Who’s Afraid of Big Bad Tech?

Well, who saw that coming? Wall Street certainly didn’t and after previous quarterly revenue declines from big tech, you can see why expectations weren’t high a month back. And yet… Meta, Alphabet, Microsoft, Amazon, and Apple (MAMAA) all defied the odds to report a bump in their latest earnings.

In image above: Ayman Haydar, CEO of MMP Worldwide

If you were left scratching your head, you weren’t the only ones. While the CEOs gave themselves a large pat on the back and investors breathed a sigh of relief, the wider threat of recession still looms large. US economists are on edge, particularly as fresh challenges hit the banking sector - already on shaky footing following the collapse of three banks earlier this year. It’s hard to comprehend how banks like Silicon Valley Bank (SVB) can fail, triggering a sharp decline in global stock prices and yet big tech comes up trumps? It seems too good to be true.

Perhaps this is a brief reprieve. A break from reality. Or maybe we’re being set up for a bigger and harder fall down the line. We’ll never know the extent of how bad things truly are; the narrative is controlled too tightly. What we do know for a fact is that economists remain concerned about the climate overall, and usually they are right on the money.

It may look like ‘genius’ is at work here to go from negative to positive in such a big way but dig a little deeper and maybe there’s been a correction in the economy or incremental changes that are starting to pay off. These guys and their share price have been gaining steadily over the past five months don’t forget. Apple, Amazon, Alphabet, and Microsoft are all up between 30-40% YTD. Meta is the anomaly here, up by a massive 96.92%. Zuckerberg lucks out again.

It raises the question: is digital advertising really growing by that much or is it largely just the walled gardens that are benefiting from this? Likely the latter, which is a dangerous place to be. They have long dominated the landscape making it impossible for others to gain market share, and that looks set to continue, even with the most severe cutbacks made in their history.

Sure, revenues may have gone up and profits increased (albeit marginally) but on the flip side, you have a huge amount of job losses, hiring freezes, and ‘pivots’ to stay relevant.

As for the wider outlook, if the US is the first ‘domino’ to fall in triggering another recession, what can be done to stop the after-effects, or at the very least, slow down the wave of disruption? The jury is still out there. But look, I really hope these guys are wrong. Collectively, we all needed a big win from big tech, and they delivered, giving the economy a much-needed boost.

Of course, it’s not all plain sailing from here on out. There are still significant challenges to overcome to stay the course before the next earnings call. Now that everyone’s victory lap has come to an end, here’s my take on the results and what it means for the broader digital advertising landscape:

Meta

Meta Platforms’ revenue grew 3% year over year to $28.6 billion in the first quarter of 2023. The majority of which ($28.1 billion) came from advertising.

The results are surprisingly positive, but caution is still advised. Meta’s cost-cutting measures seem to be doing the trick, but their mass layoffs continue to make headlines; 21,000 so far, with very little accountability from the top. Zuckerberg’s plan to slim down teams and optimize AI across functions, such as customer service, may make sense in theory but the reality is far from perfect. Just ask advertisers about Facebook’s massive overspending glitch last month and the automated responses they received as a result. A bright spot on the horizon though is Reels. They are starting to generate revenue but currently monetize at a lower rate than in-feed ads. Meta is reportedly investing in more AI to improve this after it helped improve monetization efficiency on Instagram by 30% and by more than 40% on Facebook quarter over quarter.

And finally, RIP Metaverse. Who knew that constructing virtual worlds, in reality, would be so difficult? Yes, I’m being sarcastic, but that didn’t stop the tech world’s obsession with it for the past few years, prompted by Zuckerberg changing his company’s name to ‘Meta’ in 2021. We have a lot to thank him for, don't we?

Alphabet

Alphabet’s revenue rose 3% to $69.79 billion from $68 billion a year earlier. Ad revenue beat analyst expectations but fell from the year prior to $54.55 billion. Google is also generating a profit from its cloud-computing business, while YouTube ad revenue declined from a year ago, but was still in line with analyst expectations.

That’s not surprising when you consider increased competition from TikTok and the trend for short-form videos. However, YouTube’s been working overtime to help advertisers see the potential of its own ‘Shorts’, adding more formats and branding opportunities to maximize reach and using AI to improve efficiency.

Seeing as Shorts content now racks up over 50 billion daily views - nearly double the rate compared to last year - this is one to watch.

Finally, Search is still Google’s jewel in the crown, as revenue increased slightly in this division over this quarter. However, as Microsoft’s ChatGPT integration sends Bing’s downloads soaring, Google is already planning to completely reinvent its Search function by using an AI-powered chatbot to answer questions.

Given that Bard fluffed its first big outing earlier this year, hopefully, it has gotten a lot smarter since then.

Amazon

Amazon’s net sales rose 9% year-over-year to $127.4 billion. Revenue from Amazon’s advertising business rose 21% year on year to $9.5 billion. Its e-commerce business had no year-over-year growth, while Amazon Web Services grew 16%, slightly ahead of expectations but still down from the 20% reported in the fourth quarter.

All in all, it’s a strong improvement given their 2022 performance saw shares tumble 40% as consumer spending slowed and clients made cutbacks. More investments in their machine learning services is likely to power growth in future as e-commerce remains flat and Amazon shifts its focus, much like the rest of big tech, to generative AI.

As for job losses, Amazon’s layoffs are significant. They aim to shed 27,000 corporate jobs across different divisions, most recently hitting those in their cloud computing sector. 

Finally, Amazon has also signed a multiyear partnership with Pinterest to make Amazon Ads the first (and so far, only) third-party ad tech to serve ads to Pinterest. Although it won’t roll out until later this year, this partnership could provide a more seamless shopping experience for users, while advertisers could capitalize on targeting highly engaged audiences with strong purchase intent.

In this landscape, the opportunity to increase conversion rates and improve ROAS isn’t something to be ignored. This could be very interesting indeed.

Microsoft

Microsoft reported revenue of $53bn, a 7% increase year over year this quarter, with Search a big highlight. Although given the success of the company’s partnership with OpenAI and its ChatGPT integration powering Bing, it’s not that surprising. Does Microsoft have ambitions to challenge Google and gain a bigger slice of the search market? Maybe, but I think this is more of a consequence (a nice one at that) of its bigger investments in its cloud infrastructure and growth in AI-related spending.

Elsewhere, their attempt to acquire Activision Blizzard (the company behind games like Call of Duty) has hit a big roadblock in the form of the UK’s top antitrust regulator. While the EU may have approved the deal, the Competition and Markets Authority (CMA) has announced it intends to block it because of antitrust concerns. Given the size of the acquisition ($69bn) and the access the company would have to the millions of ‘spend-happy’ gamers on these popular titles, the fear is Microsoft would then have a huge competitive advantage in cloud gaming.

A big tech company with too much power? Surely not…

Apple

Apple’s results exceeded Wall Street forecasts (expected $92.96bn, reported $94.84bn) despite declining revenue in the March 2023 quarter - its second consecutive quarterly drop in sales. Still, its services business, which includes the App Store, Apple Pay, and subscription services such as Apple TV+, Apple Music, and iCloud, hit a new record with revenue up 5.5%. India is also a big market to watch in the future. Apple’s revenue in this fast-growing market was reportedly up 50% during this period, and they are also ramping up production in the country too.

As Apple’s rivals restructure with mass redundancies, Cook has so far managed to avoid this. Their positioning in the market is different to that of Amazon, Meta & Alphabet because they didn’t increase their headcount significantly during the pandemic, growing 20% between 2020 and 2022. Also, they don’t (at least openly) pour money into projects that are unlikely to turn a profit soon. *Cough cough* looking at you, Meta. Saying that it's widely rumored that at their Worldwide Developers Conference next week they will present a mixed-reality headset.

After a masterstroke in deploying their ATT framework nearly two years ago which totally upended the digital advertising landscape (and is still disrupting it, albeit at a slower pace) I hope that this isn’t all Apple has going for it in the near future.

We’ll see.