Don’t be fooled: the mobile app economy will implode just like everything else

Paradoxically, sometimes the most poignant signals of crisis comes in the form of mitigation efforts — initiatives to address a problem can serve as alarm bells that acknowledge how severe it really is. Take, for instance, the fact that stocks and treasuries fell sharply in early March upon news that the Fed would cut interest rates: the news scared investors because it served as a tacit recognition of the critical havoc that the Coronavirus pandemic was poised to inflict on the US economy.

When Google announced last week that is rolling out what is effectively an $800MM aid package to advertisers, it should have instigated a similar level of concern within marketing departments. Real pain is coming to the advertising industry. It’s true that only $340MM of that $800MM is taking the form of direct handouts to advertisers, but that is still an enormous amount of money, and it is a canary in the advertising coal mine.

There are two ways to interpret this strategy from Google: cynically and generously. The cynical interpretation is that Google wants to keep digital advertising CPMs high as advertisers scale their budgets back en masse. The generous interpretation is that Google wants to keep SMBs alive during this economic crisis. No matter one’s disposition with respect to charitable corporate gestures like this from Google, this bailout should serve to underscore how dangerous Google views the economic downturn spurred by the Coronavirus pandemic. If Google is worried, then all advertisers should be worried, too.

Some advertising vendors are currently declaring the current situation an opportunity: CPMs are down! CTRs are up! CACs is down! Conversion rates are flat or up! These things don’t matter: the pandemic was always going to be shorter than the economic turmoil it creates. Whether the world plunges into a depression or merely a recession in the coming months, the campaign performance that advertisers are seeing right now is meaningless, because:

  1. Many of these new users will not monetize like previous cohorts;
  2. ROAS models that work over even medium-term timelines are almost certainly unreliable right now;
  3. Default rates, refund rates, and cancellations are sure to surge.

Any ad tech vendor that is championing this moment as beneficial to advertisers are either lying, talking their book, or delirious. Advertising spend will crater in this recession just like it did during the 2008 financial crisis. Advertisers should be worried, and they should be preparing for winter.

Magna, a global advertising agency, revised its revenue prediction for 2020 to a 2.8% decline from 6.6% growth. Cowen, an investment bank, estimates that Google and Facebook will lose a combined $40BN in ad revenue in 2020. 44% of advertisers surveyed by the Interactive Advertising Bureau believe that the impact of this economic crisis on their business will be significantly worse than that of the 2008-2010 global financial crisis.

In fact, advertising spend contracts more sharply than GDP during economic slowdowns: advertising spend is an expense that can be quickly scaled back, and oftentimes the revenue generated from ad spend is lagged: think of brand ad spend, or customer acquisition spend that is modeled to be recovered over a long-term timeline.

This phenomenon is especially acute in the mobile ecosystem, where digital in-app purchases and subscriptions make up the bulk of advertiser revenues. An advertiser can scale back ad spend now and not feel an immediate drop in revenue, as existing cohorts continue to contribute revenues. Of course this isn’t true for some categories, like D2C, travel, ridesharing, etc., most of which are now pulling back on advertising spend. Last week, in How has the Coronavirus impacted the App Economy?, I presented the apps that had gained the most ground in the Top Downloaded chart during the pandemic. This chart is the opposite; these are the 20 non-gaming apps that have lost the most ground since the start of the year:

The above apps represent a broad swath of the app economy; not just those that would obviously be impacted by a pandemic. Clearly a decrease in general consumer disposable income — or the threat of an impending decrease — has already begun to influence consumer behavior.

Ultimately, the interpretability of metrics that could indicate a rosy outlook for advertisers will be rendered moot by a continued deterioration in the economy: it doesn’t matter how little it costs to acquire a user if they don’t have any disposable income to spend on app content. All advertisers should be focusing on the bigger commercial picture right now, which is that economies across the world are in great peril of sinking into a depression. There is no positive way to spin the current economic crisis.

Note: I am presenting a free webinar on advertising strategy during a recession on Tuesday, March 31st at 12pm EST.

Photo by Benedikt Geyer on Unsplash