Large Tech companies like Alphabet, Meta, and Amazon missed expectations in their Q2 2022 earnings. The main drivers are lower ad spend, overhiring and declining ad targeting accuracy - each of which has mostly negative consequences for Growth. Some companies might shift a part of the budget to SEO, but only if they see the channel as a viable alternative.
In last week’s memo, I described the shift from marketing from companies to marketing through people. In this memo, I explain the changing advertising landscape, employee market, and tracking capabilities at the hand of the most recent Tech earnings.
Lower ad spend and targeting accuracy
As companies spend less on ads because they have to shift from growth to sustainability, customer acquisition cost decreases, but payback periods increase. Let me unpack this.
Recessions create a domino effect on the advertising market: customers have less money, so they spend less. At the same time, dropping startup valuations and stock prices lead to smaller funding rounds and less financial power for companies. As a result, B2B and B2C companies spend less on advertising - except for private companies with a lot of cash in the bank.
Modern advertising platforms like Google Ads or Meta are bidding marketplaces where advertisers compete for attention with money. Fewer advertisers mean lower ad prices and customer acquisition costs. However, since customers don’t spend as lavishly anymore and take more time to evaluate services and products, payback periods (the time it takes to recover the money you spend on acquiring customers) are also getting longer. In other words, the lower ad prices are offset by lower market demand and longer sales cycles.
The Q3 earnings of Alphabet show that very clearly: net income dropped by a sharp -26% year over year, even though revenues are up and digital advertising as a whole has grown +5% compared to 2021 and +42% compared to 2020. (Source)
The main reason for the decline is Youtube’s underwhelming performance despite massive engagement. Year-over-year growth was negative, with -1.9% likely due to ATT and TikTok. Even Google Search only grew by +4.3% YoY (following a very strong 2021, but still).
A logical question to ask is whether Alphabet will show more ads in Google Search to offset the losses. It’s unclear at this point. What is clear, though, is that Google needs to cut costs to improve its operating margin and show more ads or sell subscriptions to turn Youtube’s revenue trend around. Another option could be to monetize Youtube Shorts harder, which sees rapid growth and engagement.
Another shift in the advertising landscape is the two new OTT offerings from giants Netflix and Disney+. Large companies that can afford the production cost might shift from budget toward streaming ads to benefit from initially low cost and build brand awareness. If Youtube’s tracking capabilities suffer from ATT, OTT might be the better alternative for large companies after all.
More looming layoffs
Many companies that thrived during the pandemic also gained a lot of weight. Unfortunately, it’s becoming clear that they need to go on a diet, meaning layoffs. Just last week, Stripe laid off 14%, Twitter 50%, and Lyft 13% of their workforce. They will not be the last ones.
Meta continuously added +25-30% new headcount every year, reaching +87K employees in Q3 2022.
Alphabet grew headcount on average by +4.5% year-over-year and reached +186K in Q3 2022.
Compared to revenue, headcount is growing much faster while operating margins are shrinking. Since Q4 2021, revenue growth is not in line with the number of employees anymore. Sundar Pichai (CEO of Alphabet) and Mark Zuckerberg (CEO of Facebook) have both highlighted that employee productivity is off. Layoffs are imminent, in my mind.
All of this sounds cold and mechanical. I want to add two points to my statement: One, strong talent will always find work. Two, layoffs are painful, sad, and enraging. They’re also opportunities for new businesses that want to be created, happier jobs that want to be found, and recharging periods that need to be taken. I say that as someone who was recently laid off.
When their numbers skyrocketed during the pandemic, a lot of companies saw an opportunity to grow with the market. They had to decide between taking a risk and waiting. Most chose to take a risk. I can’t blame them.
While 2021 was an excellent job market, 2022 is looking a lot different, and 2023 is likely to be very bad for job seekers. My suggestion: if you’re thinking about switching roles or companies, do it now.
Targeting and attribution decay
1.5 years after its release, the havoc of ATT (Apple Tracking Transparency) is becoming clearer. Meta’s initial estimate of a -$10B whole in its profits might have been a solid understatement. Operating margins started to tank exactly when Apple released ATT in April 2021, while revenue peaked in Q4 2021.
What else started to drop in April 2021? Right, Youtube’s growth. On top of that, user numbers of Meta and Snapchat, which also released disappointing earnings, grew while TikTok’s growth seems to be slowing down (source). This leads me to believe that advertising platforms were affected more by ATT than they admit.
Even though all three (Meta, Alphabet, Snapchat) seem to invest in remedying the effect of ATT with machine learning, probabilistic measuring won’t replace measuring conversions and improving targeting.
The death of 3rd party cookies will decay targeting capabilities even more. Google already announced to retire Similar Audiences by May 2023 and replace it with automated solutions based on 1st party data (source). As a result, advertisers will have less insight into what where their money goes and who Google actually targets.
Altogether, advertising is on a path to becoming a lot more automated and a lot less transparent. SEO went through a similar process when Google stopped sharing the referring keyword for privacy reasons in 2013.
Good or bad for SEO? Yes!
To summarize, disappointing Tech earnings in Q3 are driven by a bad economy, pandemic overhiring, and reduced ad targeting capabilities.
The impact on SEO will depend on whether SEO is already a viable Growth channel for a company or not. Companies that already see decent returns might reduce advertising budgets, reduce headcount, and invest more in SEO since it’s a low-cost, high-sustainability channel.
Organic Growth experts must prove value now if they want larger investments. This is the time that many companies will rethink their budgets and headcount commitments. My advice is to prepare and share: