It’s earnings season on Wall Street and for companies in the App Economy. It's a tale of two monetization strategies plus pressure creating additional uncertainty. Here are three areas to watch as companies report Q3 2021 results:
Q3 2021 is the first full quarter impacted by Apple’s iOS privacy changes. App Tracking Transparency (ATT) rolled out with iOS 14.5 on April 26, 2021. ATT shifts the iOS ID for Advertisers (IDFA) from Opt Out to Opt In.
IDFA is used to measure a user’s interaction with advertisements. IDFA is also widely used to tie mobile users to customer profiles. This allows advertisers to follow users with ads across web and mobile.
The companies most predicted to feel pressure from the ATT rollout include Facebook (NASDAQ: FB) and Snap (NYSE: SNAP). Both are part of the App Economy due to their heavy dependence on mobile advertising revenue.
While Facebook saw little impact in Q2 resulting from ATT, the company felt the pain in Q3. Facebook missed revenue targets expected by analysts which Facebook CEO Mark Zuckerberg attributed to ATT:
“As expected, we did experience revenue headwinds this quarter, including from Apple's changes”
Facebook is preparing Wall Street for a bumpy Q4 in part due to ATT:
"Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes, and macroeconomic and COVID-related factors."
Snap also missed Q3 revenue expectations. CEO Evan Spiegal cited iOS ad tracking as the driving force:
“Our advertising business was disrupted by changes to iOS ad tracking that were broadly rolled out by Apple in June and July.”
Following the earnings report, Snap’s price per share dropped approximately 25% and hasn’t recovered after two full days of trading.
Oppenheimer analyst Jason Helfstein expects much of the digital advertising industry to face IDFA-related headwinds. Both Facebook and Snap are promising technology investments to mitigate the impact.
It remains to be seen how well companies will adapt and how aggressively advertising-centric companies look to subscriptions as a means to accelerate a return to growth.
Speaking of subscriptions, Google just announced a reduction in Play Store subscription commissions. The earnings impact for App Economy companies will take time. The change won’t take effect until January 1, 2022.
However, the market is already responding positively to the news. Shares of DuoLingo (NASDAQ: DUOL), the popular language learning app, are up ~15%:
DuoLingo isn’t alone. Shares of Bumble (NASDAQ: BMBL), the dating app, are up more than ~5%:
For subscription-based apps, the reduced commission is a feel good moment that’s likely to release some of the pressure that has been building. It’s likely temporary but will cause app publishers to pile on pressure for Apple to follow suit.
Regardless of the commission, App Economy companies will still have too much churn. These companies will need strong retention programs and they need to elevate their subscriber experience.
Apple’s advertising privacy changes put more control in the hands of the end user. In the process, they have disrupted digital advertising. At least for a while. Most users if asked would surely agree that this is a positive change. So while Apple is receiving scrutiny, it’s by the parties most dependent on advertising business models.
On the other side of the monetization coin, app publishers selling directly to consumers have long been fighting for more favorable business terms and fewer restrictions. To them, this isn't about the end user at all. Rather, about building a sustainable business.
To Apple, some of the asks such as side-loading apps, alternative app stores, or even different payment mechanisms would harm iPhone’s security and privacy models.
In the US, developers went to court and received concessions via a settlement with Apple. In Japan, the Fair Trade Commission closed an investigation into the App Store after Apple offered a different concession. Of course, the already famous Epic v. Apple lawsuit resulted in a court order followed by an appeal by Apple.
Jurisdictions around the world are examining Apple and Google for potential anti-competitive behavior. While it is not clear how this will turn out, there is no doubt uncertainty lies ahead in the App Economy.
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