Digital Advertising: “Year” of Efficiency or “Years” of Efficiency?

My take on the pursuit of efficiency from digital media owners and Meta/Facebook's potential divestiture of CRM business Kustomer.

With revenue growth in the recent past and near future coming in below where management teams of many of the world’s largest sellers of digital advertising likely expected they would be in 2022 and 2023, there have been many announcements of layoffs and drives for efficiency.  Towards these ends, at Meta CEO Mark Zuckerberg has described 2023 as their “Year of Efficiency,” leading to actions including layoffs which have been taken broadly across the sector.  However, the largest sellers of digital advertising may end up requiring “years” of efficiency if my expectations for growth play out, especially given the dominant share that many of them currently have.   At least this could be the case if they don’t succeed in investing in new sources of growth that would allow them to expand beyond industry averages.   In this note I outline what those different approaches could be.

The Largest Sellers of Advertising Dominate An Industry Set To Grow By Mid-Single Digits

At present, on a gross revenue basis for countries outside of China (the correct way to look at concentration, in my view) Alphabet and Meta alone account for nearly half of all advertising (not only digital advertising) and approximately 75% of total digital advertising.  Including Amazon this figure exceeds 80%.  When a handful of sellers of advertising account for a significant share of the advertising fast growth requires outpacing the industry in which they operate.  In other words, exceeding high single digit revenue growth in the coming years could be difficult if the overall industry only grows by mid-single digits.  Keep in mind that a mid-single digit growth rate includes the likes of TikTok, Apple, Microsoft and other sellers of retail media beyond Amazon (as all companies focused on retail media should sustain much faster rates of expansion that whatever we see in the industry).

With this in mind, when I hear about restructurings the big questions I think of are whether or not my industry expectations are embedded in current efforts to restructure and establish more efficient operations?  I then wonder about what each company’s broader ambitions for revenue growth are and how might they realize these ambitions, especially if they diverge from what’s realistic for the industry?

Approach 1: Take Share

To be sure, any one of the largest sellers of advertising will have the capacity to grow faster than the overall industry by improving consumer and/or advertiser propositions for existing digital advertising operations with an eye towards gaining share.   By improving a consumer proposition I mean efforts that result in growing share of consumer time with any one platform, and by improving an advertiser proposition I mean capturing a larger “share of wallet” based on new ad products, improved measurement, new customer segmentations or other such strategies.  Any of these actions represent solid choices that each should pursue, but I emphasize that such efforts probably result in shifts of shares of existing advertising budgets more than anything else, which could be lead to outperformance vs. advertising for a period of time, but not forever.

Approach 2: Expand Into Adjacent Media Channels

Alternately, any of them could more aggressively invest in traditional media properties in order to broaden their addressable markets within advertising as we know it today.  We’ve already seen efforts in this direction with each of the largest players buying professional sports rights which were previously held by television networks at different points in time in different countries around the world.   More activity of this nature could still occur, perhaps even going beyond video to more aggressively include other media channels.   The limitation here is that non-digital advertising platforms are by now relatively small, and profit margins are likely to be lower than the digital platforms’ legacy businesses (which doesn’t necessarily mean it’s a bad thing, of course).

Approach 3: Diversify Away From Advertising

A third approach to drive revenue outperformance which we’ve seen from companies whose roots are in digital advertising involves diversification outside of legacy revenue streams.   Certainly Alphabet has successful in this regard – today nearly a quarter of revenue comes from non-advertising based services – and Meta has certainly tried to do the same with its VR and metaverse-related initiatives.   While it’s safe to say that diversification will inevitably continue for these companies, such efforts could accelerate even faster with more investment.    

Approach 4: Diversify Into Adjacent Marketing Services and Technology Businesses

However, one approach I don’t think we’ve seen anywhere near-enough of relates to the broader marketing services and marketing technology sectors.  

As I’ve written in the past, for many years I’ve believed that marketing tech (the software-related products that are oriented around marketers’ customer data and workflows) can have meaningful synergies with ad tech (the software-related products that are oriented around media buying and selling activities, including related data).   Among them: while many marketers divide up responsibilities for vendor selection between ad tech and marketing tech among different executive teams, in many others – maybe most? – there are common decision-makers.  The data that is involved in both kinds of products is similar, too.  And the workflows are ideally tied together in a number of ways.   

However, attempts to bring such technologies together have been limited to date, which always seemed odd to me, especially considering the scale of opportunity.  If ad tech can be measured in tens of billions of dollars of annual spending, marketing tech probably sees multiples of these figures.   

There’s an important question regarding whether or not a company which owns media platforms and sells advertising can find marketers who are willing to let that media platform owner have access to the marketer’s most sensitive customer data.  For smaller ones the answer is likely to be yes most of the time, if only because those kinds of companies are often resource-constrained.   For larger ones the answer is more likely to be no unless there is a meaningful amount of perceived independence between business units intended to primarily help marketers vs. those intended to help monetize a media platform.    More generally, I believe there must be ways for larger media-focused technology companies to offer such services which are related to marketing tech given their unique scale in managing data, engineering talent and understanding of marketers’ business goals.   

It’s worth noting here that last week came news that Meta is considering a divestiture of Kustomer, a customer-service focused CRM business that it bought in 2020.   At the time of the transaction, Meta said its goal was “to give businesses access to best-in-class tools that deliver excellent service and support,” especially in context of the company’s plans for WhatsApp.  Press reports have suggested flattening growth for Kustomer, and presumably efforts to integrate with other CRM tools meant that the company didn’t see an advantage to owning the product in context of the company’s current focus on efficiency.  Perhaps there were other issues at play as well. However, I would argue that this outcome doesn’t mean there isn’t opportunity in this space, at least so long as such products are given the right balance of support and independence along with sufficient capital and managerial skill.

The Alternative To Sustained Investment In Growth May Be A Sustained Focus on Efficiency

There’s no one way to pursue growth and meet aggressive expectations for expansion, and the above approaches are only a few possible ways to do so.   In lieu of such actions, it’s unlikely that any mature company could sustain rapid growth for an extended period of time.   With that noted, a mid-single digit rate of growth should be considered to be perfectly respectable, although when this occurs I would expect that a single “year” in pursuit of efficiency might become a much more persistent endeavor.