Inside Facebook’s $10 Billion Breakup With Advertisers

When
Apple Inc.
introduced a privacy feature for mobile devices last year that restricts user tracking, she said, her costs to acquire such customers rose 10-fold. In October, she shifted her whole ad budget to search ads on
Alphabet Inc.’s
Google.

Lots of other companies that depend on e-commerce sales, including makers of nutritional powders, eyebrow stencils and toilet sprays, are taking a look at their bottom lines and deciding the same thing. They are slashing their spending on Facebook and Instagram and sending their ad money to Google,
Amazon.com Inc.,
Snap Inc.
and other platforms, according to ad buyers and e-commerce companies.

The privacy change is hitting the heart of Meta’s business: its ability to target ads at users with precision and prove to marketers that the ads generate sales. Earlier this month, Meta said it expects a roughly $10 billion hit to sales this year as the result of the Apple change, which requires apps to ask users for permission to track their activity and share it.

“It kind of feels like the end of an era with Facebook’s targeting ability,” said Ms. Krueger.

Google this week unveiled its own proposal to curtail tracking of users across apps on Android devices, potentially exacerbating Meta’s challenges.

“Facebook has known for some time that they operated at the whim of the platforms on which consumers access their app,” said

Ari Paparo,
an advertising-technology executive who sold his company to
Comcast Corp.
“And now those platforms are changing the rules, and there’s little they can do about it.”

Meta has said that macroeconomic forces including inflation and supply-chain disruption also are putting pressure on ad spending. But the privacy push appears to be the biggest threat to the social-media giant’s once ironclad grip on ad spending by small online businesses and e-commerce companies.

Investor fears about the fallout from Apple’s change are one of the reasons that Meta’s market value has dropped by more than $300 billion since the recent earnings report.

Facebook has been trying to blunt the effects of the Apple changes, and some analysts are optimistic that Meta will contain the damage and that its business could begin to rebound in the second half of 2022.

Meta said in a written statement that it has more than 10 million advertisers. “Apple’s harmful policy is making it harder and more expensive for businesses of all sizes to reach their customers,” it said. “We believe Facebook and Instagram remain the best platforms for businesses to grow and connect with people, and we’ll always keep working to improve performance and measurement.”

Meta has been working to show advertisers that ads on Facebook and Instagram are driving more sales than its analytics show. And the company is developing new technology it hopes will give marketers nearly as much information about ad performance as they had before Apple’s changes.

Meta also has appealed to users to opt into device tracking. But data from app analytics provider Flurry shows that only 18% of U.S. users are choosing to do so across all apps. Meta has rolled out more e-commerce features within Facebook and Instagram so that more transactions happen within its own ecosystem.

Apple’s change could be the most disruptive innovation Meta ever faces, said analyst

Daniel Newman
of Futurum Research, which focuses on digital technology. “Facebook has built its empire on the ability to acquire intimate details about user behavior across the internet,” he said. “Apple has changed the game.”

Meta’s big investment in the metaverse is an attempt to create a future in which it is not beholden to other device-makers, some ad industry executives said.

Meta has been critical of Apple’s move, saying it would hurt not only its revenue, but also small-business advertisers and app makers, and that Apple has created a false trade-off between personalized services and privacy.

Inside Meta, some employees saw Apple’s change, and Google’s move in the same direction, as efforts to damage Meta’s business, according to a former employee of Meta’s ad-product division familiar with internal discussions.

On Meta’s Feb. 2 earnings call, Chief Financial Officer

David Wehner
criticized Apple and Google for contributing to its ad business’s struggles and suggested that Apple’s changes had benefited Google. He noted that Google pays billions of dollars to Apple annually to be the default search engine on iPhones. Meta has struck a more positive tone about Google’s proposal to limit tracking, which isn’t expected to go into effect for at least two years.

Brows by Bossy, an eyebrow stencil maker, used to spend up to $7,000 a day on Facebook ads. As Apple’s changes rolled out, ad prices “started increasing, tracking was clearly not accurate any longer and the performance decreased,” said

Amanda Siebert,
co-founder of the e-commerce company. She said the company slashed its Facebook spending by about 80% and shifted money elsewhere, including to Amazon search ads.

Ath Sport, a company that makes and sells nutritional supplements for athletes, used to acquire a new customer for every $40 it spent on Facebook and Instagram ads. In summer 2021, that cost doubled, said Ath Sport owner

Stuart Kam.
Ath Sport cut its spending on Facebook ads and started spending 60% of its total marketing budget on Google search ads, which were more effective, he said. As companies like his spend more on Google, he said, the prices to advertise there are rising.

Advertising industry executives said marketers began to think more about moving money away from Facebook back in the summer of 2020, before Apple’s change. In the aftermath of the George Floyd murder, some brands temporarily boycotted Facebook over concerns about hate speech and faulty information on the platform. The ad executives said that was an inflection point for many companies who felt they had become too reliant on Facebook.

“It was a learning for everyone to understand that things could change. You have to have a backup plan and you have to diversify,” said

Kate Black,
vice president of social strategy at Horizon Next, an ad firm that works with e-commerce companies.

The Apple change was a tipping point. Ms. Black said the majority of her firm’s clients have begun to shift 10% to 15% of their Facebook spending to other platforms such as TikTok.

Clients are saying “let’s test and learn and see what we can do on other social platforms,” she said. “In terms of reach and scale, Meta is still the biggest player in the space and will definitely continue to be for many years to come, but others are definitely growing.”

Toilet-spray maker -Pourri, which has relied heavily on Meta during the pandemic to generate e-commerce sales, said during the second half of 2021 that its return on its ad spending on Facebook began to decline as ad prices increased.

While Facebook and Instagram still account for the majority of -Pourri’s ad spending, the Apple changes have caused the company to start “looking into new advertising channels,” said

Suzy Batiz,
-Pourri’s founder and chief executive. The company said it is seeking to shift about 30% of its ad dollars from Meta to diversify its spending. It already has begun to move some of its Facebook spending to TikTok, Amazon search ads and digital ad offerings from retailers such as
Walmart Inc.
-Pourri spends roughly $10 million a year on digital advertising.

Facebook’s disclosure after its recent quarter that its number of users had declined for the first time is worrisome for advertisers, said

Diana DiGuido,
chief client officer of Tinuiti, a digital-marketing agency that works with consumer-products and e-commerce companies.

Ms. DiGuido said some of her clients want to test TikTok and Snap more robustly to see whether they can reduce their spending on Facebook without hurting their businesses.

The data squeeze from Apple’s privacy measure has affected all digital ad players to some degree, but other companies have been more insulated from the impact than Facebook. Snap has relied on less data from across the web to target ads, and therefore it doesn’t have as much work to do to compensate for the lost data, said

Nii Ahene,
Tinuiti’s chief strategy officer.

Snap posted a net profit of $22.6 million in the most recent quarter, after sales rose 42% from the year-ago period. Snap said earlier this month that its ad business has begun to recover from the Apple changes faster than it anticipated.

Google serves up search ads to a user based on the keywords they enter. That differs from Facebook’s effort to match ads to users based on its data and the targeting choices made by advertisers. Meta’s chief financial officer said on the recent earnings call that he believed Google was somewhat shielded from the Apple change because it does a lot of business based on searches in desktop browsers, which weren’t affected.

That difference helped Google attract ad spending from e-commerce businesses, said digital-ad consultant

Eric Seufert.
Google’s search-ad revenue increased 36% in the fourth quarter from the year-earlier period, to $43.3 billion.

Rivals have been working to snatch ad dollars away from Facebook, ad buyers said. Snap,
Pinterest
and TikTok increased incentives they offer to companies that make a significant commitment, such as free credits to use toward future ad buys. TikTok and Snap have tried to help brands repurpose Facebook ads so they work better on their platforms, the ad buyers said.

TikTok has benefited from having lower ad pricing than Facebook, though the increased interest in the platform among advertisers might change that, said Mr. Ahene of Tinuiti.

Just as Apple’s changes made it harder to measure the effectiveness of Facebook ads on iPhones, Google’s proposal could do the same when it comes to Facebook ads delivered to Android users.

Google said it would give the industry substantial notice before ending its current system. The long timeline will give the ad industry time to prepare.

Meta is navigating an unprecedented challenge to its advertising business, but not an unsolvable one, said

Emad Hasan,
former head of business marketing operations and analytics at Facebook and CEO of Retina AI, which helps brands target customers on social media. He said Meta can build new ad tools to find new ways to show marketers that their ads are performing well. “Facebook knows that its way of measurement will have to change,” he said.

Women’s handbag brand Hammitt worked with Measured Inc., a company that uses statistical modeling to estimate how well Facebook ads are performing. The official rates reported by Facebook are abysmal, said Hammitt founder

Tony Drockton,
but Measured’s reports showed Hammitt’s Facebook ads are nearly as effective as they were before the privacy changes took effect.

As a result, Hammitt reduced its Facebook ad spending only slightly, from 50% of its total ad budget to 43%. Hammitt’s total dollars spent on Facebook actually increased because the company boosted its overall ad budget.

Facebook has said it has been undercounting how effectively its ads have worked for advertisers, and that it has recently made progress in solving the problem.

Facebook’s longer-term challenge is to shore up its ability to efficiently target ads at users. Rebuilding targeting systems with less data “will be a several year process,” said analyst

Michael Nathanson.
“Nevertheless, we are encouraged by the strides Facebook is making on measurement, and believe this will feed into their targeting efforts longer-term.”

Write to Suzanne Vranica at suzanne.vranica@wsj.com, Patience Haggin at patience.haggin@wsj.com and Salvador Rodriguez at salvador.rodriguez@wsj.com