for this product on Facebook or Instagram and show the effectiveness of its ads.

If Facebook can’t track conversions outside of its app, advertisers have no idea what its ads are really worth. They have to guess, and some might not like the uncertainty over other digital advertising platforms that can more easily track conversions without the input of other apps – for example, Amazon.

Facebook says its audience network, which displays ads in third-party apps, will be hit hardest by the changes. He warned that developers using Facebook Audience Network could see their revenue drop by 50% after Apple announced the new feature. The Audience Network represents only a small percentage of Facebook’s advertising activity.

Facebook isn’t the only business Apple could hurt with the update. Most digital advertising companies will experience the same effect on their ability to measure advertising effectiveness on iOS. And Facebook’s size, reach, and existing user data may give it an edge in gaining market share in a post-iOS 14.5 world.

CFO Dave Wehner agrees, but says the market may contract in the new environment. “While we might be able to maintain or possibly improve our share of the portfolio… I think you’re just going to have advertisers and businesses that decide it’s not profitable to advertise. [on iOS]”he said on a follow-up call with analysts after management’s fourth quarter earnings call.

Why Zuckerberg now thinks this is an opportunity for Facebook

Zuckerberg appeared to have changed his mind during a discussion on Clubhouse on March 18. “We may even be in a stronger position if Apple’s changes encourage more companies to trade on our platforms,” he said.

Looking back, Facebook’s native on-app commerce tools appear to have been the tech company’s back-up plan since last summer, when Apple announced transparency in app tracking.

Facebook significantly accelerated the deployment of e-commerce functionalities on Facebook, Instagram, WhatsApp and Messenger for the past nine months. While the COVID-19 pandemic certainly played a role in Facebook’s urgency to bring new tools to small businesses, upcoming changes to iOS likely played a role as well.

During Facebook’s fourth quarter earnings call, Wehner said, “We hope to help businesses by providing more on-site conversion opportunities through initiatives such as shops, and also clicks on email ads,” when discussing ways to mitigate the effect of Apple’s new privacy settings.

With a growing suite of e-commerce products, Facebook could actually gain more market share from smaller online retailers and those who don’t yet have a lot of an online presence. This could make them more dependent on Facebook ads to drive traffic and sales, and increase social network income. It could also benefit Facebook’s efforts to monetize WhatsApp and Messenger with more tools for businesses to connect with customers and close sales through direct messaging.

Only time will tell how Apple’s iOS changes will affect Facebook and the rest of the digital advertising industry. But the FAANG action is well positioned to navigate the environment and use the changes to sell businesses on its e-commerce functionality.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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About Lucille Thompson

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