Month: July 2022

Then there are the after effects of the semiconductor shortage that continue to weigh down on some of the largest advertisers, as well as the pervasiveness of softer consumer spending. Add onto that the fact that macroeconomic issues take a while to trickle through to advertising, as well as the loss of third-party addressability and how it continues to throttle the flow of media dollars into some platforms more than others. 

All told, a rocky 2022 could get even worse for some of the media industry’s most valuable companies. 

Here are the key numbers that show the precarious state of online advertising spending now:

• YouTube raked in $7.4 billion in ad revenue in the second quarter, up 4.8% from a year earlier. That’s the slowest pace since Alphabet began disclosing that data in 2019. 
• Facebook owner Meta’s quarterly revenue (the bulk of which comes from advertising) came in at $28.2 billion, down one percent on the same period a year ago. It’s the company’s first revenue decline in a decade. 
• Snap’s revenue for the second quarter was $1.1 billion. That’s 13% up from the prior-year quarter, but it’s also short of analysts’ expectations. Advertisers are cutting ad spending on the app more than expected — a slump the company attributed to the broad economic uncertainty. 
• Twitter’s ad revenue slowed to a crawl in the quarter, hitting $1.08 billion — a 2% gain year over year — as the platform struggled with economic challenges and a court battle with billionaire Elon Musk, who offered $44 billion to buy the company before trying to back out of the deal.  

Forecasts for the remainder of the year from these companies were equally as glib. Here are the main sound bites from their earnings calls:

• Ruth Porat, chief financial officer of Alphabet, said: “In YouTube and Network, the pullbacks in spend by some advertisers in the second quarter reflects uncertainty about a number of factors that are challenging to disaggregate. Within other revenues in the third quarter, we expect an ongoing headwind from the fee changes and the slowdown in buyer spend that impacted results in the second quarter.”

• Dave Wehner, chief financial officer at Meta, said: “Advertising revenue growth slowed throughout the second quarter as advertiser demand softened. The deceleration has been broad-based across verticals, and we believe businesses are lowering their advertising spend in response to the increased economic uncertainty. Foreign currency headwinds also increased throughout the second quarter.”

• Derek Andersen, chief financial officer at Snapchat, said: “We’re seeing these various headwinds put pressure on the earnings of a wide variety of companies, and this is directly impacting the demand for advertising. Specifically, advertising spending, in particular, auction-driven direct response advertising is among the very few line items in a company’s cost structure that they can reduce immediately in response to pressure on their top line or their input costs.”

So why is ad spending slowing on platforms? We took a closer look.

A two-track online ad economy

It seems like a two-track online ad economy emerged over the last quarter, with advertisers shoring up search ad spend as a critical part of their media strategies while cutting other areas like online display and social media. Google’s search revenue over the period grew at a 13% clip compared to the same stretch last year, to reach $40.7 billion. It’s a similar story at Microsoft, where Bing search ad revenue rose 15% in the quarter compared to the same one last year. Compare these gains to the sluggish growth and even declines posted by YouTube and other media platforms over a similar period. Search advertising continues to be the one safe harbor for many advertisers when ill winds blow.

Downturns suck out waste like a vacuum cleaner

Consumer spending and corporate investment are likely to be subdued for a while yet, leaving ruthless cost efficiency as the only viable way to maintain margin. Or to put it another way, all corporate eyes are on inefficiencies, including in advertising. It’s a point not lost on Google. The day after Alphabet disclosed its Q2 earnings, Google unveiled a transparency tool dubbed “Confirming Gross Revenue,” in what can only be interpreted as a play to allay advertisers’ growing fears that its automated “black box” platforms don’t deliver the value promised and reverse the decline noted in the previous day’s disclosure.

In a blog post marking the launch, Allan Thygesen, president, Americas and global partners at Google, referenced a study from PricewaterhouseCoopers, which found that 15% of all automated ad spend is unaccountable. “One of my biggest concerns about this trend is its impact on marketer confidence in digital advertising,” he noted, going on to claim that this team wants to provide greater visibility into such investments. 

Certain about the uncertainty

As for how ad spending will shake out the rest of the year, it’s hard to say.

“The remainder of the year is up in the air due to what’s going on in the macro environment that I wouldn’t draw causal conclusions from in Q2,” said Aviran Eder, svp at Verge Group. “We are headed into a traditionally stronger part of the advertising calendar. Q2 is not necessarily going to be a predictor of what is going to happen in Q3, Q4, for the rest of the year. There is just so much that’s fluid and in flux in the macro environment that I think each platform is going to have their own independent outcomes.”

Seb Joesph and Ronan Shields contributed reporting to this story.

The company’s “Smiley Stays” activation will target travelers looking for vacation rental properties for the summer months, with “Smiley Stays” referring to luxurious locations travelers can book across the country. The limited-edition “Smiley Stays,” which feature Smiley decor and amenities, will be available for two-night stays Aug. 12 to 14 for $50.

Additionally, Booking.com has revived its Booking.yeah ads, which feature award-winning actor and musician Idris Elba. The brand worked with Los Angeles-based creative consultancy Horses & Mules to develop the Booking.yeah ad spots.

“The travel and hospitality industry was hit really hard by the global pandemic and a global partnership with a global and cross-cultural talent like Idris Elba strategically brings the brand into the cultural and experience conversation while meeting their end benefit of travel made easy through Booking.com,” said Jeffrey Bowman, CEO and founder of tech and services company Reframe.

A Booking.com survey found that 76% of people who travel do so to boost their mood. The company’s summer ad campaign reflects Booking.com’s range of accommodations, which include over 28 million listings that feature 6.5 million homes, apartments and unique places to stay. One campaign spot, titled “Perfect Stay: Windsurf,” exemplifies Booking.com’s array of accommodations.

“Given it has been such a heavy, stressful environment over the past few years, we wanted the ads to have a lighthearted, feel-good tone that brought a smile to people’s faces again with the excitement of travel,” Dijk said.

Booking.com also aims to provide a broad audience of travel lovers, accommodation partners and industry professionals with the convenience of booking directly with the company to ease the process for all parties involved. And giving travelers more options to choose from is key in the post-Covid world.

“We want travelers to know they have plenty of experiences and properties to choose from — and that’s exactly what the ‘Summer of “Yeah”‘ is all about,” Dijk said.

It is unclear how much of Booking.com’s advertising budget is allocated to the campaign, as Dijk would not share overall budget specifics. According to Pathmatics, the company has spent a little over $35 million so far in 2022 for marketing efforts. Dijk noted that Booking.com has a strategic media mix to ensure paid efforts per channel, which encompass YouTube, Instagram and the company’s recently launched TikTok page, are effective and maximized.

Booking.com is not the only travel agency brand that has collaborated with celebrities for their marketing efforts amid the return of travel. Days Inn recently ran an outdoor advertisement campaign to stand out for people returning to travel post-Covid.

“Booking.com is wise to remind consumers with this campaign that, higher-than-ever ticket prices aside, travel can be the ultimate feel-good remedy for otherwise stressful times, that finding the ‘perfect’ spot can give us all a sense of control over our conditions in a period where we are often at a loss,” said Margo Kahnrose, CMO at omnichannel marketing platform Skai.

The key numbers:

• $764 million in total revenue, up 18% year over year
• $673 million in platform revenue, up 26% year over year
• $91.2 million in player revenue, down 19% year over year
• 63.1 million active accounts, up 14% year over year
• 20.7 billion hours worth of video streamed through Roku, up 19% year over year
• Average revenue per user of $44.10, up 21% year over year

Advertising slowdown

Roku did not put any numbers on its advertising slowdown, but the company did underline that advertising revenue grew by some percentage, just at a slower pace. It attributed the ebb to advertisers pulling money from the scatter market, i.e. the inventory available for purchase outside of annual upfront commitments. 

Platform revenue growth “was lower than expected as many marketers abruptly curtailed or paused advertising spend in the ad scatter market during the latter half of Q2,” the company stated in the shareholder letter.

During a call with reporters on Thursday afternoon, Roku chief financial officer Steve Louden said the scatter ad market pullback generally occurs “at the state of some kind of downturn.” Roku enables upfront advertisers to cancel their commitments to a greater degree than traditional TV networks by offering a two-day cancelation option. However, Roku vp of ad sales and strategy Alison Levin said during the call with reporters that Roku did not see upfront advertisers cancel their commitments in Q2 “at a rate any different than previous quarters” and attributed the slowdown to the “pullback in scatter.”

Upfront bright spot

Roku has signed upfront deals with all seven major agency holding companies and secured $1 billion in total commitments, the company announced in tandem with its earnings report. Of the advertisers that made upfront commitments to Roku this year, 25% did not sign upfront deals with the company last year. 

Asked what percentage of last year’s upfront advertisers did upfront deals with Roku this year, Levin did not directly answer the question, but said that “in key verticals,” Roku retained 100% of upfront advertisers from last year. She did not specify what those verticals were.

Hardware hardship

Roku’s declining hardware business isn’t helping the company deal with the advertising slowdown. The company has been dealing with supply chain issues affecting sales of its CTV devices and smart TVs that are powered by its CTV platform. 

In Q2, Roku’s U.S. hardware sales “were lower than Q2 2021,” per the shareholder letter. That decline in sales would mean that Roku is not adding as many people to its platform as in previous periods, though it still added 1.8 million active accounts in the quarter. 

With hardware sales struggling, Roku would appear to be pressed to get its existing user base to spend more time streaming movies, TV shows and videos on its platform in order to generate platform revenue, which would include advertising revenue. However, in Q2 the amount of time people spent streaming programming on Roku’s platform dipped by 1% from Q1 to 20.7 billion hours. That dip contrasts with streaming’s share of total TV watch time in the U.S., which increased in the period, reaching a record 34% share in June, according to Nielsen.

Murky outlook

Roku has withdrawn its revenue growth guidance for the full year of 2022 in light of the gloomy macroeconomic conditions. In other words: “There is too much macro uncertainty for us to provide a full year outlook,” Roku CEO Anthony Wood said during the company’s earnings call with analysts on Thursday.

Amid that uncertainty, Roku has slowed its pace of hiring “quite a bit” and has also looked to slow the growth of “non-head count costs,” Louden said during the call with reporters. He didn’t say what those costs were, but he later said that the company has been looking at the costs associated with its free, ad-supported streaming TV service The Roku Channel, which includes the money the company spends to license programming for the service as well as the money it spends to produce original shows and movies.

Roku did shed light on its expectations for the third quarter. They’re not great, though the company does expect total revenue to tick up by 3% year over year in Q3 to reach $700 million. 

Roku is expecting that “advertising spend, particularly in the scatter market, will continue to be negatively impacted. We also believe that consumer discretionary spend will continue to moderate, pressuring both Roku TV and Roku player sales,” its shareholder letter stated.

It was only a matter of time until Netflix’s subscriptions began to drop off, and the company’s boardroom has had its eyes on other revenue streams since at least January 2019, when CEO Reed Hastings infamously told shareholders that his company viewed Fortnite as more of a rival than streamers such as HBO or Amazon. The company made its first executive gaming hire in July 2021, recruiting former Facebook Reality Lab vp of content Mike Verdu, and doubled down over the ensuing eight months by poaching 14 gaming executives from companies such as Riot Games, Activision Blizzard and PlayStation.

Netflix’s gaming push is an acknowledgement of the so-called attention economy. Audiences are no longer split between different types of entertainment; instead, modern consumers are constantly searching for new content across platforms and formats. “Any form of entertainment that keeps eyeballs on a screen is competing with others in the same medium,” said Gil Hirsch, CEO of the livestreaming tools and services provider StreamElements, “so streaming services and games are often vying for the same audiences if they are targeting the elusive Gen-Z and millennial demographics.”

Netflix already boasts ample potential advertising inventory in its homegrown intellectual properties; according to some observers, the popular Netflix series “Stranger Things” could generate millions of dollars through product placement. But building up a library of original games could help increase the variety and scale of Netflix’s available ad inventory, particularly as in-game advertising becomes a more fully developed channel.

The streamer has already shown that there is demand for games based on its original properties, developing a free mobile game for “Stranger Things” as early as 2017. It’s also started to experiment with the gamification of other popular IPs such as “Black Mirror” through the 2018 choose-your-own-adventure episode “Black Mirror: Bandersnatch.” There’s room for outside properties, too: the interactive adventure “Minecraft: Story Mode” has been available on the platform since 2018.

Netflix may have to choose between implementing ads into its games and charging users a higher subscription to access them. Gamers are far more willing to accept ads in free-to-play games over premium games, willingly exchanging their eyeballs (and ad impressions) for free gameplay. If Netflix makes its gaming-inclusive subscriptions more expensive than standard subs, it might have a harder time placing ads into its games.

“If, hypothetically, Netflix entered this space and offered a bunch of free games that are not at an additional cost to your subscription, that would be one possible way to implement ads into it,” said Tom Morris, a gaming insights analyst at the consumer research firm GWI. “What we’re talking about here is a trade off. People are probably going to pay more — we can’t necessarily count on that — but paying for a streaming service that offers both viewing content and gaming does open up the idea that you don’t necessarily want to have ads when you are paying for it, so in-game advertising is quite tricky like that.” 

Increased ad inventory isn’t the only reason why gaming could play a critical role in Netflix’s future. The streamer has been open about its plans to crack down on shared accounts, recently implementing extra fees for users logged in across multiple households.

For television and movie consumers, password sharing is a no-brainer — there’s practically no downside. But for gamers, an account is more than a way to access streamed content; it represents a unique character that embodies an individual and their virtual identity. Once games are in the mix, password sharing will naturally become a less attractive prospect to Netflix users that have invested time into their characters or avatars.

As gaming and traditional streaming converge, Netflix is arguably falling behind some of its competitors. Amazon has already bridged the gap between game development and streaming, offering both original series and games such as Lost Ark on via Amazon Prime; Google, YouTube and TikTok all have longstanding gaming departments dedicated to livestreaming or game development. Netflix will have to move quickly to make up for lost time.

“The tech companies are watching key demographics spend more time in gaming, either just to hang out or to pursue entertainment, and they’re like, ‘we’ve got to do more here — we need exposure to that trend,’” said Josh Chapman, a managing partner at the gaming-focused venture firm Konvoy.

“I do think that it will certainly help their top line revenue over the coming years, and that will be really well-timed as certain other products they have are sunsetting or becoming irrelevant.”

“You get back to the basics in a roundabout way,” said Harley Butler, CMO at Fuzzy. “Instead of just micro-targeted [ads] and you’re obsessed with that, you really start to refocus on what your broader go-to-market messaging [and] strategy is.”

The six-year-old, California-based company leaned more heavily into direct mail about six months ago, ramping up spend from 10% this time last year to 35-40% of marketing spend now. From January to June of this year, Fuzzy spent an estimated $3.4 million on Facebook and Instagram, significantly down from the $12 million spent in 2021, according to Pathmatics. 

As a startup, Fuzzy has spent the last year focused on product development, tweaking its membership initiative and nailing down the specifics of its business model. As the brand grows, they’re looking to boost awareness via marketing. Ultimately, they’re in growth mode right now, tripling ad spend over the last year, according to Butler. He did not provide further details regarding specific dollar figures. 

“For the last year, we’ve really focused on making sure that it is a very, very well oiled machine, that we are making sure our communication strategy with our members is really strong,” Butler said. 

At present, Fuzzy’s strategy is to send direct mail advertisements on a monthly basis, reserving daily ads for retargeting interested shoppers. According to the pet healthcare brand, direct mail has been cost-efficient and useful in terms of tapping into pet parents working from home, collecting personal information via quizzes, questionnaires and surveys. 

Aside from the direct mail, Fuzzy’s media mix is made up of influencer marketing, audio streaming and digital video, paid search and some paid social. Soon, the startup plans to launch linear television and OTT efforts, Butler said. 

While digital media takes top billing in most marketing plans, direct mail is a highly-targeted and measurable way to capture shopper’s attention in real life, according to Shalanna Clark, head of marketing at Code3 marketing agency.

“As uncertainty looms for the second half of the year, marketers are looking for creative ways to keep trends moving north. Direct mail may be one of the levers that moves the needle,” Clark said via email.

As the company looks to bolster itself in an increasingly crowded and competitive marketplace, with companies like Pawp and PetDesk competing for shopper attention, Fuzzy says it’ll continue to experiment with direct mail and other channels to perfect its mix.

“This is that critical moment where we feel like we have the right ingredients,” Butler said. “The go-to-market strategy has been a big priority in this past year, to really introduce Fuzzy and the business model to more people.”