It's no more business as usual

The advertising-driven revenue model may finally be seeing cracks due to two technological developments over the last 12 months

Given the constant upgrade to technologies, business models in the Web economy have seen remarkable stability.  Google’s search engine grabs almost all search traffic, and monetises it via advertising. Meanwhile, Facebook corners social media engagement and monetises that via advertising.

This has survived tectonic shifts in technology as Web 2.0 got going, and as internet access went mobile. Indeed, advertising has flourished in the smartphone era, adding apps that sucked more data, and exploited additional locational data, available with always-on broadband.

That advertising-driven revenue model may finally be seeing cracks due to two technological developments over the last 12 months. One is the arrival of ChatGPT and similar Artificial Intelligence-driven algorithms good at natural language processing (NLP). The other is Apple’s implementation of its App Tracking Transparency (ATT) tool.

ChatGPT from OpenAI (now a Microsoft partner), and Google’s variation on NLP, Bard, promises to transform the ways in which people search, apart from providing other functions. Meanwhile, ATT makes it more difficult to deliver targeted advertising, and thus cuts ad-efficacy on iOS.

Both technologies (if we consider natural language processing AI as one technology and ATT plus similar tools as another) have powerful behavioural traction.  Most people prefer NLP’s essay-style results to plain vanilla links, and they’ve also started using ChatGPT to write poetry and fiction, including erotic fiction. There are several Reddit threads on how to get around the AI’s restrictions on generating porn and erotica-related content. The followups to “50 Shades” or “Fantastic Beasts” may well be written by ChatGPT.

Both Google and Facebook have had disappointing results after the implementation of these new technologies. The drops in revenues can be directly attributed to one or the other development. Facebook, in fact, has said as much, pointing at ATT as a revenue-downer.

Google parent Alphabet saw a steep drop in profits after tax to $59.9 billion for 2022 versus $76 billion in 2021, and a $2 billion year-on-year(YoY) drop in advertising revenues in the fourth quarter. Meta, which owns Facebook, saw revenue drop 1 per cent YoY for 2022 and average ad prices decline 16 per cent YoY. Meta’s profit after tax dipped to $23.2 billion in 2022, versus $39.4 billion in 2021.

Former Meta chief operating officer Sheryl Sandberg said, “The impact of Apple’s iOS14 changes have created headwinds for others in the industry as well. … As a result, we’ve encountered two challenges. One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes for our advertisers. And the other is that measuring those outcomes became more difficult.”

ATT is designed to force apps on iOS to disclose when they are tracking users, and those trackers can be blocked painlessly. Most people tend to refuse permission to be tracked across apps. This is understandable in behavioural terms – people find being tracked creepy, if they know about it. 

This is also a good reason at the moment for surfers who are concerned about privacy to consider switching to iOS. Google has, therefore, started looking at implementing something similar on the Android platform. Once that is rolled out, given the combined market share of iOS (27.6 per cent) and Android (71.7 per cent), over 98 per cent of mobile broadband users will be on some version of ATT. Of course, developers are trying to find ways to bypass ATT by a variety of means, including server-side methods. But this is much harder.

ChatGPT has picked up over 100 million active users by January 2022, just two months after launch, which is by far, the fastest engagement rate in history. TikTok took nine months to reach that level, while Facebook took 55 months. The embedding of ChatGPT in Bing, by Microsoft, may look like overkill, but it will surely drive engagement some more. Google’s Bard will compete, but the Alphabet share price actually fell after the announcement of Bard’s launch. Other NLPs could soon be in action as well.

Alphabet and Meta remain vastly profitable, but if the ad-revenue model cannot pivot quickly to handle the new technologies, the pecking order might finally change.