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Equity

Apple Privacy Updates Upend the Digital Marketing World

Users and digital marketers should strike a balance between privacy and profits.

01/25/2023
Woman in coffee shop looking at phone.

Key Takeaways

Apple’s decision to have users “opt-in” to share their information has profoundly altered the digital marketing landscape.

Digital advertising and social media platforms, including Facebook, have already felt the financial impact.

While user-tracking technologies are controversial, we believe the digital advertising market will continue moving toward consented ad tracking.

In 2021, Apple’s iOS privacy update changed its mobile operating system to enhance protections for users of its devices. But this seemingly modest modification had significant consequences for the digital advertising market.

The response from digital advertisers, social media platforms, search engines, web publishers, mobile app providers and others in the massive global advertising industry will determine the future of the digital ad market — an evolution we're calling Ad Personalization 2.0.

Since the iPhone's earliest days — unless you proactively switched off a privacy access button in the phone’s settings — you allowed apps access to your devices. The default setting allowing this access gave apps virtually unlimited capability to track your data on other apps and websites, similar to how internet browsers use cookies for tracking.

This individual device "identifier for advertisers," or IDFA, proved crucial for reaching users of mobile devices who tend to spend most of their time on apps.

IDFA tracking enables better user targeting based on specific usage data across devices, apps and ad platforms. Apple’s privacy update turned this default setting of the past 15 years on its head. Now you must proactively allow apps to track your iPhone and iPad data. The default setting aims to safeguard your privacy unless you explicitly permit tracking.

Disrupting a Massive Global Market

Academic research across many fields shows that human behavior tends toward inertia, or in this case, "the tendency to maintain the default." This means you typically don't adjust or change your device settings. And that has overwhelmingly been the case with Apple device users' privacy settings since the 2021 software update.

Media attention about the privacy update, regulatory scrutiny and improved awareness of how devices track users' data has magnified this effect further. As a result, an estimated seven of every eight iOS users — regardless of intent — now restrict tracking.

The change impacted digital advertisers relying heavily on mobile tracking. This market, of course, is massive. The digital advertising market grew to an estimated $524 billion last year — a 56% increase from just three years earlier. See Figure 1.

Analysts expect the digital ad market to continue expanding rapidly over the next few years, benefiting from superior ad tracking capabilities compared to traditional advertising mediums such as linear TV, print and billboards. Accordingly, we think big rewards may await those who figure out Ad Personalization 2.0.

Figure 1 | iOS Ad Tracking Privacy Updates Are Roiling a Huge Market

Digital Advertising Spending Worldwide (Billions USD)

Bar chart showing worldwide digital advertising spending in billions of dollars. 2019 was 335.6 billion. 2020 was 378.2 billion. 20221 was 455.3 billion. The estimates for 2022, 2023 and 2024 are 524.3 billion, 586 billion and 645.8 billion.

Data from 1/1/2019 – 9/20/2022. Source: Statista. *2022 and beyond are estimates based on Statista research.

However, some advertisers have scaled back or reconsidered their digital advertising spending since Apple’s privacy setting changed, with predictable financial impacts. For example, Meta Platforms —Facebook’s parent company — reports that it makes 97% of its approximately $120 billion in annual revenue from global advertisers on its Facebook, Instagram, Messenger and WhatsApp applications.

In the second quarter of 2022, Meta recorded a decline in revenues for the first time.

In its second-quarter 2022 financial results, the company said its revenue dropped 1% from the same period a year earlier to $28.9 billion. That's the first time Meta ever recorded a quarterly decline in revenue. The company’s management explicitly discussed the challenges resulting from Apple's iOS changes during its ensuing quarterly earnings call.

It's important to note that Alphabet, Google's parent company, hasn’t followed suit and plans a more measured pace in addressing Android privacy issues, such as ad tracking. The company has also delayed planned changes that would eliminate the use of cookies for tracking on its Chrome web browser.

Presumably, though, Alphabet will eventually implement similar privacy controls. In the broader picture, digital advertisers and the online world will have to find answers for a shifting privacy landscape focused on safeguarding users' data more closely.

Toward Ad Personalization 2.0 — Assessing Data-Tracking Suitable Options

Client-Side vs. Server-Side Tracking

Digital advertisers have already begun turning to so-called "server-side tracking" as an alternative to the "client-side device tracking" that Apple's new default setting aims to limit. With server-side tracking, advertisers can obtain IP and email addresses when users log into a publisher's website. This occurs at the server level rather than off the user’s device.

The foundation for server-side tracking relies on the premise that you consent to tracking when you enter websites. This is similar to the notion that you accept getting recorded by security cameras in retail stores. The obvious difference is that you don't automatically consent to retailers sharing that camera footage with other retailers. Some website publishers, however, give you the option to consent to share some of your data with advertising and analytics partners.

Meta Platforms has adopted server-side tracking as a solution to Apple's software update. Its servers connect directly to the servers of publishers or online retailers and can measure if you click a product page or make a purchase. This allows Meta Platforms to match ads presented on its properties with subsequent app downloads, clicks or purchases.

But some debate has surfaced about whether server-side tracking adequately safeguards privacy. Moreover, Apple's iOS 15 software update added features allowing users to limit access to their email and IP addresses.

Universal ID

Another option, called Universal ID, relies on users providing their email addresses to websites and apps. By accessing sites or apps, you allow advertisers to match your activities across different publishers, devices and platforms. This approach takes server-side tracking one step further by encrypting users' email addresses between web servers and ad servers. You would only see targeted ads across websites that require your login information.

Universal ID allows advertisers to track ad performance while protecting users' personal identification information. But user adoption remains limited because many people don't want to register their information with websites. Universal ID won’t work if users restrict access to their email addresses with Apple's new features. Meanwhile, Alphabet, Meta Platforms and Amazon have little incentive to adopt this approach because they already have massive datasets of users' information.

Proprietary Data Platforms

A third approach involves companies building proprietary data platforms to profile their customers. Such platforms allow companies to market more effectively to existing customers via segmentation and targeting. Typically, such a platform will collaborate with a customer relationship management (CRM) platform. A robust customer data platform also helps companies discover new customers by building "look-alike" models targeting customers who have never visited their websites or bought their products.

Balancing Privacy and Profits

As the digital advertising market progresses toward a better privacy solution, users must determine the level of information sharing they deem reasonable. Web publishers still need to earn money from advertisers to produce the content they distribute. If that revenue source dries up, publishers will have to earn money through other means, including subscriptions or transactions. If users insist on complete privacy, the open and free internet as we have known it will cease to exist, as will free mobile apps.

However, users can find ad personalization useful and worthwhile if it is done correctly. The reality is that you will still see ads, even after Apple’s privacy update. The question is the degree to which you want ads to be personalized and tailored to your interests.

If users insist on complete privacy, the open and free internet as we have known it will cease to exist, as will free mobile apps.

Consider, for instance, that targeted advertising allows you to discover new merchants, products and vacation destinations by watching creative, entertaining and informative ads. Many of us, after all, actively choose to watch Super Bowl ads.

Ad Personalization 2.0 will require all participants — users, the sites they visit, the platforms they access, the apps they enjoy and the advertisers trying to garner their attention — to cooperate in establishing a suitable solution. Even Apple should agree that a poor mobile web experience wouldn’t boost iPhone sales.

With that in mind, we believe server-side tracking, universal ID and customer data platforms — or some combination thereof — offer the best opportunity to move toward a consented-ad-tracking approach that strikes the proper balance for everyone.

Author
Keith Lee, CFA
Keith Lee, CFA

Co-Chief Investment Officer

Global Growth Equity

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