Did Apple create an unfair advantage with iOS 14.5?

John Tyreman:  Hi gang. Welcome to The Digital Marketing Troop, where we go in the trenches to make sense of digital marketing topics and trends. It’s a pleasure to be here with Louis Belpaire, Silverback Strategies’ Chief Operating Officer. We are here to answer the question: did Apple create an unfair advantage with iOS 14.5? But before we do that, I like to start these podcast episodes off with an icebreaker to get things rolling. So, Louis, you’ve been a fan of Apple for some time. When did your brand affinity start? Was there a defining moment?

Louis Belpaire:  I think it was pretty early for me. So in the early 90’s my dad got like a Macintosh Classic 2… I don’t know if you’ve seen what that looks like. But basically, think like a nine inch screen that’s black and white with like an 11 inch deep, sort of like mini fridge type setup. So my dad got one of the oldest Apple computers in the early 90s. And that’s kind of like how I got into computers. I think it was like $1,900 back then for like two megabytes of memory, which is pretty insane. But that’s how I got into Apple computers because they were around the house growing up. The Mac Classic 2 had this game called Frogger where you were like a frog on the highway and you had to like kind of like jump over the traffic. And man, I’ve played like hundreds of hours of that growing up. So it started pretty early for me and then it continued through. Yeah.

John Tyreman:  In elementary school, we had Macintosh computers and I remember playing Frogger as a kid, so that’s pretty cool.

Louis Belpaire:  It’s a great game. 

John Tyreman:  Well, fast forward to today. Apple’s advertising business has more than tripled its market share in the six months after it introduced privacy changes to iPhones that obstructed rivals like Facebook and Google from targeting ads at consumers. Some say they’ve created an unfair advantage. Well, let’s unpack that. How did this happen in the first place?

Louis Belpaire:  So if we’re gonna look at what happened, I think there’s sort of like two different things. But the first one is, like you said, Apple introduced a new privacy policy. So that’s back in April of this year. That’s the ATT that everyone’s talking about. ATT stands for App Tracking Transparency, and it’s just a new privacy policy. Right? So Apple’s saying, if you want to collect this unique identifier that every iPhone has, the IDFA, you have to receive explicit consent from the user. And prior to ATT, the IDFA was widely used for ad personalization on platforms like Facebook, but also for ad targeting, and for measurement. So by introducing this new privacy policy and this new framework, Apple essentially rendered its own ad solution a lot more powerful than the ones of competitors. And that’s the first part to this. But if we’re talking about the increase in market share on the advertising industry from Apple, the other reason that explains that is the fact that they’ve just monetized a lot more of the App Store. So April, they rolled out a new privacy policy. In May they increased motivation on the App Store by adding new ad placement. I don’t know if you’ve seen like the search tab campaigns on your iPhone, but essentially, up until May, if you were like let’s say a company like Uber, you would like search for… if a user is searching for a taxi, you could show an ad there for Uber right? With those search type campaigns, it’s a little more predictive. So when you’re on the search bar before you’ve even typed anything, there’s going to be an ad for Uber there. So Apple’s taking a more like predictive type of approach and just increasing the amount of ads they are showing. So between making their own product, the Apple search ads, like more impactful, easier to track and increasing the spaces where they show apps. That’s what led to them tripling their market share as it’s been reported in the Financial Times essentially.

John Tyreman:  It seems like Apple’s creating their own rules as they’re going along. What do you think their end goal is?

Louis Belpaire:  So the end goal is… that’s a super interesting question because obviously there’s a little bit of this cynical approach which is to say like it’s all revenue motivated, and I’m sure that played a role. But we have to dive into that a little bit more to understand if that’s really the end goal. If we look at the ad revenue from app install ads, and obviously we’re saying that’s going to be about $2 billion for Apple this year, probably $5 billion next year, and up to like 20 in 2025. So four years from now. That’s not negligible. But we’re talking about such a big company that I don’t think that was the first consideration. But we can just look at revenue – we have to look at profit. Apple’s obviously still a hardware company. Right? Half the revenue is coming from iPhones, Macs are like 10 or 11% of revenue. They have great profit margins on the hardware, but it’s still never going to be as profitable as software or things like ad services. So the fact that they’re increasing their ad real estate on a property like the app store that’s virtually cost free, right? You add a few placements, that generates millions of dollars, you can totally do that. It’s easy. This is why Walmart, Amazon, all of these sort of retailers are increasing ad units on their websites. It’s because it’s a very easy way to monetize eyeballs. So revenue, I’d say not super significant – profit, definitely. But there’s a much more interesting end goal. I think Apple is a company that thinks in five to 10 years terms, right? So it’s not just about the revenue. To me, what they’re really trying to do is to sort of reclaim that end part of the discovery, right? The moment where you’re like searching for an app and discovering it. I think they have lost a little bit of that to companies like Facebook, who are doing a lot of ads on their own platform. And they’re also seeing that a company like Facebook, whether it’s Metaverse now, or the Oculus Rift is trying to go vertical and own a little bit more of the full spectrum, if you will. Right? So Apple owns the hardware, the operating system, the whole funnel. Google has the operating system, has tried on the device side but failed. Facebook has tried both on the operating and the device side and it wasn’t a great success at all. So they’re just seeing that these companies are starting to compete with each other a lot more and Apple is trying to sort of reclaim this discovery point. Because strategically, it’s really important to own the data around that moment. At least that’s my take on it.

John Tyreman:  It seems they’ve been successful so far since introducing their app tracking transparency. Who do you think is the biggest loser in terms of market share that Apple has gained from? Who have they taken away from the most?

Louis Belpaire:  You kind of have to look at… we looked at the earnings reports for Snapchat, Facebook and Twitter. And what’s really interesting (and Google as well) is that every app platform, I would say, is in a little bit of a different position. So if we unpack that, I would say, in terms of biggest loser, it’s going to be companies like Snapchat or Pinterest. I would put Google kind of like in the middle of it, and then Twitter is actually pretty unaffected, but that’s because their ad capabilities, especially on the direct response side, are not that strong, so there wasn’t much to lose in the first place. But ultimately, in terms of like, who’s to lose the most, it’s a matter of the makeup of the audience in the first place, the types of ads that are run on the platform, and also if the platform is more of a direct response type platform, more of a branding platform. So if we take the example of Google, they were affected and they mentioned it in their earnings goals, and their reports of like figures that are thrown of like $10 billion, but it’s all guesstimates. I think it’s been pretty mild for Google, because they have all of that first party data of their own right? Like whether it’s Google Maps, YouTube… There’s all these properties… Android and so Google is able to build its own targeting model that is relying on different signals. Whereas Facebook, through their pixel installed on plenty of websites on the web was relying on a lot of like, third party signals that are disappearing because of something like IDFA. So Google is in a slightly better position. Facebook, not so much. And then Snapchat is probably the worst. I say that because their stock I think took a dive of like 25% the other day when their earnings call happened. But in Q2, they were pretty dismissive of the update. So I think they just didn’t realize what was going to happen. And for Snapchat, a big part of their loss is also because they rely on a lot of gaming type ads. And the freemium type of games are just being heard by IDFA as well, because if you’re an app developer that makes these types of freemium games, right, where like 1% of your users eventually purchase something in app, you can’t really tie that back to the ad platform. So you’re not advertising as much. And I think Snapchat because of their demographics, were showing a lot of these types of ads, and so they’re impacting a lot more on the audience side.

John Tyreman:  That is super interesting. And it seems like there’s an arms race among these platforms to see who can build the biggest walled gardens where data can be freely shared. While staying compliant with evolving data privacy regulations. It seems like Google is building their own walled garden between their search platform, display network and YouTube. What’s your outlook on Google and their direction? Can they fend off Apple’s advertising advances?

Louis Belpaire:  I would say mostly so. First of all, because they own the other competing operating system, right?  Android OS. But also because something like ATT is a targeting, and a measurement challenge and I think Google is working and has work on a solution on both ends there. And they’re also not as reliant on that third party data. So the one thing that’s not super clear to me is things like the federated learning of cohorts, right? The FLoC measurement system, how that’s progressing. I think there was a sunsetting date for cookies that was set by Google of like 2022. Now we know it’s not going to happen, it’s going to be 2023. There are rumors in Europe that the FLoC methodology is not compliant with GDPR. Google has said that they might not duplicate the Android User ID, which is like the Android equivalent of the IDFA. So I think it’s still very murky on what solution they’re gonna put in place to replace the current framework, but all we know is that they’re actively working on it. And they probably have some of the best engineers to figure this out. So I’d say yes, like ultimately, thinking long term, they should be able to defend off like Apple’s advertising advances. Yeah.

John Tyreman:  Okay. Well, it’s been well documented that iOS 14.5 has significantly impacted Facebook ad campaigns. So, Louis, can you talk a little bit about the ripple effects on Facebook in particular?

Louis Belpaire:  Yeah, so it’s really interesting, because I think you mentioned John, like the unfair advantage, which is something that’s been talked about quite a bit in our industry and to understand why it’s unfair, we kind of have to dive into the technical side of it. And that’s how you can see why this is impacting Facebook pretty negatively. So if we take an example of… let’s imagine, John, that you’re running ads for an app right? And you’re trying to promote your app. You kind of have two different pathways right now. So let’s say you’re running an app campaign on YouTube. So it’s going to be a placement on YouTube with a link to install the app from the iOS App Store, right? If you’re doing that today, November 8, 2021, you’re going to have to rely on a measurement framework from Apple that’s called the SK Ad Network. That’s like Apple’s API for App Install Attribution. And this framework, to take kind of a gaming analogy, is really Nered, compared to Apple’s own solution, right? So if you’re running that ad on YouTube, and you install the app… sorry, your customers are installing the app, there’s all sorts of privacy related features that make the signals much harder to interpret. So the first one is that there is essentially like a timer on the conversion data. So your customer sees your ad on YouTube, downloads the app 30 minutes later, Apple’s not gonna report on a conversion until up to like 24 hours later. They’re doing this for privacy reasons. That makes sense, but the quality of the signal is just not as good as it used to be. And it’s not as good as if you were running an Apple type of ad – an Apple search ad on the App Store – where you would get the immediate response back to the campaign. So the timer is one of the issues. People are also talking about the ability to attribute that install from your customer to a very specific ad creative unit. So before the ATT framework you could track creative IDs at the creative level. That’s super important on a platform like Facebook, where Facebook is essentially like mix and matching creative all the time, hundreds and 1000s of combinations. And with the ATT framework, Apple is saying you can only do that for up to 100 campaigns. And you can’t do this at the creative level. So a platform like Facebook no longer understands if it’s creative, A, B, C or D that drove the app installs. It can only do this on a campaign versus campaign level which really muddies the water for their own optimization systems. And then sort of the last issue with that SK Ad Network – ad networks outside of Apple have to rely on –  is that it’s routing for privacy reasons again. It’s routing that postback of the install through a VPN. So you’re no longer seeing that like geolocation data with the app install. And that’s something that was really useful for advertisers to control for like fake installs, essentially. So those are generally the complaints about the SKA Ad Network. I think each of the reasons they’ve been implemented make sense. The problem and the reason it’s unfair to someone like Facebook is that, to go back to the example here, if you, John, choose to then run an ad on the Apple search ad network, you’re going to benefit from a ton of first party data that Apple’s acquired. Some of it is coming from its payment systems, right? Like you have to go through the App Store and iTunes to buy apps so they know who you are. They’re using that to inform their own algorithm. There’s also the fact that the prompt, the consent on the Apple search ad side, when you use an app is very sort of user friendly. The language is like we’re doing this to improve your experience versus the ATT prompt is saying this app is trying to track you everywhere across apps. Do you really want to do this? And most people say no. So there’s kind of like two different rules. And Apple is both sort of the judge and the party and in this which is why people are saying it’s unfair and especially to a company like Facebook that needs these signals to optimize the app install campaigns.

John Tyreman:  Okay, I could see how this could frustrate a lot of marketers, it seems like Apple is making up rules as they go. I guess my question is, are they following their own rules?

Louis Belpaire:  Well, that’s a really interesting question. Because in a way, I mean, they will say yes, because, in essence, they are offering a solution that is still privacy conscious. They’re just able to do so because they have so much more data. So the problem is the double standard, right? Like it is a privacy conscious solution, but it just happens to be better if you buy the ad unit from there than elsewhere, and that’s what’s unfair essentially. I can’t find a good analogy in a different market. I don’t know. It’s almost like if you bought a car from manufacturer A you would get the gas for free. No, that’s not a great analogy. I don’t know if you have one that comes to mind, but it’s just using its position… Apple’s using its position to just essentially create a better service than the competition and that just seems unfair.

John Tyreman:  Well, a good example may be SpotHero. They declined to use Apple’s retargeting tool because they worry about being out of compliance with Apple’s own privacy rules. It just… it just doesn’t add up to me. It seems a bit shady.

Louis Belpaire:  Yeah, I’ve heard also about, it’s a great point. There is… people who’ve looked into how the Apple Search Ads methodology works, have found that that system is actually putting a token on your device to be able to attribute your installs. So it’s just… it’s not called the IDFA anymore. It’s a token that only Apple has access to. But how is that very different than the IDFA in the first place? It’s like, they can fingerprint you, the rest of the world can’t. Therefore, that’s privacy safe?

John Tyreman:  It seems like it’s very similar to what Google was trying to do with their Federated Learning of Cohorts or FloC.

Louis Belpaire:  Yes, it’s a similar concept of anonymization to the extent that it’s necessary to protect someone’s privacy. And in exchange, you’re going to get your data. So I think one issue with that is for smaller advertisers, you’re never going to get the threshold of data to get the insight. We were talking about the freemium model a little bit.  A big issue over there is that you know, with games on iPhones, it’s maybe half a percent of users that actually purchases inside the app. And how often does that happen? Right? So if it happens only once or a couple times a day, then you don’t meet the privacy threshold. You don’t see the data in the platform. So it’s also a measure that tends to advantage like larger advertisers, of course.

John Tyreman:  Louis, you mentioned that you were a fan of Apple since you were a boy and your dad got an old Macintosh computer. What’s your take on how Apple’s brand identity has evolved over the years?

Louis Belpaire:  To me there’s a little bit of a double standard now, especially when it comes to something like privacy. You think about the US market or the Apple keynotes and all the narrative is around protecting the end user privacy. I get that. I understand that the public demands it and it’s great that a company like Apple is focusing on it. But if I look on a more global basis or more global scale, I have a couple of issues with this double standard. You think back to May 2021, a piece of investigation from the New York Times saying in China, Apple has its own data centers that are basically… where on the premises you can access both the data and the digital keys to unlock the data. So I mean, there’s this whole thing with Apple until that point where the idea was that like every iPhone’s encrypted, and even if the police asked, unless Apple gave the digital key, there’s no way to decrypt it. Well, by hosting the digital keys in the same place as a data center, you can just kind of get to your own conclusion with what that means, right? That’s one thing. I think the other one is that client side scanning idea that they threw like a few months ago. So just to like, align with you that the concept was, we’re going to scan every iPhone for like, essentially child pornography, and we’re going to hash the data, compare it to some hash data on our servers, and if there’s a match I don’t know exactly what happens but potentially opens the door for the person to be reported. I get it like, on why they want to do this. The issue is that we’re kind of policing the 99.8% of the population to catch the 0.2%. So there’s sort of… it’s the first foray into… we’re moving from you’re innocent until proven guilty to you’re potentially guilty until you’re proven innocent. So of course, like sexual abuse and children is terrible, but like what prevents a government tomorrow from saying, “Hey, Apple, we want our data to be in our data centers at home, just like China”? And Apple’s like, granted that wish, obviously with China. So your country could say that and could also say, “You know, homosexuality is forbidden here. And so we want a similar CSS framework”. But it’s going to be looking for those types of… that type of content, right? It’s just creating a precedent for monitoring that just seems unnecessary. But it’s a very complex issue. I just think for me, that just doesn’t really jive well with the original essence of Apple as a brand. I think back to like, for me, this was more the “Think Different”, the underdog type of company and that’s what I’ve been mostly excited about growing up and I just, I am seeing that it’s changing a little bit. Now just to end on a positive note, what I’m really liking about Apple this year is all the work they’re doing on the chipset side with these M1 processors. So I have the newest Mac Mini and the M1 chip is just absolutely amazing. So on the hardware side, I just love that they’re getting back into hardware. Even with Macs, like Macs are just – we were saying – eight or 10% of their revenue. They didn’t necessarily have to but there’s all of that iPhone innovation and computing is trickling to the max and that’s just awesome because you think back to like 2005 Apple made the move from powerPC to Intel based chips and the fanboys at the time said, well, Apple’s like soul has disappeared because now it’s just running on Intel, just like any PC. And that was kind of true, right? Like the only difference between a Mac and a PC up to the M1 chip of last year was really just the operating system but it was using the same components inside so I think that’s like just Apple going back to its roots from a hardware standpoint, which is really interesting. Yeah.

John Tyreman:  Yeah, it does seem like Apple’s brand has evolved beyond the underdog story and, well, personally, it’s becoming hard for me to get behind the brand today. It seems like in the broader market, there could be questions of competition. And I follow Tom Wheeler, former chairman of the Federal Communications Commission in the United States, and he contends that since we’ve transitioned from an industrial era economy to a digital first economy, that these regulatory bodies need to evolve as well. He says that Congress should establish an independent federal agency responsible for protecting consumers while being an effective competition in the 21st century. What are your thoughts? Should we break up this oligopoly even more?

Louis Belpaire:  To answer this question, I think it’s so hard because the notion of breaking up, to me, that makes me think of, you know, the antitrust laws of the 19th century. And I’m like, what does it mean to break up something like Google, right? You’re gonna spin off YouTube from Google Maps? Like that’s not even really possible or if it were, I just don’t know what that would do, the type of damage that would do to the company and ultimately is that in the US’ best interest? I think that the issue at heart and I’m like, it’s certainly not a domain and the most qualified to speak about but, if you think of what happened January 6th, and the aftermath, it wasn’t a government response. Right? We had a tech response. So there’s no doubt that tech companies have reached a level of power that’s almost like above the government, and they’re global entities. And so when we talk about regulation or breaking them up, there’s sort of this broader like context that it’s really hard to understand. Too powerful? Maybe, but what does breaking these entities up create, you know, on the global scene? It’s such a hard thing to plan for that when you look back at the antitrust law, I can process that because I think of the railroads and then like, yeah, you can have the Northwest and the Southeast and you break it off in like four different companies. But breaking something like Facebook. What does that really mean? It’s so hard when the product isn’t really a product that’s sold to customers. It’s advertising based. Anyway, it’s a tough question.

John Tyreman:  Yeah, I was thinking of it through mostly a consumer data protection standpoint, I wasn’t thinking of it from the standpoint that tech companies have grown to the point where they can challenge one of the most powerful governments on the planet. It definitely makes you wonder as a marketer and as a citizen of the world, what does the future hold? A thought provoking question. Well, Louis, I know that we’re running up on our time together. If folks want to connect with you and learn more, where can they find you?

Louis Belpaire:  That would be on Twitter. So my handle is @B_Louis or just on LinkedIn as Louis Belpaire.

John Tyreman:  Louis, thank you so much for your time. It’s always a pleasure speaking to you. I feel like I could talk with you for hours about this stuff.

Louis Belpaire:  Thanks, John. Thanks for having me. Always a pleasure.