Apple’s big iOS14 update could hurt these 2 tech giants

In June, Apple (NASDAQ: AAPL) announced that it would require users to enable ad tracking capabilities for each app in iOS 14. The ad immediately sparked complaints from advertisers looking to track ad performance and of publishers claiming the change would significantly reduce advertising revenue.

In response, Apple postponed the feature’s introduction when it launched iOS 14 in September. However, it still has plans to add the feature in the next year, and online advertising giants like Facebook (NASDAQ: FB) and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) Google should be concerned.

Apple’s growing war against Facebook and Google

Apple CEO Tim Cook has repeatedly criticized Facebook and Google for their data collection practices in recent years. Apple has also replaced some of Google’s services, such as Maps, with its own competing services.

Image source: Apple.

In 2015, Apple began allowing developers to produce third-party ad blocking extensions for Safari on iOS and subsequently launched several advertising campaigns to promote the privacy-oriented features of the iPhone. The addition of activation requirements for targeted ads in iOS 14 is an extension of that strategy.

Apple is challenging Facebook, Google, and other targeted advertisers for three main reasons. First, Apple doesn’t generate significant revenue from ads, so it can afford to promote iOS as a privacy-oriented operating system. Doing so is also good PR, especially as Facebook and Google are repeatedly maligned for their privacy, fake news, and hate speech issues.

Secondly, Google is Apple’s biggest competitor in the smartphone market. Google’s Android operating system runs on 85% of the world’s smartphones, according to IDC, while iOS controls the remaining 15%. Therefore, it makes sense for Apple to prevent Google from expanding its data collection ecosystem on its iOS devices.

Finally, Apple’s biggest selling point is its walled garden. iOS only works on iPhones and iPads, and those devices are closely tied to its App Store and subscription services. Facebook and Google both compete with Apple in other markets such as streaming media, virtual assistants, and smart home devices, and they both profit from displaying targeted ads to iOS users. Cutting those profits would be a smart strategic move.

To what extent could the update harm Facebook and Google?

Facebook generates nearly 99% of its revenue from online ads. These ads are mainly displayed on its main Facebook platform, Instagram, and its audience network, which displays ads on third-party websites and apps.

Image source: Apple.

Facebook says that during internal testing, the revenue of its Audience Network publishers dropped by more than 50% “when personalization was removed from mobile app ad setup campaigns.” It also warns that the impact could “be much greater” and that it is still working on short- and long-term solutions to counter the blow.

This statement, coupled with recent Facebook full-page newspaper ads claiming to “stand up to Apple for small businesses everywhere,” strongly suggests that the social networking giant is concerned.

Alphabet generated 80% of its revenue from Google’s advertising business in the first nine months of 2020. This vast business includes its search ads, website and app display ads, and YouTube ads.

Unlike Facebook, Google has offered no internal projection on the impact the iOS 14 update could have on its core advertising business. It also did not buy full-page advertising in the newspapers and declared war on Apple.

Instead, Google appears to thwart Apple’s criticism with stricter privacy controls for Android devices. These updates may appease Android users, but they don’t address the potential impact of the iOS 14 update.

Additionally, 56% of marketers in a recent AppsFlyer survey felt they would be negatively impacted by the iOS 14 update. One third of respondents also planned to reduce their marketing spend, presumably on affected ad platforms like Facebook. and Google, in response to those changes.

Facebook and Google should be worried

Apple only controls 15% of the global smartphone market, but its market share is much higher in most developed countries. It controls nearly half of the market in the US and Japan and nearly one third of the market in Europe.

These higher-income markets generate much higher average revenue per user for Facebook and Google than the developing and emerging markets. However, that revenue could plummet if Apple allowed its users to opt out of targeted advertising campaigns.

Revenue growth of Facebook and Google already slowed during the COVID-19 crisis as marketers bought fewer ads. Most analysts expect ad sales to accelerate after the pandemic ends, but Apple’s upcoming iOS 14 changes could generate unpredictable headwinds next year.

Apple probably won’t push Facebook and Google off the precipice, since both companies can still display untargeted ads on iOS, but it could certainly hurt the two tech giants. Looking ahead, Facebook and Google investors should closely monitor these upcoming changes to assess the damage.

Through: www.fool.com

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