Member Mailing #283: After Snap, Facebook & YouTube's Q3 Results, What Will Happen to Legacy Media AVODs?
Searching for clues as to how Apple's Anti-Tracking Tool is likely to impact legacy media's bets on AVOD and FAST, either directly or indirectly, in Q3 & Q4 2021.
If Snap was caught off-guard by how much it was impacted by ATT, less sophisticated legacy media AVOD platforms may be even more impacted
Snap’s, Facebook’s, and Google’s Q3 earnings offer clues to how ATT is likely to impact legacy media.
Growing advertiser demand for first-party transaction data is struggling to find competitive CTV solutions beyond YouTube, Amazon, and Roku.
Legacy media AVODs & FASTs seem nowhere near being able to deliver “Content Fortress”-type outcomes offering first-party data and scale.
Q2 rumors like the Walmart-ViacomCBS merger or Sam’s Club-Peacock partnership seem primed to re-emerge
In Member Mailing #271: AVOD after the 2021 Upfronts, I concluded:
The reality of the advertising marketplace in summer 2021 is that advertiser demand has now been fundamentally changed more by Apple’s [Anti-Tracking Transparency or ATT] than by the emergence of streaming ad inventory from legacy media companies. First-party data is more important than ever.
The question is whether legacy media companies will look “outside of the box” at gaming or e-commerce platforms for “aggregator 2.0” mergers or partnerships to meet this demand. Or, whether they simply will pursue mergers with other media companies.
That point was about whether media companies understood the implications of ATT. I was skeptical. I was also implicitly less skeptical of companies like Snap (disclosure: in which I am an investor) and Facebook.
In retrospect, my implicit logic was: “Snap and Facebook have the best engineering talent, they are more likely to figure out ATT than media companies relying on third-party data”.
Snap told investors in their Q3 2021 earnings call that they had assumed the same thing, too:
We saw meaningful adoption in June and July when Apple pushed all of its users to update to the new version of iOS. Broadly speaking, these changes have upended many of the industry norms and advertiser behaviors that were built on IDFA, Apple's unique device identifier for advertising over the past decade, which now require a double opt-in by users in order to access directly. As part of these changes, Apple rolled out SKAdNetwork or Scan as a proprietary solution to allow app-based advertisers to continue measuring their advertising on iOS.
And yet, they found themselves coming up short in Q3, missing the lower end of our guidance by $3 million:
The initial results we observed using Scan were generally aligned with prior industry standard solutions and we were among the first platforms to lean into this solution and push for widespread industry adoption. However, over time, we saw Scan measurement results diverge meaningfully from the results we observed on other first and third party measurement solutions, making Scan unreliable at a stand-alone measurement solution.
If Snap was caught off-guard by how much it was impacted by ATT, less sophisticated ad-supported digital media businesses (meaning, legacy media AVOD platforms) may be even more impacted by ATT, and especially those relying on third-party measurement solutions.
Snap’s problem in Q3 was not first-party data. Rather, as Snap CEO Evan Spiegel told investors, the problem was third-party measurement:
…advertisers have essentially for a long time now use a set of really sophisticated tool to measure and optimize their campaigns. So that allows them to test out a bunch of different creative and see what's performing more effectively, so on and so forth. And the big change there was that with these new Apple changes, those tools were essentially rendered blind and in their place Apple released a new product called SKAdNetwork that allows advertisers to measure across different advertising platforms, but without a lot of the flexibility that they're used to.
So for example, you can only really measure your advertising results using the success parameters that Apple has already defined. The reporting is delayed for a significant period of time and often unavailable if you don't hit a certain threshold of conversion. It's very hard to see performance on a creative level.
In short, advertisers still value first-party data most, but their ability to measure the performance of ad campaigns built off of this first-party data has been limited by Apple.
The looming question for Q3 2021 earnings and Q4 is, to what extent will ATT impact legacy media companies with AVODs and FASTs?
Because they offer competitively weaker first-party data sets, and less scale for advertising campaigns. Moreover, Q4 is shaping up to be weaker because of advertisers deciding “it makes little sense to advertise products to consumers that can’t be purchased in Q4 of this year.”
We will not know until early next month. Instead, we can look to Snap’s, Facebook’s, and Google’s Q3 earnings for clues and guidance to how ATT is likely to impact legacy media’s Q3 and Q4 2021.
The Growing Importance of First-Party Data
The purpose of Member Mailing #271 was to highlight the options for legacy media AVODs, in particular, in merging with companies owning first-party data. The genesis of the idea was from a rumored ViacomCBS-Walmart merger from Sun Valley, and there was also a rumored partnership between Peacock and Sam’s Club.
Both outcomes would end up with legacy media companies either fully integrated into first-party data ecosystems (ViacomCBS-Walmart) or in the case of Peacock and Sam’s Club:
a third-party “aggregator 2.0” bundle where Sam’s Club would be a third-party bundler with zero marginal costs of marketing multiple services to an existing user base at scale. Users could move across Sam’s Club and a streaming service seamlessly.
Advertiser demand for first-party transaction data would be met by the retailer, and the merging of databases would create a user database at perhaps double the scale for ViacomCBS or Comcast.
Neither outcome has emerged in the three months since I wrote that (though Comcast and ViacomCBS have since partnered around the international distribution of SVODs).
But, it is worth flagging them because the “Content Fortress” model is starting to percolate more in the advertising marketplace as a post-ATT outcome for social media platforms and legacy media companies.
For example, a rumored acquisition of Pinterest by PayPal would have created “a formidable Content Fortress”, as Mobile Dev Memo’s Eric Seufert writes:
…by combining PayPal’s payments platform with Pinterest’s advertising infrastructure, it could allow advertisers to bring about purchases for their products directly in the Pinterest app, which would give Pinterest first-party access to the data emitted by those transactions.
But next-gen “Content Fortesses” in legacy media and social media have yet to be an actual outcome: all three instances of rumored mergers and partnerships, above, have ended in failed discussions, to date.
But the Q3 results from Facebook, Snap, and YouTube have all proven demand for first-party transactional data from advertisers is strong, and these advertisers want scalable target advertising solutions.
Facebook’s Q3 & ATT
Facebook reported negative impact from ATT:
Our outlook reflects the significant uncertainty we face in the fourth quarter in light of continued headwinds from Apple's iOS 14 changes, and macroeconomic and COVID-related factors.
But, Facebook had prepared their investors for ATT in the Q2 2021 earnings call:
In terms of your question on ATT, so the impact from the ATT changes has really generally been in line with our expectation.
We're obviously benefiting, as others are, from a very strong macro environment for advertising. But look, this has been very challenging for advertisers to navigate, and we're working with them to help them navigate these changes. And we've introduced solutions to help them do that through approaches like our Aggregated Events Management API, which is aggregated data for targeting and measurement. Obviously, we're doing a lot of work on using machine learning and AI to help rank apps and make them more valuable.
But overall, we do think there are opportunities to continue to improve our capabilities through investments in areas like machine learning and AI to make ads more effective. And if we can get advertisers to get the same number of conversions from fewer ads, that's great. That works for them, and it creates more value for the ads for us.
They also prepared investors in a blog post in August 2021:
We’re focused on improving campaign performance by adapting in the areas of targeting, optimization, delivery and measurement, even with the increased limitations facing our industry.
The issue was not that ATT ended up impacting the quality of Facebook’s first-party data. Rather, it ended up impacting the ability to monitor ad targeting, optimization, delivery and measurement.
By contrast, Snap had been less cautious in a Q2 earnings call:
So, where we are in the cycle right now is that we've rolled out full support of SKAdnetwork 3.0, which we know will aid or we believe will aid and attribution for advertisers. And we've also implemented Apple's API. In addition, we launched advanced conversions in ad manager, so advertisers can measure their campaigns with our privacy conscious measurement stack. And then I think one of the things that we are -- what we're observing here is that our opt-in rates have been above what is sort of widely reported in both the press as well as with the analyst community. So that's been good. But it remains so early in these iOS changes, and there is no question that it will be a change for the industry in and of itself. But I think we prepared to do the best that we can.
Snap’s results offer two obvious questions for looking ahead to Q3.
The most obvious question from advertisers will be whether the first-party data from legacy media AVODs is competitive to what that these social platforms have.
The second obvious question will be how many of these legacy media companies will have needed to prepare their customers and investors for ATT like Snap, and how prepared their customers and investors like Facebook?
YouTube’s Q3 & ATT
Google reported YouTube’s results yesterday — revenues up 43% YoY to $7.2B — and their answer was very different from both Facebook’s and Snap’s.
CFO Ruth Porat told investors:
"In terms of the iOS 14 changes specifically, they had a modest impact on YouTube revenues that was primarily in direct response."
Chief Business Officer Philipp Schindler added:
“Yeah from our standpoint we see ATT as one aspect of the many broader ecosystem changes that are under way. and we have been investing in privacy preserving technology for many years…. We really see the future of digital advertising being built on advances in privacy preserving on-device technologies which support the free and open internet and obviously a robust ads ecosystem. ”
So, YouTube’s answers to the two questions raised by Snap’s and Facebook’s earnings are:
Advertisers increasingly value YouTube’s first-party data, and
ATT did not impact their business.
Notably, we will not hear from ad-buying platform The Trade Desk — the best third-party resource on the AVOD marketplace — until November. But in Q3 2020 they told investors:
So about 10% of our spend uses IDFA [NOTE: which ATT eliminates]. And because we've had limited targeting on that 10% for quite a long time, continuing to limit it or limited in a new way, doesn't have a material impact to our business. Because we're looking at roughly 12 million ads every single second, when you take 1 million-ish of those and say, we're going to allow less data to be used on those. We just look more carefully for gems in the other 11 million.
The impact of ATT on The Trade Desk, and therefore its OTT customers, will be minimal in Q3 2021 and Q4.
How will post-ATT impact YouTube & the Connected TV Marketplace?
Another purpose of Member Mailing #271 was to highlight how “addressable connected TV and streaming inventory at higher CPMs should be making up for the shortfalls in revenue from lower primetime inventory.”
But, “media buying agencies are not incentivized to make up this shortfall because of the optics- and bulk-pricing-driven practices of old school TV ad buying.”
Last week independent journalist Mike Shields wrote about what he learned about the legacy media ad marketplace while “roam[ing] the halls of Hudson Yards for the yes-we’re-back-in person version of Advertising Week”:
It seems that in every other panel session, ad executives were gushing with enthusiasm over the potential of CTV - that is until they got into the details. Measurement is tricky. Managing reach frequency? Forget it- there are like 12 walled gardens. Measuring impact? Yes, as long as I have some kind of custom report that only works in this one instance. Using first-party data - um, yes, sort of, but the rules are different everywhere.
Is there enough CTV ad space out there?
“There is demand,” said Amy McGovern, vp of addressable sales, Warner Media. “One of the biggest challenges is scale.”
This point about scale is key. Shields has been unusually good at writing about the dynamics of the “co-dependent” linear advertising marketplace.
Every advertiser is seeking connected TV solutions, but:
…somehow, with the rise of automated content recognition (ACR )technology, there is still this belieff [sic] that advertisers will be able to use TV sets to insert addressable ads in national broadcasts - that is, as long as virtually every TV company cedes control of their inventory and potentially blows up their ratings data. At which point, you’ll have a very clever way to swap out ads during linear broadcasts reaching hordes of 75-year-olds.
Meaning, co-dependence in linear is not leading to scalable outcomes in CTV.
YouTube is best positioned to as an alternative that delivers scale, argues Shields because:
In my mind, it comes down to this - you can kill yourself to make all these advanced TV platforms work - or you can just buy YouTube.
But, notably, advertisers have been hesitant to spend more with YouTube.
In the Q3 earnings call, YouTube Chief Business Officer Philippe Schindler shared that:
YouTube's reach is becoming increasingly incremental to TV. We're helping advertisers find audiences they can't find anywhere else. Connected TV is driving part of this growth, is our fastest-growing screen. The precision of digital paired with the scale of linear is proving to be an awesome combo.
And even more so now with the expansion of video action campaigns for CTV. Advertisers can now drive conversions on the big screen, which brings me to help brands of all sizes continue to buy YouTube at both ends of the funnel to create future demand while they convert existing demand. And they're seeing upside.
For example, we found that advertisers using both [direct response] and brand video see brands driving 28% of conversion assists. Domino's Pizza is a great example. the UK business delivered a 9x return on ad spend on their direct response campaigns when paired with our brand campaigns. Lastly, I've said it before, and I'll say it again: our success is only possible because of our customers and partners.
All of this points to an interesting question for Q3 earnings calls for legacy media: what will be advertiser demand for legacy media’s scatter inventory and Connected TV advertising in Q4?
Roku, YouTube and Amazon all offer better first-party audience data, at scale, for advertisers than the social platforms post-ATT. YouTube has a win, and both Roku and Amazon look positioned for more wins.
It is less clear how legacy media companies navigate this storm without quality first-party transactional data. This raises the question of whether in this emerging post-pandemic, post-ATT market uncertainty, the future of legacy media company AVOD business models lies within the Walmarts and Sam’s Clubs of the world.
The first surprise in Q3 2021, so far, is how brutal ATT was for Snap, leading to a 25% stock drop.
The second surprise (arguably) in Q3 2021, so far, is that YouTube emerged unscathed by ATT compared to Snap and Facebook (which had warned investors).
Those set a precedent for two polar opposite outcomes for legacy media companies with ad-supported streaming services in both Q3 and Q4 2021.
One polar outcome is that ATT is going to have a negative impact on third-party trackers advertisers use for measuring ad performance on legacy media AVODs like Peacock and Paramount+, and FASTs like Pluto TV, Xumo, and Tubi. The question will be whether legacy media streaming services will be equal to the challenge of solving for this, like YouTube, or will fall short like Snap.
The other polar outcome is the impact of ATT will not matter in Connected TV. It is limited to mobile — where the majority of Snap’s and Facebook’s have exposure — and if ~10% of The Trade Desk’s customer base is only impacted by ATT, then it is hard to imagine any AVOD being concerned.
Moreover, the majority of Peacock and Pluto TV viewers are Connected TV viewers, and half of Tubi viewers are Connected TV viewers.
It could play out either way over the next month of earnings calls.
The X factor in all of this is the disconnect Mike Shields highlights above — whether growing advertiser demand for first-party data fails to find either competitively valuable data or scalable CTV solutions from legacy media AVODs outside of YouTube, Amazon, and Roku.
I think that is ultimately what Snap’s, Facebook’s and YouTube’s results highlight (alongside the Trade Desk’s 10% number from Q3 2020): even with ATT, advertiser demand remains strong for reliable first-party data solutions that can scale.
Legacy media seems nowhere near being able to meet that demand without “Content Fortress”-type outcomes. Q2 rumors like the Walmart-ViacomCBS merger or Sam’s Club-Peacock partnership seem primed to re-emerge.