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The Disruptive Strategist – Apps, advertising and the importance of data access

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GAM Investments’ Mark Hawtin and the Disruptive Growth team discuss upcoming changes around the way iPhone and iPad users will interact with advertisers and the potential impact on the constantly evolving advertising space.

11 May 2021

Click here to download The Disruptive Strategist Q1 2021

Last summer Apple announced it would be changing the way IDFA (Identification for Advertisers) works. An ID number is given to every device and is used by advertisers to identify users / customers, and the impending changes will limit its use with the aim of increasing privacy (and seemingly indirectly transferring power to Apple). Although the implementation of these changes has been delayed, their introduction is expected imminently, but the exact details of the changes are not yet known. Whenever significant changes are announced (and even more so when the details are not known), concerns manifest around the impact of the changes to all parties in the ecosystem. As Facebook is the largest player in this space, much of the debate and speculation surrounding the impact is directed at the social media company and the potential negative hit to its revenue growth. This serves as a reminder that regulatory changes are not the only risk factor for companies in the advertising space.

IDFA is used by advertisers for three main things: re-targeting, audience monetisation and attribution. It is used by apps which do not have logged in users and therefore cannot use email addresses or phone number information to target that user. Within re-targeting, 40% of Facebook’s spend is via custom audience targeting, which uses email or phone number data and therefore will likely not be affected by the change. Another 40% is lookalike targeting (this is where advertisers target users who have similar characteristics to their existing customers), which equally should not be impacted. Of the remaining 20%, 2% is desktop, 9% Android and 9% iOS. For this portion, the user will still see an ad, but Facebook will just not serve an ad which uses IDFA for targeting, which has the effect of the top bidder dropping out of the auction. Facebook auctions are highly competitive as advertisers are bidding for a user rather than a search term / vertical, which is the Google model. Google has previously conducted analysis on the impact of the top bidder dropping out of an auction and in highly crowded auctions the price fell 10%. Consequently, the impact from this change could be quite small for Facebook. This also does not account for behavioural changes, for example users being encouraged to experience apps in a logged in state especially via Facebook Connect. 

Apps use the Facebook Audience Network (FAN) to monetise their audience. Rather than building out their own costly ad platform, apps utilise Facebook’s ad platform and benefit from Facebook’s targeting capabilities with Facebook taking a share of the ad revenue generated. For a ‘free-to-play’ app with a non-logged in users, the reliance on IDFA for targeting is high. Without IDFA the app would know nothing about the user and could only serve an ad with a low CPM (cost per thousand impressions). By using FAN the app can increase CPM dramatically. When these changes are implemented it is likely that CPMs will drop, making many free-to-play apps unsustainable. However, similar to re-targeting, apps will encourage users to log in to get around the issue. This could cause some short-term volatility but over the long term, it is unlikely to be a major issue as apps that cannot figure out how to effectively monetise will fail. This survival of the fittest could result in improved ad quality and conversion and therefore an eventual higher spend.

IDFA is a unique identifier at the device level and can therefore ensure that the same user (or device) does not see the same ad multiple times within different apps. It is also used to measure brand advertising. Although the precise details are not known, it is predicted that the measurement window will fall from 30 to seven days. This sounds like a major change that could have huge implications for attribution, however most attribution is calculated within seven days anyway. There is also the anticipation that the user must interact with the app at least once within a 24-hour period to sustain the tracking and the list of attributes available to track will reduce from 25 to eight. All of these changes make attribution harder but not impossible and there are workarounds for them all, such as apps encouraging repeat usage through the use of in-game currency or virtual rewards.

Conversations with industry experts suggest Facebook has dedicated a large amount of resources to IDFA and already has a whole host of solutions ready. With past changes such as General Data Protection Regulation (GDPR) or the removal of cookies, Facebook’s advertising revenue has not been impacted. Continued innovation and new products more than offset the negatives from changes and there is no reason to believe that the IDFA effect will be different. The advertising space is constantly evolving, however, in our view, the one constant that remains is that those companies who have access to the greatest amount of data and users, as well as the tools to utilise that access, have the ability to endure and thrive, often at the expense of others.

Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. There is no guarantee that forecasts will be realised.

Mark Hawtin

Investment Director

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