What you need to know?

• Meta and Alphabet's advertising businesses both fell about four per cent.
• Amazon's advertising business is roaring ahead.
• AI, video and data clean rooms backed to drive the next wave of advertising and user engagement innovation.
• Reels growth is costing Meta money as its steals user attention from Feed.
• Google's core search dropped slightly but YouTube and Google Network got whacked.
• Don't be evil. For real this time. We pinky promise.
• Crisis, what crisis, says Amazon, which barely mentions advertising in its commentary.

Financials for Meta and Alphabet, released last week, had a lot in common. The digital duopolists both saw quarterly ad revenues fall about four per cent. Both heralded the ability of AI to turn things around and both got pwned in the advertising growth stakes by Amazon. 

The ecom and cloud computing giant’s ad business has casually sauntered to over $US37bn annually, a seven per cent share of the lucrative digital ad pie. Amazon’s advertising business is getting fat on the hog even if it is still a relative piglet by comparison to Meta and Alphabet. The company's ad business recorded $11.6bn, a 19 per cent increase during the final quarter of 2022 compared to Q4 2021.

As an aside, while artificial intelligence was a central theme of the Meta and Alphabet earnings calls with financial analysts, it didn’t rate a mention in Amazon’s 44-minute call with its investors. Advertising warranted only the thinnest of references – there aren’t too many $37bn advertising businesses that can skate by on such limited scrutiny.

Indeed, there aren't too many $37bn advertising businesses. 

Mi3 read the tea leaves from each of the investor presentations for Meta, Alphabet, and Amazon to discern the key trends. Four, in particular, stand out:

• The economic headwinds will drag on growth for a while yet.
• Video is likely to be a source of innovation and provide a lot of the advertising upside, particularly at Meta and Alphabet.
• Artificial intelligence will drive the next great wave in digital advertising innovation.
• Expect further innovation around data clean rooms.

Meta: better?

Advertising provided Meta with $31.2bn of its $32.1bn revenue in Q4, a decline on the corresponding period a year ago. However, in the endless game of market expectations that was still seen as a win, and the share price roared. (The $40bn share buyback also helped a little.)

There was also good news on the user engagement front with Facebook reaching 2 billion daily active users (DAUs) for the first time in December, an increase of four per cent or 71 million compared to the previous year.

Last year's daily active user reversals were what caused Facebook's shareprice to tank by $230bn exactly one year ago – the biggest one day fall in US history. Monthly average users also increased two per cent YoY.

“Weak advertising demand continues to be impacted by the uncertain macroeconomic landscape with the financial services and technology verticals experiencing the biggest decline. The improvements in travel and healthcare while encouraging were not enough to offset the losses," per CFO Susan Li. "The largest positive contributors to YoY growth in Q4 were the travel and healthcare verticals."

Analysis of the figures shows the firm is serving quite a lot more ads than a year ago – up 23 percent driven by a strong performance in APAC and the Rest of World. That's on top of a 10 per cent increase in ads to users it disclosed in Q4 2022.

But Meta is also getting quite a lot less money for those ads, with the average price per ad decreasing by 22 per cent, wiping out the 24 per cent price increases reported a year ago. Thanks Apple and TikTok.... and maybe retailers getting serious about the ad business.

TikTok playbook

CEO Mark Zuckerberg is putting a lot of faith in artificial intelligence to help the company accelerate its monetisation efforts.

“Facebook and Instagram are shifting from being organised solely around people and accounts you follow to increasingly showing more relevant content recommended by our AI systems. And this covers every content format, which is something that makes our services unique," he said.

“In our broader ads business, we are continuing to invest in AI and we are seeing our efforts pay off here. In the last quarter, advertisers saw over 20 per cent more conversions than in the year before. And combined with the decline in cost per acquisition, this has resulted in higher returns on ad spend."

Meta is especially focused Reels, its short-form video product. Reels plays doubled over the last year while shares on social media doubled in just the last six months, he said.

Reels eats Feed

Zuckerberg cautioned investors however that there is currently a gap between the engagement around short-form video and its monetisation, and that the 'monetisation efficiency' of Reels remains lower than Feed. 

For now the more Reels grows, the more Feed declines, which means that the company actually loses money, according to the Facebook founder. In other words, Reels is eating Feed's lunch.

"But people want to see more Reels though. So the key to unlocking that is improving our monetisation efficiencies. That way we can show more Reels without losing increasing amounts of money. We are making progress here and our monetisation efficiency on Facebook has doubled in the past six months. In terms of the revenue headwind, we are still on track to be roughly neutral by the end of this year or maybe early next year," per the chief.

"Then after that, we should be able to profitably grow Reels while keeping up with the demand that we see.”

Google: Worse

Alphabet’s performance – down four per cent, matched that of Meta. But there was no $12B bonus for the company founders. The market expected better.

As ever, there were devils buried deep in the detail. While search – which accounts for the bulk of Alphabet’s revenues – dipped by two per cent, YouTube retreated by eight per cent. Google Network did even worse, falling nine per cent.

Google also finds itself having to answer questions following the arrival of ChatGPT. With the emergence of a new generation of generative AI powered search tools such as ChatGPT and the recently launched and Y Combinator-backed Andi, the murmurs about the long-term health of Google's core search business are intensifying.

Little wonder then that CEO Sundar Pichai is talking up how Alphabet will respond to the threat of ChatGPT — and more importantly the threat from Microsoft. Its Redmond-based competitor in the business apps, cloud and search looks set to own 49 per cent of ChatGPT owner OpenAI after a new investment deal announced this last week. 

Pichai's AI pitch

Among some of the other key statistics from Alphabet’s 2022 Q4:

• Operating expenses were up 10 per cent, with increase in R&D and G&A costs
• Operating income was down 17 per cent and net income was $13.6bn
• $59bn of Class A and Class C shares repurchased in 2022

Like Meta, Google says it is focused on using AI in advertising to drive better user experiences for consumers and deliver better results to advertisers.

Describing AI as the most profound technology being developed at the company today, Pichai said: “Our talented researchers, infrastructure, and technology make us extremely well-positioned as AI reaches an inflection point.” And its vast data advantage provides a better foundation than most.

In the coming months the company will announce new AI initiatives in three areas, per Pichai: 

• New models
• APIs and tools for developers, creators and partners
• Specific AI solutions for manufacturing, life sciences, and retail verticals

And in albeit less catchy hat tip to its 'Don't be evil' antecedent-self, he said: "We'll pursue this work boldly but with a deep sense of responsibility with our AI principles and the highest standards of information integrity at the core of all our work."

Pichai also slapped back to those who might feel Alphabet is looking more like an incumbent than an insurgent these days. “More than six years ago, I first spoke about Google being an AI-first company.”

“Since then, we have been a leader in developing AI. In fact, our Transformer research project and our field-defining paper in 2017, as well as our path-breaking work in diffusion models are now the basis of many of the generative AI applications you're starting to see today. Translating these kinds of technical leaps into products that help billions of people is what our company has always strived on. Everyone working on the various projects underway is excited.”

On advertising and AI specifically, the Google chief noted that AI is powering what he described as dramatic campaign improvements and value-adding features for them.

Phillip Schindler, senior vice president and chief business officer for Alphabet, filled in some of the blanks.

“Already, breakthroughs in everything from natural language understanding to generative AI are fuelling our ability to deliver results that drive meaningful performance for advertisers and are useful to users. Take smart bidding, which uses AI to predict future ad conversions and their value, helping businesses stay agile and responsive to rapid shifts in demand.”

He said that in 2022, AI advances boosted bidding performance, which in turn helped to move advertiser outcomes down the funnel to drive better ROI and budget efficiently. 

“In search query matching, large language models like MUM matched advertiser offers to user queries. This understanding of human intent of language, combined with advances in bidding prediction, are why business can see an average of 35 per cent more conversions when they upgrade exact match keywords to broad match in campaigns that use a target CPA. Google AI also underlies our creative products like tech suggestions in Google ads and creative optimisation and responsive search ads.”

Amazon: network effects

Most of Amazon's ad revenue does not come from Amazon.com but rather from its ad network. However, the data it collects about buyers on its own site fuels the success of the campaigns that run off network – Amazon.com feeds the bigger beast. Whereas Google search surmises that you are interested in a purchase, Amazon knows you have already blown the dust off your credit card – and pretty much everything you've already bought.

Hence Amazon's advertising business delivered a strong performance with a 19 per cent increase in Q4 revenues. It outperformed both Alphabet and Meta, albeit from a much smaller base. It also beat market expectations, and the total Amazon business overall.

The company is currently capturing a touch above seven per cent of the overall online ad market, and at $11.6bn for the three month period, the advertising business remains just a small part of a leviathan pulling total net sales of $149bn for the quarter, and which still generates the bulk of its money from ecommerce and IT infrastructure (AWS).

Amazon didn’t entirely escape the impact of a slowdown in digital advertising. Its cloud business suffered a revenue reversal because advertising companies bought less of its services last year.

On the flip side, next year those customer will have new services to buy.

Amazon has launched AWS Clean Rooms, which it says helps companies across industries easily and securely analyse and collaborate on combined datasets without sharing or revealing underlying data. The firm claimed said its clean rooms provide built-in data access controls to protect sensitive data, while allowing customers to create secure places to generate unique insights about advertising campaigns. Google has already jumped into this space, alongside a swathe of specialist players.

Should Google actually cull third party cookies next year, it's a market that could soon become a little more heated.