By Christopher Mims
If Apple is King Kong and Facebook is Godzilla, mom-and-pop online merchants are worried they're the screaming, scattering citizens who are about to get stomped as these two giants battle it out.
What's at issue is a seemingly small change to the iPhone and iPad operating system that upends the past decade of the online ad industry, by prompting users to choose whether or not they'd like to be tracked by the apps they use.
Apple Chief Executive Tim Cook says the iOS update, currently rolling out, is about respecting user privacy. Facebook CEO Mark Zuckerberg has accused Apple and Mr. Cook of a power grab, an attempt to take control of data that has long been widely available to advertisers and data brokers. Facebook launched an ad campaign insisting that those who will be most hurt by Apple's changes are small and medium-size businesses, which represent the majority of the social network's more than 10 million advertisers.
Anything Facebook says about the virtues of it having unfettered access to our data should be greeted with an appropriate level of skepticism. But, according to small-business owners who advertise heavily online, and the agencies that help them, Facebook is speaking truth about how Apple's shift might disproportionately affect them. What's more, the privacy-minded ad tools the iPhone maker is offering instead likely won't provide the same clear view of target customers.
It's possible that businesses will end up having fewer insights into their ad spending -- and paying more for less-effective advertising. Whether this change is enough to harm a business depends on its size, maturity and what sort of goods it sells.
The Data Behind the Online Ads
Online advertising is built around data. For many years, merchants, through their own sites, and platforms like Facebook, through their apps, have tracked users, matching them via email addresses, phone numbers and their phones' unique advertising identifiers. A retailer can verify that a person who saw its ad, wherever it appeared, is the same person who later made a purchase -- even if they hit "buy" on a different app or device than where they saw the ad.
This has provided advertisers with the ability to spend a small amount of money targeting a very specific audience on Facebook or Instagram, and tweaking their targeting and ads repeatedly to find the most receptive audience, almost in real-time. This system has also allowed Facebook to demonstrate how effective its ads are, yielding a record $84 billion in advertising revenue for the company in 2020.
With Apple's change in user tracking via apps, this flood of data about users could become a trickle.
When presented with the pop-up question, " Allow this app to track your activity?" many iPhone users will choose no. Changes Facebook has already made to its internal advertising systems, some in anticipation of Apple's new rules, have already led to a coarser picture of who responds to ads, says Gracie Foxwell, co-founder of Foxwell Digital, which advises businesses on their online advertising.
"Apple's privacy changes are well-intentioned, but they do hurt small businesses in a real, tangible way, making it much more confusing for business owners to navigate and stay abreast of rapidly changing rules," says Ms. Foxwell.
Advertisers can still track purchases, and they still have a limited view of what happened before that purchase, because they will have, among other things, statistical inferences from Facebook about what ads users interacted with. Advertisers could also still access anonymized user data collected on devices other than the iPhone or iPad, such as a laptop running Chrome. (This, too, may change in the next two years, as Google makes its own moves to increase privacy and change how advertisers can track customers.)
The Impact on Small Businesses
Before, even the smallest business could throw as little as a hundred bucks at a tiny ad campaign on Facebook or Instagram, and get detailed and immediate feedback. Now they will have to spend substantially more -- thousands of dollars at least -- to show their ads to a larger audience, because the targeting will be less precise, says Christian Lovrecich, founder of PixlFeed Media, an e-commerce marketing agency.
Much of this targeting is driven by Facebook's "look-alike audiences" feature, a complicated algorithm that uses artificial intelligence to generate a pool of people who resemble, in ways that affect how they're likely to spend, an existing pool of customers or prospects provided by a merchant. For example, a merchant that already has a mailing list of customers for its adult onesies can feed that to Facebook, and Facebook's algorithm will allow them to find yet more fully grown humans who are likely to wear children's pajamas. These could be obvious similarities, like age, and not so obvious, such as having a job in an industry that allows working from home. The more data Facebook can feed this algorithm, the more correlations it can look for.
This situation highlights a fundamental trade-off between two countervailing trends in technology as a whole: consumers' desire for privacy and their desire for experiences tailored just to them.
"I'm not in the camp that privacy doesn't matter, but data has been used forever in order to personalize advertising," says John Merris, CEO of Solo Stove, a startup that sells backyard fire pits online. "The question is, where is the right place to draw the line? And why is Apple now the decider?"
Mr. Merris's company splits its digital ad spend among Facebook's properties, Google, and a grab bag of smaller platforms, including Pinterest, Reddit and podcasts. Mr. Merris has prepared for the impending changes by hiring engineers to build a system to track ads, aggregate available data and look for correlations. It behaves much like Facebook's ad system, but works across all the places Solo Stove buys ads. "It was a huge undertaking, a huge investment," says Mr. Merris.
Apple's influence on the U.S. digital advertising industry is a product of its dominance in mobile devices. Apple has 60% of the share of all mobile devices in use in the U.S., according to web analytics company Statcounter. People who use iPhones and iPads are also more valuable to marketers, because they tend to have higher incomes and spend more online.
Mr. Cook has expressed exasperation over the ad-tracking debate that arose with Apple's decision to prompt users. In a recent podcast, he said he was "shocked that there's been a pushback on this to this degree." He also called arguments against Apple's moves, such as those made by Facebook, "flimsy."
Facebook, for its part, presents small-business owners such as Hrag Kalebjian, proprietor of Henry's House of Coffee, a San Francisco-based coffee shop that also sells roasted beans online. Mr. Kalebjian says he earns $3 for every $1 he spends on Facebook, and that it has been enough to make up for the revenue lost when the pandemic forced him to close his shop. He says he's worried that after Apple updates its mobile operating system, the money he spends on advertising on Facebook won't lead to as many sales.
'Users Should Have the Choice'
Apple isn't entirely deaf to advertisers' concerns. "We firmly support advertising, we simply believe users should have the choice over the data that is being collected about them and how it's used," says an Apple spokesman. "Apps and advertisers can continue to track users across apps and websites as before -- App Tracking Transparency in iOS 14 simply requires that they ask for users' permission before sharing their data with other companies," he adds.
Apple is also rolling out its own alternatives to the traditional ad-tracking identifier. They allow advertisers to figure out if an ad campaign is working -- a process called "attribution" -- while protecting the privacy of the user. Since Apple does the processing required for these technologies on your device instead of in the cloud, they inherently limit what data can be sent to data brokers and companies like Facebook.
However, the ad consultants I talked to said these tools would require advertisers to change their processes, and probably wouldn't result in the same sharpness of targeting. My colleagues have reported that some big advertisers, such as Procter & Gamble, are exploring such alternative tactics as "device fingerprinting," a tracking workaround that Apple frowns upon.
"Even though in the short term this is probably not a great thing for small and medium-size businesses, in the long term it's probably for the best," says Solo Stove's Mr. Merris. He expects innovators to find ways to build "wonderful personalized experiences that generate good return on investment, while getting around some of these hotter topics like data collection."
Write to Christopher Mims at firstname.lastname@example.org
(END) Dow Jones Newswires