Why Apple privacy hurts display ads more than search ads

Display vs. search ads and privacy

Display ads on the Internet are all those banners you see on websites and social media that sometimes chase you around (remarketing) the Internet. Display ads are like the old media ads on TV, Radio, Newspapers, and Magazines that rely on circulation data for audience targeting. Compare the ads you see on US TV evening news to Football games. You will likely see far more medicine ads on the evening news than watching a game. Media planners figure that many evening news watchers are older folks with various ailments, and the medicine ads should resonate.

Search ads are the ads you see after you search for something on Google, Bing, etc.

Here is a great video from the Wall Street Journal that has Apple’s Craig Federighi explaining the privacy changes that Apple has put in place:

iPhones have over half of the US market and tend to have customers who have higher incomes. It turns out that only between 16% -37% of iPhone and iPad users allowed apps to share data.

According to an August 12, 2022 article by Salvador Rodriguez of the Wall Street Journal, Apple wanted their standard 30% of Facebook Ads revenue generated due to the data sharing. Facebook refused. And there was talk of having an ad-free paid Facebook product. Google pays billions to Apple to have the privilege of being the default search engine on Apple products. Other iPhone apps will likely have to charge for all those free apps without ad revenue.

After all, companies that work on these apps need to make money. We will discuss consumer privacy and the free apps issue up in a future post.

This is an existential crisis for all advertisers involved in display advertising. This includes Facebook, Instagram, Snapchat, TikTok, Twitter, and, yes, Google display advertising.

Where does the data for targeting display and search come from?

To understand why display advertising is so hard hit by iPhone users not allowing apps to share data, it’s useful to recognize the nature of first-party, second-party, and third-party data.

First party data is the direct data that a business receives from customers. For websites, free analytics tools like Google Analytics will report things like what search term or ad landed you on a certain page, how long you stayed there, what you saw next and so on. Loyalty cards/logins are a great way to gather first party data. All tech, social media platforms we use insist on logging in so that they can track our behavior on their platform. That behavior is very helpful in serving up relevant ads.

Second party data is data you gather from another business for their first party customers. This is through a business deal where one business shares data of who is doing what on their platform so that you can improve your platform’s ad effectiveness. For example, if you are a seller on Amazon, the commission goes towards Amazon serving up your product and ads to relevant Amazon customers and searches.

The real power in display advertising is from third-party data, ie, those data points about your behavior collected from your browser about what you do on other websites. However, because of third party browser cookie privacy objections that data source is drying up.

Enter big and smaller tech. Apple, Google, Facebook, Microsoft, Amazon and yes Pinterest, TikTok, Yelp. They are the second party who are taking over the third party role. They have their own first party relationships with their users who browse their services (after logging in) for free. All their user behavior data is worth it for advertisers running display ads.

When we live on our phones and don’t talk to even family members, the phone software owners viz. Google for Android and Apple for iOS are very powerful. As far as we can tell Google has a revenue path through ads but Apple needs to get their money from Apps who must in turn charge users for apps or/and have an ad revenue model.

Between apps on your iPhone, the data sharing allowed Facebook to observe what you did on Google search or the Spotify app. What songs you like gives valuable clues about your preferences. An advertising platform like TikTok would not know that you are a Machine Gun Kelly fan. You might reveal something on TikTok about your singer preference, but the full picture is pretty incomplete if you have not allowed tracking on Spotify on your iPhone. Advertising becomes wasteful, costs vs. results for advertisers keep going up, and we are back at the saying by Wanamaker (1838-1920) “Half the money I spend on advertising is wasted,” at least for display ads.

Machine learning alone might be able to outweigh behavioral targeting for ad networks, according to a great paper (2021) by Omid Rafieian and Hema Yoganarasimhan. We can be sure that data scientists at Facebook etc., are working hard on this angle.

Google search relies on what you put on the search bar. Your first party party data and all the results you see, including search ads, are relevant to your search terms. Just bidding higher will not get you the top spot in Google search ads unless your ad and landing page experience matches the search intent of the searcher. Google’s search ad business model focuses on making the searcher happy just as the free top results. It takes years of SEO to get on the first page of organic or free results. Paid ads can run on the same day. If the searcher is kept happy with relevant search results- the ad revenue follows.

To summarize, online display ads are cost-effective for the advertiser when backed by third-party or big tech second-party data. Search ads are effective because they rely on first-party data that is the customer’s search term. A caveat is that if you have several competitors with better campaigns and landing page experience, competing at the Google reverse auction keeps increasing your costs per acquisition. You start wondering if the “Half the money I spend on advertising” quote still stands!

If Netflix is getting into display ads could Apple get into search ads?

The shocking news that Netflix is getting into advertising in partnership with Microsoft begs the question whether Apple will get into search advertising.

Netflix has troves of data on our behavior on the platform, and that’s great for display advertising. Users are wondering if they might be able to fast-forward the ads when they come.

As for Apple, Scott Galloway writes that Apple would get into search and search advertising. The iPhone currently uses Google as the default search engine.

We disagree with Galloway. We believe that the carefully cultivated Apple upscale image that allows those ridiculous product prices would be too much at risk if Apple got into the ad business. Ad business for Apple would be seen as too hypocritical given its holier-than-though privacy stance. The outcry on Twitter and social media would be just too damaging.

But never say never when everyone is looking for revenue streams.

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