Digital Ad Giants Signal Troubling Times Ahead

Digital Ad Giants Signal Troubling Times
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As if we needed any more evidence of a deteriorating economy, Facebook parent Meta reported its first-ever year-over-year revenue decline in Q2. Meta’s results come on the heels of disappointing reports from peers Snap, Twitter and YouTube.  

Much of the commentary out of Meta’s C-suite echoed what others in the space cited as the reason for recent Q2 revenue declines — weakening ad demand amid macroeconomic uncertainty. “We seem to have entered an economic downturn that will have a broad impact on the digital ad business,” CEO Mark Zuckerberg said in his opening remarks on the company’s earnings call. “It’s always hard to predict how deep or how long these cycles will be, but the situation seems worse than it did a quarter ago.”

After seeing robust gains in 2020 during the peak of the COVID-19 pandemic, the digital ad giants are now grappling with the aftermath of the pandemic’s wrath.  The pandemic left a slew of economic challenges in its path, including surging inflation, which is leading to slowing spending and production and a higher interest rate environment that will ultimately put pressure on economic growth.  

All this has caused companies to pull back on marketing and advertising. Within the media industry, digital advertising giants Snap, Meta, Twitter and YouTube provide the quickest and clearest economic picture due to their exposure to the ad market. The Big 4 derive nearly all their revenue from ads, and as necessary as digital advertising is in most budgets, they are also the easiest to ax when a company is in a pinch. Thus, the impact is often swift and hard. 

So why does any of this matter in the macro picture?  

Digital advertising is often considered a bellwether for the health of the overall online economy. Growth sectors like tech have been under immense pressure this year, and further deterioration in digital advertising will likely weigh on the broader group. 

Then there’s all this chatter about a recession when it comes to the topic. Some have argued the U.S. is already in a recession, while others question what the real definition of a recession even is. What folks fail to realize is it doesn’t matter if there's technically a recession or not because the mere anticipation of one has both corporations and consumers tightening their belts.  

Unlike previous recessions, digital ads account now for a bigger piece of the ad market pie than they did in the past. According to Magna Global, digital advertising revenue represented 62% of total advertising sales worldwide in 2021. That compares with 10% of the total ad market in 2007 and just 5% in 2000.  

There’s no way to predict the future, and even Q2 results are backward looking in nature. All we have to go on is the commentary from execs on the outlook for the future, and judging by messaging we’ve heard this earnings season, investors should brace for more pain ahead.