After Snap’s poorly received Q1 digest and ahead of this week’s string of earnings reports from the largest U.S. tech companies, we wondered whether the advertising market is in trouble. Not that most folks associate Microsoft or Apple with advertising the way they may with Alphabet or Meta, but the majors — Amazon and Apple included — have ads businesses of material size, meaning that the ad market impacts each of them.
(That ads are considered to be a lackluster business model for smaller companies and startups — speaking loosely — but are a huge revenue source for platform companies says something interesting about competition inside of the technology industry. But perhaps that’s a topic for another day.)
Now, with three of the five majors having reported their Q2 results, how are their advertising results faring?
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The question ripples into other areas of the economy: Tech companies generate huge incomes from hosting advertisements, but with companies as far afield as Netflix working hard to bolster their subscription incomes through ads, the question of advertising performance is not idle and impacts trillions of dollars of corporate value.
Let’s chat about the latest results ahead of the Amazon and Apple earnings reports that will drop this afternoon.
Thank god for the cloud
In Q2 2022, Alphabet reported revenue growth of 13% when compared to the year-ago quarter. Inside its results was 13% growth in its search business (advertising based), 5% growth in YouTube incomes (again, advertising grounded) and 8.7% growth in its network business (once more, ads driven).
Alphabet’s growth was supported by a nearly 36% expansion in cloud revenues. More simply, Google’s unprofitable cloud business provided a boost to its revenue growth, while its slowing ads-based business made all the money. Our expectation that the ads market for tech was slowing and that the slowdown would show up in results is therefore holding up thus far.
Meta’s story is similar, if perhaps slightly worse. Facebook’s parent company reported its first quarter of negative growth (revenue contraction on a year-over-year basis) since going public, with $28.8 billion in Q2 2022 top line, compared to $29.1 billion in the year-ago period. Sadly for Meta, its second bet is not of a similar scale to Google’s cloud business. So while it was good that Meta’s AR/VR line item (“Reality Labs,” in Meta parlance) grew 48% in the second quarter, the bad news is that it worked out to just 1.6% of the company’s revenues, while also proving a huge drag on profitability.
Again, our general perspective is holding up.
But now we turn to Microsoft, where things are a bit harder to parse. Revenue at the software company rose 12% in its most recent quarter, a figure that was admittedly impacted by changing currency values to the tune of 400 basis points (it clocked 16% growth in constant currency).
But while the company’s results had much to like (40% unadjusted growth in its Azure cloud group, for example), its advertising story is actually somewhat positive. LinkedIn revenue was up 26% in the last year, while “search and news advertising excluding traffic acquisition costs” rose 18%, both ahead of the company’s aggregate revenue growth. So for Microsoft, the ads game was a net winner on the growth front.
Given that, among the three companies we’ve discussed so far, Microsoft generates the smallest fraction of its income from advertisements; it’s worth possibly considering it an outlier.
But we’re not done yet. Apple and Amazon are on the horizon. Here’s where they stood after Q1 (calendar):
- Apple’s “services” revenue category, which includes advertising (App Store, elsewhere), expanded from $16.9 billion in calendar Q1 2021 to $19.8 billion in calendar Q1 2022.
- Amazon’s “advertising services” line item grew from $6.4 billion in Q1 2021 to $7.9 billion in the first quarter of this year.
Naturally, we wish that Apple broke out its revenue more granularly, but as all mega-cap companies operate like secretive nation-states, we aren’t going to get more. The two companies have grown at least in part on the back of their advertising incomes. What they report today will fill in the gaps in our knowledge.
Yes, Snap’s earnings were confirmation that the ads market was getting worse. That perspective has been backed up, largely, by Big Tech earnings thus far, with Microsoft as the outlier. What we’ll learn today when Apple and Amazon report is whether Big Tech is weathering the ads slowdown better than other sectors. Good ads results from the consumer electronics and e-commerce giants would indicate that Microsoft is more average than outlier; lesser results would indicate the opposite.
Regardless, we cannot think about Big Tech without considering the ads market, period. Perhaps we should update our thinking. It is common to watch software companies add revenue lines over time — vertical SaaS adding payments, software vendors buying related companies to extend their offerings, that sort of thing.
But perhaps the real deciding line between Big Tech and the rest of the technology industry is the point at which advertising incomes become a material part of their revenues.
Why might that be the case? Scale and platform power. Those make ads a great gig for Big Tech companies. And you know who lacks those very things? The rest of the damn industry.
More after hours when we get the rest of the data.