The Culprits Responsible For The Slowdown In Social Media Ad Spending

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The once red-hot social media ad boom has come to an abrupt halt after enjoying more than a decade of explosive growth and performance fueled by tech-hungry investors and Silicon Valley venture capitalists.

As the global economy teeters on the brink of a looming recession, tech giants and social media conglomerates are pointing fingers at one another as they try and decipher who’s really to blame for the sudden slowdown in ad spending and performance.

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Greater macroeconomic problems, from stubbornly high inflation, aggressive monetary tightening leading to the soaring cost of borrowing, supply chain bottlenecks, and geopolitical tension have all eaten their way into companies’ profits this year.

On the foundation, consumers are pulling back aggressively as it looks to keep up with the cost of living crisis which has so far taken a massive plunge into their disposable income. Second to this is corporate advertisers who have been making swift changes to their advertising budgets, as bigger economic problems weigh themselves into their profits.

In recent months, tech and social media giants have been slashing jobs at a phenomenal rate, as it tries to lower their full-year guidance on the back of slowing growth.

By looking at how many jobs companies in tech and social media have cut this year alone, it’s already a clear indication that conditions are far worse than what many expected after the industry enjoyed a decade-long escapade of frothy investments and job growth.

A grim sight of tech layoffs continue

This year has been earmarked with job cuts and aggressive layoffs as companies try to ride out the macroeconomic problems. From the beginning of the year, conditions in Silicon Valley started deteriorating, only to snowball as we stretched later into the year.

Companies including Microsoft, Netflix, Robinhood, Carvana, and Klarna, among others, led the trend in layoffs, terminating hundreds of jobs as early as April this year.

A wave of job cuts soon followed, with Snap slashing 20% of its more than 6,400 workforces back in August. Snap’s stock prices are down more than 80% this year alone. After two consecutive months of declining revenue, Facebook parent company Meta announced that it will eliminate 13% of its staff, amounting to more than 11,0000 employees. Musk-owned Twitter has also been shaken by thousands of layoffs, as roughly 3,700 employees were cut from the company.

Other tech companies including Amazon also announced that it will be laying off 3% of its workforce, which represents 10,000 jobs. While Apple and Shopify have also been making some changes to their employee structure in recent months as it looks to cut back on costs.

As of mid-November 2022, more than 73,000 tech workers in the U.S. have been laid off according to a Crunchbase News tally. Persisting job cuts represent only the tip of the iceberg of ongoing financial problems that have plagued the tech sector for much of the year.

Who’s To Blame?

With much of the tech sector currently hanging on by a thread, companies are fraught with questions over the sudden slowdown in ad spending coming from private and public companies.

Apple’s Changing Ad Tracking Policies

Back in 2020, iPhone giant Apple announced it was changing how advertisers and social media platforms can track users across their devices. The idea behind Apple’s ad tracking changes meant that it will minimize intrusive advertising, allowing users better privacy, and single-handedly cutting off advertisers from tracking users on the internet and their behavior.

This in itself didn’t do much to tarnish Apple’s ad business, as it didn’t have much of an ad business to start with. The change in Apple’s privacy policies meant that companies such as Meta, Twitter, and other similar companies will find it increasingly difficult to gather a detailed digital footprint of users.

TikTok’s Growing Dominance

Some pointed out that TikTok’s explosive growth in recent years has also contributed to several other platforms, including Facebook, Instagram and Snap seeing a sudden decline in ad spending revenue. Back in April this year, the company projected its ad revenue to increase to $12 billion, an increase of $4 billion from last year.

In the first quarter of the year, the platform had more than 1.6 billion global monthly users, slightly below the 2.9 billion of Facebook, but this marked a 45% growth from the year before. The video-sharing app has given Instagram, Facebook, and YouTube a run for their money this year, leading companies to innovate at a rapid pace as it seeks to compete against its surging global dominance.

On top of this, TikTok’s influence and growth left Facebook and YouTube frightened, with both companies now looking to introduce similar features to their platforms as their greatest competitor. Even with these efforts, the cost of YouTube ads, and that of Facebook are still not delivering a substantial return for advertisers.

Turning Economic Conditions

Another culprit and perhaps the biggest and most noticeable of all of them is the changing economic cycle, which has now led to expert economists believing the global economy is fast approaching a breaking point. As a recessionary measure, consumers, corporate advertisers, and investors are all pulling their cash from the market in the hopes of shielding themselves against the sudden economic slowdown.

To counter red-hot inflation, which hit 7.7% in October, - the smallest 12-month increase since January - the Federal Reserve has been boosting the cost of borrowing with its aggressive monetary tightening.

In less than a year, prime interest rates have more than doubled, going from near zero at the start of 2022, to a range of 3.75% to 4%. But rates are expected to remain elevated, as the Federal Open Market Committee is set to continue hiking up rates, where it is expected to peak at 4.5% to 4.75% in 2023.

Soaring prices and a cost of living crisis sent consumers and corporate advertisers into survival mode. With consumers spending less than usual and plumping up their savings, companies soon felt the shockwave of slowing economic activity, sending companies into overdrive, cutting their advertising dollars and making adjustments to their marketing expenses.

Changing eCommerce Landscape

eCommerce and online retail giant enjoyed a banner year at the height of the pandemic in 2020. Throughout much of the COVID era, corporate retailers such as Amazon, Target, and Walmart, to name a few, started growing their digital marketing businesses. As consumers swiftly transitioned to online shopping, major retailers sought out an opportunity to disrupt the competitive playing field.

As of late 2022, retail media represented 11% of total ad spending globally.

The successful growth and development of these businesses have meant that fewer ad dollars are being spent on social media, and more are being directed to in-house digital marketing efforts. For these companies, search and banner ads remain a vital source of consumer marketing and point of purchase.

Additionally, retail advertisers have also been less affected by Apple’s privacy policy changes, as much of their marketing efforts and tactics do not currently rely on third-party data and information.

Bearish VC Deals

Over the last decade or so, tech-heavy venture capital deals meant that media and tech companies grew at an exponential rate, as billions of dollars freely flowed across the industry. During the pandemic, investors were even more aggressive with their spending, dishing out record-shattering amounts, hoping to see positive returns in the coming years.

Though this may have been the case for several years, tightening economic conditions and sinking market sentiment have led to a shift in venture capital deals over the last couple of months.

Data suggest that VC investments totaled roughly $43 billion across more than 4,074 deals in Q3 2022 - this represented a nine-quarter low for total deal value. The same data suggests that the total number of deals has also fallen by more than 20%, marking the lowest deal count since Q4 2022.

The once capital-backed free-flowing venture capital has now started to dry up, leaving companies in tech and media to scramble and market their way across the industry as they look for ways to survive the financial and economic crunch hitting them from all sides.

The Not-So-Good-Looking Potential Of The Metaverse

Last year, the metaverse captivated the global marketplace, seeing companies investing millions, if not billions into the further development of what then looked like a promising virtual world of opportunity.

At the turn of the year, companies and investors started having growing doubts about the potential of the metaverse. As investors started putting a pause on ongoing deals, and companies slowed down spending on their metaverse side of the business, the idea started to fizzle out and the metaverse is something many will only look to pursue in the coming years.

These conditions have however not stopped the CEO of Meta, Mark Zuckerberg from continuously plaguing billions into the further development of the metaverse. An idea that many have dubbed a cause for disaster.

At an earnings call in October, Zuckerberg and Meta's executives were positive that the company had managed to make significant changes to its ads policies in recent months, and that it’s still looking to curtail Apple’s privacy policies with innovative measures.

Zuckerberg told shareholders that “those who are patient and invest with us will end up being rewarded,” citing that the company’s investment in the metaverse will create bigger opportunities in the coming years.

The Final Verdict

Having to pick one or two, and simply claiming it as the reason why corporate advertisers are spending less on social media ads can seem a bit far-fetched to say the least.

Slowing economic performance and changing investor sentiment have battered companies for much of the year. Apart from this, consumer spending behavior, coupled with surging inflation and interest rate hikes has also not made it any easier for companies to properly predict what they can expect going forward.

While it’s not possible to directly name or pull a culprit from the hat, it’s best understood that a combination of changing economic conditions on the macro landscape has resulted in the sudden deflation of social media ads spending.

Though the market is projected to see positive growth in the upcoming year, there’s still too much uncertainty that’s currently looming, leading to bigger cause for concern and unpredictable volatile conditions.