Madison and Wall: Big Tech, Not So Big Ad Growth
Alphabet, Amazon, Apple Results Indicate Low- to Mid-Single Digit Growth for Digital Advertising in 4Q22. New Data on Amazon Video Content Spending
Welcome to Madison and Wall, which is both the name of my new strategic advisory firm (learn more at www.madisonandwall.com) as well as this newsletter. The name refers to the work I have done for many years, which typically sits at the proverbial intersection of Madison Avenue and Wall Street. I hope you enjoy this newsletter. Please stay in touch with me at brian@madisonandwall.com
Following on Wednesday’s results from Meta, three of the other biggest technology-focused companies (Alphabet, Amazon and Apple) reported their earnings results for the fourth quarter of 2022 on Thursday.
Alphabet, by far the world’s biggest seller of advertising, saw an as-reported decline in ad revenue of nearly 4% during the fourth quarter, although on a constant currency basis total advertising was up by 2%. YouTube and Network Advertising were drags, with YouTube down by what I estimate was around 2% in constant currency terms (by 8% as reported) and Network ad revenue down by around 3% (with a 9% as-reported decline).
Clearly this was a soft quarter for Alphabet and for global advertising as well, but it wasn’t necessarily negative. With the positive constant currency growth numbers posted here, similarly positive numbers from Meta, higher single digit growth from Microsoft and much more rapid growth from TikTok and Amazon, digital growth – and implicitly 70+% of all advertising could very well have been up by low to mid-single digits during the fourth quarter on a constant currency basis. Revenues for other media owners other than outdoor advertising companies could very well have fallen around the world, but not necessarily by enough to cause the industry to go negative.
More specifically, in Amazon’s own fourth quarter results, we saw ad revenue grew in the quarter by 23% in constant currency terms to end the year at $38 billion. E-commerce-related retail media continues to be an important source of growth for the overall industry, well beyond Amazon. Earlier on Thursday Publicis’ CEO said during their earnings call that his company’s retail ad network and white label retail media software business CitrusAd had now doubled in revenue since acquisition (for a sense of scale, the business had 130 employees at the time of acquisition in mid-2021), and stated “CPG companies will spend more on retail media than on linear TV by 2025,” which could be a very realistic expectation in a market such as the United States.
Interestingly, Amazon provided a new disclosure about its content spending. The company said it invested approximately $7 billion in 2022 across Amazon Originals, live sports and licensed third-party video content included with Prime, up from $5 billion in 2021. This compares with disclosures in the company’s 10-Ks which characterize a broader array of spending on content. In 2021, the company’s total music and video expense – which also includes costs of sold or rented content as well as, of course, music expenses, amounted to $13 billion and presumably more in 2022 (the most recent 10-K has not yet been released).
For reference, Netflix’ annual content expense during 2022 amounted to $14 billion in recorded expenses but $17 billion in cash outflows (a difference of this nature is to be expected for any service that is growing rapidly, and so we could infer that Amazon’s actual cash spending on content in 2022 was higher than $7 billion. Amazon does not disclose the cash outflow associated with its video services). At $7 billion, Amazon is still one of the world’s largest buyers of video-based content, and its growth is illustrative of a point I made in my inaugural post about expectations for ongoing growth of spending in video content (and loss of market share for those companies who fail to keep up).
Finally, Apple also reported results and cited macroeconomic headwinds impacting its digital advertising. The company does not disclose the size of this business, although it’s likely in the single digit billions of dollars.