Apple (AAPL -0.95%) is working on a new privacy feature for iOS 14 called App Tracking Transparency. The feature will go live to everyone with the release of iOS 14.5 this spring.
Few companies have been more outspoken about the changes than Facebook (META -1.48%). The company warned that "the impact of platform changes, notably iOS 14" will act as a "significant ad targeting headwind" during its fourth-quarter earnings release.
But CEO Mark Zuckerberg has started to accept the forthcoming changes from Apple. In fact, he recently said the new privacy feature could strengthen its position with businesses and advertisers.
What exactly is changing?
The new feature from Apple will block apps and websites from collecting and sharing an identifier called IDFA (The Identifier for Advertisers). This will prevent Facebook from using something called "view-through conversions" to get a complete picture of an ad's effectiveness.
If a person sees an ad on Facebook but doesn't immediately take action, that doesn't mean the ad was completely ineffective. That same person may do a web search for that product later and buy it. But with Apple's update, Facebook will never know that, and neither will its advertisers.
Today, when a person makes a purchase on a retail website or app, that retailer can share the IDFA with Facebook. Facebook can then check to see whether that same IDFA saw an ad for that product on Facebook or Instagram and show the effectiveness of its ads.
If Facebook can't track conversions outside of its app, advertisers have no idea how valuable its ads really are. They're left guessing, and some might not like the uncertainty compared to other digital advertising platforms that can more easily track conversions without input from other apps -- for example, Amazon.
Facebook says its Audience Network, which displays advertisements in third-party apps, will get hit hardest by the changes. It warned that developers using Facebook Audience Network could see revenue decline 50% after Apple announced the new feature. The Audience Network only accounts for a small percentage of Facebook's ad business.
Facebook isn't the only company that Apple could hurt with the update. Most digital advertising companies will face the same effect on their ability to measure advertising effectiveness on iOS. And Facebook's size, reach, and existing user data may give it an advantage in taking share of the market in a post-iOS 14.5 world.
CFO Dave Wehner agrees, but he says the market could shrink in the new environment. "Whereas we might be able to maintain or possibly improve our share of wallet ... I do think you're just going to get advertisers and businesses who are going to decide that it's not cost-effective to advertise [on iOS]," he said during a follow-up call with analysts after management's fourth-quarter earnings call.
Why Zuckerberg now thinks it's an opportunity for Facebook
Zuckerberg seemed to have a change of heart during a discussion on Clubhouse on March 18. "It's possible that we may even be in a stronger position if Apple's changes encourage more businesses to conduct commerce on our platforms," he said.
Looking back, native commerce tools on Facebook's app seem to have been the tech company's backup plan ever since last summer when Apple announced App Tracking Transparency.
Facebook meaningfully accelerated the rollout of e-commerce features across Facebook, Instagram, WhatsApp, and Messenger over the last nine months. While the COVID-19 pandemic has certainly played a role in Facebook's urgency to offer new tools to small businesses, the forthcoming iOS changes likely played a role as well.
During Facebook's fourth-quarter earnings call, Wehner mentioned: "We hope to help businesses by providing more on-site conversion opportunities through initiatives like shops, and also click to messaging ads," when discussing ways to mitigate the effect of Apple's new privacy settings.
With a growing suite of e-commerce products, Facebook may actually gain more share of business from small online retailers and those that don't yet have much of an online presence. That could make them more reliant on Facebook ads to drive traffic and sales, and boost revenue for the social network. It could also benefit Facebook's efforts to monetize WhatsApp and Messenger with more tools for businesses to connect with customers and complete sales through direct messaging.
Only time will tell how Apple's iOS changes will affect Facebook and the rest of the digital advertising industry. But the FAANG stock is well-positioned to navigate the environment and use the changes to sell businesses on its e-commerce features.