Tech Giants See Boost in Advertising Revenue, but Will It Last?

Recent quarterly reports indicate that major tech companies such as Amazon and Meta have experienced a boost in advertising revenue, suggesting a possible recovery of the digital advertising industry.

However, as retail media gains momentum and brands and retailers seek new ways to attract and retain customers, the sustainability of this trend remains uncertain. This is particularly relevant as digital advertising costs continue to rise.

A Review of Q1 2023

Amazon’s advertising revenue during Q1 showed a significant increase of 21%, reaching $9.5 billion in comparison to the previous year’s $7.8 billion.

Meta’s total revenue saw a 3% increase by the end of March, with advertising revenue reaching $28.1 billion, marking a 4.1% growth and the company’s first sales increase in almost a year. This growth can be attributed to enhancements made in their advertising business.

Meanwhile, Google experienced a 1% decrease in advertising revenue growth, with a total of $54.5 billion, but its search advertising division saw a 1.7% growth in revenue, hitting $40.3 billion.

Other players like Pinterest, reported a 5% increase in revenue to $602.5 million, while Snap, the parent company of Snapchat, recorded a 7% drop in revenue for the first quarter to $989 million, compared to the same period last year.

Collectively, these findings suggest that retailers are still placing a high priority on digital advertising expenditure, despite a slowdown in consumer spending due to inflation. Retailers and eCommerce startups are still willing to invest more in advertising platforms that focus on the lower end of the sales funnel.

Additionally, the results indicate that Meta has been successful in attracting brands by introducing new ad formats and campaigns, despite the adverse effects of Apple’s iOS 14 update on its advertising operations.

Reflecting on Revenue Outcomes

During their earnings calls, executives emphasized that retail and eCommerce companies were major drivers of the growth in advertising revenue.

Philipp Schindler, Google’s SVP and chief business officer, stated on the earnings call that the “search and other” revenue within Google Advertising grew by 2% year-over-year, mainly due to an upswing in the travel and retail verticals.

Furthermore, Schindler stated that despite the challenging economic climate, their tools and solutions have proven to be valuable for online and omnichannel retailers, allowing them to attract high-value customers and achieve more with less.

Similarly, Meta’s CFO, Susan Li, emphasized that “online commerce vertical” was the biggest contributor to the year-over-year growth of Meta’s ad revenue, followed by healthcare and entertainment and media.

Is the Sector Turning a Corner?

After experiencing a decline in the previous quarter, Google Search has rebounded to a moderate year-over-year growth of about 2%. Meanwhile, Google’s programmatic advertising sector is still struggling, and their ad partners may continue to face challenges.

Despite Alphabet’s ad figures slightly declining, Debra Aho Williamson, principal analyst at Intelligence Insider, stated, “in this environment, I think flat is the new good.”

Williamson’s overall outlook was slightly more cautious, saying, “I would say that the whole landscape remains highly unpredictable at present.” She added, “Nonetheless, there are indications of some optimism, with Meta being a prime example. Although YouTube’s revenue growth has been problematic for several quarters, Alphabet’s results were marginally better than anticipated.”

While the growth of Meta provides cause for cautious optimism regarding the recovery of digital ad spending, it is premature to conclude that the industry has fully bounced back, especially as we still have Q2, Q3 and Q4 still remaining.

Overcoming iOS14 Update

Meta has been exploring alternative methods to use data for personalized ads following the limitations imposed by the iOS14 update. The company has now turned to partnering with retail media platforms to leverage their data to run targeted ads for brands, and it’s a solution that’s tracking well with participants.

According to a report by Modern Retail on April 14, retailers who have implemented Meta’s Managed Partner Ads Lite and local inventory ads have experienced an increase in sales after just one month since the solutions were launched.

On March 29, a spokesperson from Dollar General told PYMNTS that with the help of DGMN, they can now assist brands in comprehending their actual return on ad spend via attribution-based measurement, which can aid them in confirming the effectiveness of their marketing expenditures.

Additionally, Walgreens came on as a partner and reportedly used the advertising tool to boost its sales of health remedies by 3.9% and skin care products by 2.5%.

See also: Merchants and Brands Seeing Sales Boost From Retail Media Partnerships

Google’s Schindler has identified retail, artificial intelligence and YouTube as three promising areas of growth for advertising.

Amazon CFO Brian Olsavsky identified sponsored products and brands as a significant driver of growth in the company’s advertising business during Amazon’s earnings call. He also highlighted the focus on delivering performance through flexible measurement capabilities and providing insights that allow advertisers to measure their return on advertising spend.

Where Retail Media Fits In

Retail media presents a significant challenge for digital advertising giants as retailers like Walmart, Instacart, and even Dollar General have looked to develop their own advertising platforms, offering high-margin and profitable business models that rival those of Amazon and Google.

This becomes even more critical as consumers make their way back into physical stores, prompting both retailers and brands to rethink their in-store strategy, especially as brick-and-mortar stores remain the primary source of revenue for many retailers, with more than 85% of all U.S. retail sales still occurring in the physical world, not online.

Read also: Retailers Give In-Store Media an Interactive Twist to Boost Basket Size

This discovery has prompted various brands, ranging from athleisure company Beyond Yoga to prescription eyewear retailer Warby Parker to telehealth provider Hims & Hers Health, to either venture into or establish a presence in brick-and-mortar retail.

See also: How Consumers and D2C Brands Like Warby Parker Are Embracing in-Store Shopping

The shift of advertising budgets to retail media could potentially affect traditional digital advertising. According to Intelligence Insider’s forecast, retail media is expected to make up 17.1% of digital ad spending in the U.S. by 2023.

In spite of that finding, Amazon has recently announced the launch of free, ad-supported streaming channels exclusively for Fire TV, indicating its continued focus on advertising.

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