Back in November of last year, I attempted to unpack the then-nascent mass proliferation of advertising networks in a piece titled Everything is an Ad Network. In the article, I suggest that the unshakable grip that Facebook especially but really all social media has on digital display advertising is loosening as a result of a changing privacy landscape. The hub-and-spoke model that dominated the digital advertising market, in which advertisers transmit user-identifiable conversion data to ad platforms such that user behavioral profiles can be established and lookalike audiences generated in real-time, is disrupted through platform privacy policies like Apple’s App Tracking Transparency (ATT) and Google’s decision to deprecate the third-party cookie in Chrome and the GAID on Android.
As the viability of the hub-and-spoke model wanes, a new model emerges in which Everything is an Ad Network. From the aforementioned piece:
Each of these companies sees an opportunity to layer ad impressions atop first-party data so as to facilitate proprietary ad targeting. This opportunity is new: while Google and Facebook took 89% of all ad spend growth previously because their enormous reach provided them with the leverage and ability to ingest third-party data from advertising clients, now those advertisers are wrapping their arms around their data and monetizing it…Ad networks are highly profitable, generally running on very thick gross margins and mostly monetizing content and product surface area that already exists. So as the norms for data collection and aggregation change, favoring first-party contexts, the companies that can package together their first-party customer data to attract advertising revenue will do just that.
Since publishing that article, more ad networks have emerged, such as those from:
- Albertson’s, which will offer ad inventory inside its digital properties;
- Marriott Hotels, with its in-room ad network;
- Family Dollar, with its in-app and eCommerce ad network;
- Ulta, the beauty products and cosmetics retailer;
- Netflix, which will introduce an ad-supported membership tier later this year;
- Xbox, which is rumored to be bringing in-game ads to free-to-play titles on the platform.
The appeal in building these brand-specific ad networks, often called retail media networks, is readily apparent: Walmart generated $2.1BN with its relatively new ad network last year, and Amazon — forced to present advertising as an independent revenue line item for the first time in its 2021 results — generated $31.2BN, rendering advertising a larger business than Prime subscriptions. Consulting firm McKinsey estimates that retail media networks may process more than $100BN in advertising spending by 2024.
To understand the precipitous growth of this category, it’s important to consider the role that Facebook played in the display marketing universe prior to the (still incipient) shift in consumer privacy protocol catalyzed by Apple’s ITP policy for Safari but primarily manifested through ATT. Facebook was the Everything Store for Ads: it paired an enormous, globe-spanning user base with a tremendous bank of user-level data supplied by advertisers.
That bank of data was the company’s primary driver of value with its advertising product. As I posit in Surveillance advertising is a myth, the first-party data to which social platforms have direct access — on-site interactions with content, such as likes and comments — are minimally helpful in targeting advertising. This is evident in Facebook’s ARPU growth following the launch of its App Event Optimization (AEO) product. The AEO bid strategy allows advertisers to optimize campaigns for the completion of certain events, the targeting for which is accommodated through user behavioral profiles. ARPU growth was roughly equivalent for the US & Canada and the Worldwide regions prior to the launch of AEO in Q1 2016; following its launch, ARPU growth in the US & Canada region outpaced growth in the Worldwide region by between roughly 50% and 100%. The US & Canada region would feature the most robust off-site conversions data and would thus benefit disproportionately from a product like AEO.
With ATT and other privacy interventions, the “events stream” of conversions data that previously flowed freely between advertiser properties and ad platform data environments evaporates. As a result, ad spend for many advertisers, in many categories, is less effective on social platforms as a result. And as social platforms lose appeal as destinations for ad spend, the companies best positioned to capture on that retreating budget are those that sell specific things.
In some cases, such as Best Buy and Lowe’s and Ulta, these are retailers that operate within a specific commercial niche. If I’m trying to reach consumers interested in consumer electronics, and I can no longer rely on Facebook to be the Everything Store for Ads, then I’ll find appropriate consumers in a contextually-relevant retail media network. Ditto home improvement products (Lowe’s) and beauty products (Ulta). These retailers often feature rewards or loyalty programs that allow them to aggregate voluminous and valuable data around their consumers that can be used to target ads.
But the Everything is an Ad Network phenomenon doesn’t pertain exclusively to retailers: Uber, for instance, generated $141MM in ad revenue in 2021 and expects to reach $1BN in ad revenue by 2024. Instacart, GoPuff, Doordash, and a growing number of apps sell ads. Many of these apps offer search ad products, but nonetheless, the app-centric companies entering this market possess incredibly potent purchase histories on their users that allow for relevant on-site ad targeting. Social platforms can no longer ingest the totality of digital artifacts emitted by users as they traverse across apps and websites. In this new privacy landscape, the best place for some advertisers to deploy budget may be contextually-relevant retail or eCommerce properties that possess first-party, user-level purchase history data within the product categories most relevant to their own.
Note that this new proposition is what makes Shopify’s recently-announced Audience product so compelling. The largest retailers and eCommerce destinations, possessing purchase history data for millions of customers, can bundle that data with ad inventory and monetize it via ad sales. But even smaller Shopify retailers can participate in the activation of their data, albeit as more of a cross-retailer data co-op than a commercial opportunity.