Good morning,

I wish all of you an excellent Monday!

On to the update:

Apple and Facebook’s Pre-ATT Negotiations

From the Wall Street Journal:

An ongoing dispute over privacy between Apple Inc. and Facebook is roiling the digital economy, leading companies to shift billions in ad spending as users continue to limit the data available to advertisers. The feud took off last year, when Apple rolled out iOS 14.5, a version of its mobile operating system that made it easier than ever for iPhone and iPad users to opt out of letting apps like Facebook track their activity on their devices.

The two companies weren’t always at odds. In fact, they were almost business partners. In the years before the change, Apple suggested a series of possible arrangements that would earn the iPhone maker a slice of Facebook’s revenue, according to people who either participated in the meetings or were briefed about them. As one person recalled: Apple officials said they wanted to “build businesses together.”

One idea that was discussed: creating a subscription-based version of Facebook that would be free of ads, according to people familiar with the discussions. Because Apple collects a cut of subscription revenue for apps in its App Store, that product could have generated significant revenue for the Cupertino, Calif., giant. The companies also haggled over whether Apple was entitled to a piece of Facebook’s sales from so-called boosted posts, said people familiar with the matter. A boost allows a user to pay to increase the number of people that see a post on Facebook or Instagram. Facebook, which considers boosts ads, has always contended that boosts are a form of advertising, in part because they are often used by small businesses to reach a bigger audience, said one of the people. Apple, which doesn’t take a cut of advertising from developers, argued that Facebook boosts should be considered in-app purchases, according to a person familiar with the matter. Apple’s standard terms would entitle it to take a 30% share of those sales.

Apple and Facebook, which has since changed its name to Meta Platforms Inc., didn’t reach agreements on any of the proposals to work more closely together…The negotiations between the two companies, and Facebook’s internal discussions about privacy, haven’t been previously reported. They provide fresh insight into the origins of the contentious rivalry that is changing the kind of advertising consumers see online and putting billions of dollars in ad spending up for grabs.

This story is a bit of a bombshell, and I feel pretty confident that it is true. In fact, Stratechery hinted at something similar back in 2020; from a Daily Update about Apple’s public dispute with Hey developer Basecamp:

What I suspect explains all of these curious statements is the penultimate paragraph of Apple’s response to Hey:

Thank you for being an iOS app developer. We understand that Basecamp has developed a number of apps and many subsequent versions for the App Store for many years, and that the App Store has distributed millions of these apps to iOS users. These apps do not offer in-app purchase — and, consequently, have not contributed any revenue to the App Store over the last eight years. We are happy to continue to support you in your app business and offer you the solutions to provide your services for free — so long as you follow and respect the same App Store Review Guidelines and terms that all developers must follow.

I have been recounting the stories over the last week of developers who have seen Apple over the last six months start blocking software-as-a-service (SaaS) apps that have been in the App Store for years until they added in-app purchase functionality; another story I have heard is that Apple has been communicating that it is time for the company to get what it claims is its fair share for apps that are “free.” That certainly seems to be what Apple is stating in this paragraph, and if so, it suggests that all of those curious statements are window-dressing disguising the crux of the matter: Apple wants more money from developers, has the means to extract it because of App Store review, and is increasingly determined to do just that.

To provide some additional clarity on this, “apps that are ‘free'” referred to advertising-supported apps like Facebook (above-and-beyond SaaS front-ends like Basecamp); that noted, I did not hear this from Facebook, but another large ad-supported app maker. The conversation that was relayed, though, sounded an awful lot like what this Wall Street Journal article describes: Apple expressed frustration that this ad-supported app had made a substantial amount of money over the last decade, and that it would be in the company’s interest to find a way to incorporate in-app purchase going forward. The “or-else” was implied.

This isn’t the only confirmation: Automattic CEO Matt Mullenweg posted on Twitter:

There are, to be clear, two issues described by the Wall Street Journal: first, that Apple was strongly encouraging Facebook to not just find a way to monetize outside of advertising, but also to make sure that way incorporated in-app purchase; secondly, that Apple felt it deserved a share of Facebook promoted posts. This is exactly what Mullenweg describes with regards to Tumblr, and just to be very clear, this has nothing to do with iOS; these are web services offering a standard form of advertising, but Apple wanted a piece just because it could.

Timing and Documentation

The specific timing of all of this is still a little unclear; the Wall Street Journal article says with regards to Facebook:

The discussions between the two companies, mostly between the years 2016 and 2018, represented efforts to find common ground in a period before their positions hardened.

This does cast some doubt on a tidy narrative of Apple making threats to app developers in early 2020 — which was definitely happening — followed by the announcement of App Tracking Transparency (ATT) at that year’s WWDC; that noted, I don’t think it is at all a stretch to tie all of these moving pieces together. What we now know is that:

• Apple had discussions with Facebook between 2016-2018
• Apple had similar discussions with another ad-supported company some time before June 2020
• Apple systematically moved against consumer SaaS apps in 2019 and early 2020, halting updates unless they incorporated in-app purchase
• Apple blocked “Hey” updates in May 2020 due to the lack of in-app purchase
• Apple announced ATT in June 2020

One more relevant date: Apple unveiled its “Services Narrative” in January 2016.

Taken as a whole, it is very hard to come up with any explanation beyond the obvious: Apple embarked on an aggressive campaign to boost its App Store revenue. It started by looking for money from Facebook — the most obvious place to start given Facebook’s symbiotic relationship with the App Store. It extended that campaign to other ad-supported apps, then started cracking down on consumer SaaS companies. Finally, it announced ATT that kneecapped the entire ad-supported app economy.

Oh, and there’s one more piece; from Mark Gurman’s Bloomberg newsletter over the weekend:

The tech giant’s future ambitions are broader. Several months ago, Apple’s advertising teams gained a foothold within the company’s services organization. The ad group’s vice president in charge, Todd Teresi, started to again report directly to services chief Eddy Cue instead of deputy services head Peter Stern. (Teresi reported to Cue in the days of Apple’s in-app iAd network, which shut down in 2016.)…

Inside the ads group, Teresi has talked up expanding the business significantly. It’s generating about $4 billion in revenue annually, and he wants to increase that to the double digits. That means Apple needs to crank up its efforts.

I believe that the iPhone maker will eventually expand search ads to Maps. It also will likely add them to digital storefronts like Apple Books and Apple Podcasts. And TV+ could generate more advertising with multiple tiers (just as Netflix Inc., Walt Disney Co. and Warner Bros. Discovery Inc. are doing with their streaming services). That being said, I don’t anticipate Apple going back into the business of serving up ads inside of third-party apps—at least not soon. Apple tried and failed at that with iAd starting in 2010.

I think that “at least not soon” is carrying a considerable amount of weight; I have a difficult time seeing how Apple more than doubles its ad revenue without building out an ad network for 3rd-party apps — which, as I explained earlier this year, Apple will almost certainly consider first-party for its advertising platform, just as it does for in-app purchase.

To that end, I get that I’ve already covered a lot of this; this Wall Street Journal piece, though, is an important addition to the timeline of what remains to my mind the most breathtaking exercise of market power in the history of technology; obviously my posts haven’t stopped it from happening, but at minimum I think it is worth documenting.

ATT’s Impact

This post by Nick Heer questioning whether or not ATT has really had an impact has been bouncing around the Apple blogosphere; I hate to be blunt, but the evidence presented doesn’t stand up to scrutiny.

Much of Heer’s argument rests on the difference in results between the U.S. and the rest of the world; while he repeats these arguments elsewhere, this is the most substantive articulation of his thesis:

If ATT were so significantly kneecapping revenue, I would think we would see a pronounced skew against North America compared to elsewhere. But that is not the case. Revenue in North America is only slightly off compared to the company total, and it is increasing how much it earns per North American user compared to the rest of the world.

What about Alphabet? It has actually posted year-over-year revenue gains in the United States — one of few countries where iOS is dominant — higher than those in Africa, Asia, or Europe in its first and second quarters this year. In fairness, its gains were much stronger in “Other Americas”, which comprises Mexico, southward, plus Canada.

Meta’s business is the one everyone appears to be watching because two quarters this year have been rough. In its most recent, it reported its first ever year-over-year revenue decline, which dropped by about a billion dollars in Europe and about $600 million in the U.S. and Canada. That is alarming for the company, to be sure, but it still does not track with ATT causality for two reasons:

• iOS is far more popular in the U.S. and Canada than it is in Europe, but Meta incurred a greater revenue decline — in absolute terms and, especially, in percentage terms — in Europe.
• Meta was still posting year-over-year gains in both those regions until this most recent quarter, even though ATT rolled out over a year ago.

Those are all big, well-known companies. What about pure advertising businesses? Surprisingly few are publicly traded. Even so, I pulled the earnings from a few popular programmatic display ad providers. Magnite, for example, calls itself the “world’s largest independent sell-side ad platform”. In its most recent quarter, the proportion of revenue it derived from the U.S. increased year-over-year compared to the rest of the world. The most recent investor report from Criteo, a major provider of retargeted ads, showed an overall decline year-over-year, but the Americas performed far better than African, Asian, or European markets.

What Heer ignores is the strengthening U.S. dollar. Looking at the Euro specifically:

A stronger U.S. dollar means that non-U.S. revenue is lower than it would be on a currency-adjusted basis. For example, here is Meta’s North American and European ad revenue and growth rates over the last year as reported in Meta’s earnings:

This is exactly what Heer describes: Europe is doing worse than the U.S. However, a basic currency adjustment (taking the exchange rate at the end of the relevant quarter and re-converting to US$ using the July 1, 2022 exchange rate) paints a different picture:

This is the opposite of what Heer describes, and is in fact aligned with his core thesis that Meta ought to be showing worse results in North America given iOS’s increased penetration; so they are. Moreover, this is on top of the impact of the Ukraine War, which multiple ad platforms have stated impacted European ad sales more than North American ones.

This isn’t the only issue with the analysis. For example, the treatment of Google stands out in that it doesn’t differentiate between Google Search and YouTube. This is particularly noteworthy because not only would we expect the latter to be more impacted by ATT, we would also expect the former to benefit given it is not impacted by ATT and is likely to absorb money moving away from ATT-impacted platforms; that is exactly what is happening.

Stepping back, I understand and, to a degree, sympathize with the argument that ATT is good policy that was a long-time in coming. Indeed, the charitable interpretation of the previous items in this update is that Apple was cleaning up bad behavior and, if they build an ad network, are doing so not necessarily to make money but because they recognize there is now a void in the app ecosystem for privacy-centric ads that a lot of developers need to survive (more pragmatically, Apple needs apps to make money so the App Store can make money). By all means make that argument.

What I don’t understand, though, is the attempt to pretend like ATT didn’t have any impact at all. It seems to be a close cousin of the popular “all digital advertising is a scam” argument made by many privacy absolutists. This has always confused me given that the entire reason to be concerned about the privacy angle is because ad targeting works; what seems more likely is that folks want to avoid the fact that Meta gets the headlines but small businesses uniquely enabled by targeted advertising bear the brunt.

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