Back in June, Apple (AAPL 0.51%) announced it would require users to opt-in for ad tracking features for every app in iOS 14. The announcement immediately sparked complaints from advertisers that want to track ad performance and from publishers who claim the change would significantly reduce their ad revenue.
In response, Apple postponed the introduction of the feature when it launched iOS 14 in September. However, it still plans to add the feature sometime next year -- and online advertising giants like Facebook (FB +3.67%) and Alphabet's (GOOG +2.08%) (GOOGL +2.09%) Google should be concerned.
Apple's escalating war against Facebook and Google
Apple CEO Tim Cook has repeatedly criticized Facebook and Google for their data-gathering practices in recent years. Apple also replaced some of Google's services, such as Maps, with its own competing services.
Image source: Apple.
In 2015, Apple started letting developers produce third-party ad-blocking extensions for Safari on iOS, and subsequently launched several ad campaigns touting the iPhone's privacy-oriented features. Adding opt-in requirements for targeted ads in iOS 14 represents an extension of that strategy.
Apple is challenging Facebook, Google, and other targeted advertisers for three main reasons. First, Apple doesn't generate any meaningful revenue from ads, so it can afford to promote iOS as a privacy-oriented operating system. Doing so is also good PR, especially as Facebook and Google are repeatedly vilified for their privacy, fake news, and hate speech problems.
Second, Google is Apple's main competitor in the smartphone market. Google's Android OS runs on 85% of the world's smartphones, according to IDC, while iOS controls the remaining 15%. Therefore, it's logical for Apple to stop Google from expanding its data-gathering ecosystem onto its iOS devices.
Lastly, Apple's greatest strength is its walled garden. iOS only runs on iPhones and iPads, and those devices are tightly tethered to its App Store and subscription services. Facebook and Google both compete against Apple in other markets like streaming media, virtual assistants, and smart home devices, and they both profit by displaying targeted ads to iOS users. Cutting off those profits would be a smart strategic move.
How badly could the update hurt Facebook and Google?
Facebook generates nearly 99% of its revenue from online ads. These ads are mainly displayed on its core Facebook platform, Instagram, and its Audience Network, which displays ads on third-party websites and apps.
Image source: Apple.
Facebook claims that during internal tests, revenue from its Audience Network publishers fell by over 50% "when personalization was removed from mobile app ad install campaigns." It also warns the impact could "be much more," and that it's still working on short-term and long-term solutions to counter the blow.
That statement, along with Facebook's recent full-page newspaper ads claiming it's "standing up to Apple for small businesses everywhere," strongly suggests that the social networking giant is worried.
Alphabet generated 80% of its revenue from Google's advertising business in the first nine months of 2020. That sprawling business includes its search ads, display ads across websites and apps, and YouTube's ads.
Unlike Facebook, Google hasn't offered any internal projections about how badly the iOS 14 update could impact its core advertising business. It also didn't buy full-page newspaper ads and declare war on Apple.
Instead, Google seems to be countering Apple's criticisms with tighter privacy controls for Android devices. Those updates might placate Android users, but they don't solve the potential impact of the iOS 14 update.
Moreover, 56% of marketers in a recent AppsFlyer survey believed they would be negatively impacted by the iOS 14 update. A third of the respondents also planned to reduce their marketing spending -- presumably on affected advertising platforms like Facebook and Google -- in response to those changes.
Facebook and Google should be worried
Apple only controls 15% of the global smartphone market, but its market share is much higher in most developed countries. It controls nearly half the market in the U.S. and Japan, and nearly a third of the market in Europe.
Those higher-income markets generate much higher average revenue per user for Facebook and Google than developing and emerging markets. However, that revenue could plunge if Apple lets its users opt out of targeted advertising campaigns.
Facebook and Google's revenue growth already decelerated throughout the COVID-19 crisis as marketers bought fewer ads. Most analysts expect their ad sales to accelerate after the pandemic passes -- but Apple's upcoming iOS 14 changes could generate unpredictable headwinds next year.
Apple probably won't push Facebook and Google off a cliff, since both companies can still display non-targeted ads on iOS, but it could certainly wound the two tech giants. Looking ahead, Facebook and Google investors should carefully monitor these upcoming changes to assess the damage.
