Apple's privacy move pressures Israels digital ad sector

Viola Ventures congratulates portfolio companies on their IPOs credit: City Media

Companies like Playtika, ironSource and Outbrain have been struck blind when it comes to Apple users.

Apple CEO Tim Cook has made privacy one of his main concerns as head of the company, and for good reason. Safeguarding privacy benefits the Apple brand, positioning it as a company that cares about its customers, while also giving an edge versus the competition, which should boost revenue in the long run. Besides placing restraints on giants like Facebook and Google, the new privacy restrictions on Apple devices are putting the entire technology and digital marketing industry under pressure. In Israel, some players are already considering freezing their ad campaigns.

Right now, marketing executives at Israeli technology companies are waiting to see how Apple's new restrictions will affect their ability to reach new audiences and the effectiveness of their multimillion dollar campaigns. Although Apple announced these restrictions several months ago, they only became operational a few weeks ago, when millions of Apple customers began downloading the new operating system that makes it difficult for technology companies to expose users to advertisements.

The new restrictions imposed on the industry by Apple affect almost every part of the marketing infrastructure at technology companies, effectively making them blind in relation to Apple customers across the company's range of devices, rendering them unable to customize marketing messages or measure campaign effectiveness. In the coming weeks, Apple will begin limiting customization of in-app advertisements, remove the ability to embed "cookies" (software installed on the user's computer that can detect, analyze, store and track behavior patterns) in Safari browsers on PCs, and impose severe restrictions on user behavior monitoring and on email marketing systems like Mailchimp and marketing management systems like HubSpot, the most popular marketing management software in Israel.

What's happening with Apple customers isn't just a worry for the large Israeli downloadable app developers like Playtika and Moonactive. It also affects companies that sell products to corporate customers and manage huge advertising budgets on YouTube and Facebook, like monday.com and Wix, and enterprise software companies that make extensive use of content-based e-mail campaigns like SimilarWeb. Watching from the sidelines with concern for the growing difficulty of advertising to Apple users - and the consequent rise in ad rates - are small and medium-sized enterprises that depend on platforms like Facebook and Amazon to reach their customers.

"Crazy price hikes will eliminate players"

"Since mid-June - when Apple's restrictions began to affect the market - we've seen an insane increase in advertising prices, raising campaign costs by about 30%," says one senior marketing executive at a major company who requested anonymity. "The immediate victims are digital ad-oriented companies that encourage users to download apps or go to landing pages, as well as small advertisers who won't be able to withstand this increase in advertising rates. Now, everyone is waiting to see if these small advertisers will leave the market or reduce their ad spend."

IronSource, which made the largest Israeli IPO ever on the NYSE, is one of the companies most affected by Apple's move. As one of the world's biggest mobile advertising networks, it has had to raise the price of in-app ad placements by a considerable amount - a cost that is passed on to app developers, among others. And "Globes" has learned that Facebook, which initially slammed Apple over the move - claiming that it would hurt small businesses - recently raised its ad rates by about 30%.

Whether as a consequence or not, the market caps of most of the advertising companies that recently went public on Wall Street have fallen significantly. IronSource's share price dropped by about 20%, Outbrain was forced to cut its valuation prior in its week's IPO the other week, and its share price has fallen since.

"App companies, website owners and advertising agencies are worried about what's happening. Apple is taking away a distribution channel that they've relied on for many years," Russell Jeffery, Director of Strategic Integrations at Israeli company Duda, which helps small and medium-sized businesses set up and design websites on mobile and PC, told "Globes". "It's frustrating when you can't use a tool that's so central to your business, and the businesses we work with see the move as something that will undoubtedly hurt them. It's very worrying."

"It's not making anyone stop their campaigns right now, but it's definitely making them re-examination them," says Barak Witkowski, VP Product at AppsFlyer. "At this stage, everyone is looking at the returns on their marketing campaigns, the prices of ads they sell or buy. This definitely doesn't mean that there won't be a bigger change in the long run."

"This topic is top of mind for the marketing executives at Moonactive, Playtika, and Plarium, but also for executives at medium-size and small companies," a senior digital advertising company told "Globes". "This isn't about what will happen to each individual company; it's about the future of digital advertising, privacy, and the decision-making considerations of giant corporations."

Upgrade to a system that encourages blocking

How sharp and abrupt the change that Apple has introduced is can be seen from the upgrade patterns of its users to its iOS 14.5 operating system, which encourages users to shield themselves from advertisers' tracking systems.

Within three weeks, Witkowski told "Globes", the proportion of blocked users had risen from 30% to 60% of all Apple users. Itai Cohen, VP Marketing and Corporate Strategy at advertising technology company Fyber, puts the number of users upgrading to the advanced operating system at 80%. "In the first month, the pace of upgrades was slow, and suddenly in early June we saw a sharp jump, with Apple pushing the update to something like 30% of users within one week. Since then, it’s been rising consistently."

Users who have not yet upgraded, meanwhile, constitute a control group for the entire advertising industry as exceptions to the rule. The market is nonetheless on high alert and living on borrowed time, as this group is expected to shrink rapidly. According to ad agency Yellowhead, the rate of users blocking ads in fintech and e-commerce applications is double that of users blocking ads in gaming apps.

Fyber states that only about 20% of Apple customers who upgraded their operating systems have actively opted for advertisers to track their patterns of behavior.

Although Apple customers represent a minority slice of the digital advertising exposure pie, 26% of all users, they are considered highly desirable by advertisers. In key markets, such as the US, Apple holds 60% of the total market, the reverse of its rest-of-world share.

"The relative share of Apple users in advertising budgets is greater, because their users have greater purchasing power," Cohen told "Globes". "Before the changes to the operating system, the proportion of advertising budgets targeted at Apple users was 55% of all budgets. In recent weeks, it's dropped to 50%. We see this as a transition period, and our expectation is that the market will learn to adapt to the new reality."

"The Internet grew as a cheap, almost free consumer product. Apple has come along to spearhead the approach whereby the Internet is consumed for a fee," says a senior executive at a major digital advertising company. "There's a war going on here between Apple, Facebook and Google. The casualties are the consumers, who have to pay for more services and who receive less-targeted advertising, and small businesses, for whom a significant revenue channel has suddenly been cut off. The public must decide which it prefers: to pay for online services, or to receive them for free and be exposed to customized advertisements."

Apple versus Facebook and Google

Underlying the issue of Apple's restrictions is the war between the Internet giants over user data. When Apple limits the link between the advertiser or service and the potential user, it pulls the rug out from under the feet of companies like Google and Facebook whose apps are on its devices.

But Apple is far from seeking purely to benefit the consumer. The motives for its move are not just protecting privacy, but also taking a slice out of its competitors' markets in three main ways.

First, it continues to collect information about the demographic and behavioral characteristics of its users, without a push notification opt-in. Meaning, Apple does not apply to itself the restrictions it imposes on its competitors. Users who don’t want Apple to monitor them must go into their privacy settings and manually turn off data sharing with Apple.

Secondly, Apple is expanding its advertising network significantly, and will become a more important player in the mobile advertising market. The jobs available on the Apple website indicate a spike in recruitment for advertising-related positions.

Thirdly, by taking companies dependent on advertising revenue out of the game, Apple strengthens its own for-pay apps and services, which are based on purchasing virtual goods. For-pay apps, or apps with a for-pay option, bring Apple 30% on each transaction - a very large share, relative even to what credit companies take for clearing transactions.

"There's a limit to how much you can base yourself on Android"

As always, the big companies will find new and creative ways to get around Apple’s restrictions. Israeli companies have already found a number of methods based on statistics and inference from small samples, such as testing different geographies or different populations and using them to make projections about all Apple users.

Some of these technologies are being developed by Israeli companies like AppFlyer. Others target advertising to Android users only, but, says a senior executive at a large digital advertising firm, "There’s a limit to how much you can base yourself solely on Android, a market made up mostly of users from developing countries with relatively little purchasing power. Eventually you’ll have to find a new way to track Apple users."

Published by Globes, Israel business news - en.globes.co.il - on August 1, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2021

 
Viola Ventures congratulates portfolio companies on their IPOs credit: City Media
Viola Ventures congratulates portfolio companies on their IPOs credit: City Media
Twitter Facebook Linkedin RSS Newsletters Israel Business Conference 2018