Tag Archive: recession

  1. Is Big Tech in big trouble?

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    The news has been full in recent weeks of stories about layoffs from the Big Tech firms. It started with Twitter: when Elon Musk took over and seemingly unleashed chaos, half of the social network’s workforce – 3,700 people – was told that they no longer had a job. Just a few days later, Meta announced that it would be letting 11,000 employees go, equating to an eighth of its workforce. Amazon is said to be planning to lay off around 10,000 people, largely in corporate and technology jobs, while Google is also rumored to have plans to reduce its workforce by around 6% (10,000 people) in early 2023.

    Do these redundancies tell a story of trouble brewing amongst the Big Tech companies, or are they simply a sign of challenging economic times?

    What’s behind the Big Tech layoffs?

    For years, Big Tech has benefitted from low interest rates, easy access to cheap money and an environment that encouraged expansion financed by debt. These conditions were exacerbated during the pandemic, when tech companies were some of the only businesses to grow thanks to home-bound captive audiences. The combined revenue of the five largest tech companies – Alphabet, Amazon, Apple, Meta and Microsoft – rocketed to 19% in 2020 and 28% in 2021. The feeling of invincibility that these conditions fueled led to huge expansion: Twitter’s headcount doubled in five years, while Meta’s tripled.

    However, many of the Big Tech firms made a fatal error: they assumed that the changes in behavior that drove their growth during the pandemic would continue in the post-pandemic world. That has not come to pass. Consumers have by and large returned to their pre-pandemic lifestyles, and Big Tech growth has followed suit – growth for the big five is expected to decrease to 9% in 2022, the same as it was in 2019, the year before the pandemic.

    But the tech hiring spree continued well into this year, for roles including working on new projects that wouldn’t necessarily come into profitability for many years (hello metaverse). There was also a desire to scoop up scarce engineering talent. Now that the proverbial has hit the fan in the wider economy, investors are demanding that efficiencies are made. The obvious first place to look has been the bulging workforces – and it’s likely that the leaders knew that some severe cuts would eventually need to be made, even as they were hiring left, right and center.

    What’s the situation with Big Tech and advertising?

    Advertising has of course been the rocket fuel that has launched many of the tech companies into the stratosphere. But that business model has become somewhat wobbly of late, with increased scrutiny on privacy laws and increasing competition from the likes of TikTok. Meta has been particularly affected by these two factors: in its Q3 earnings report at the end of October, it reported $27.2bn in ad revenue – a 4% drop year on year. The company is projecting another drop in revenue in Q4. Meta was hit to the tune of $10 billion when Apple announced it was allowing users to opt out of in-app tracking, and the effects of this move are undoubtedly still being felt. The impact of the recession and global tightening of belts will also be a factor – as is the growth of TikTok. Despite these issues with its core revenue-driver, Mark Zuckerberg still seems to be investing much of the company’s time and effort into the metaverse.

    Amazon, on the other hand, is enjoying increasing ad revenue. In its Q3 earnings report, the company disclosed that its ads business generated $9.5 billion in revenue, a 25% increase year on year and a clear demonstration of its increasing prominence in the sector. Amazon has been steadily investing in its tech offerings and attracting advertisers with targeting based on purchase history and other demographics which potentially leads directly to sales – and that’s especially appealing to advertisers looking to covert customers during a downturn.

    Ever-increasing scrutiny

    It’s not just economic trouble that the Big Tech firms are facing. Across the world, regulatory bodies in the US, Europe and globally are scrutinising the activities of the likes of Meta, Alphabet, Amazon, Apple and Microsoft, particularly when it comes to competition. Meta was recently fined €265 million by the Irish watchdog over privacy concerns, and the US, the UK and the EU have all recently launched reviews into Microsoft’s acquisition of Activision Blizzard. The deal, which would be the largest consumer tech deal since AOL bought Time Warner, needs the approval of 16 governments in order to go through, but currently has the go-ahead from just three – Brazil, Saudi Arabia and Serbia. Whether Microsoft succeeds or not will give a clear message about Big Tech’s ability to continue its meteoric growth in the face of fears that they wield too much power. Microsoft has for the past decade been seen as the ‘nice guy’ of Big Tech – if they can’t get the deal through, it seems unlikely that others would be able to.

    What does the future hold for Big Tech?

    Let’s start off by clarifying that despite the trouble we are seeing, Big Tech is going nowhere. These are still the most powerful companies in the world, and the death of the cookie will only reinforce that power – Meta and Alphabet in particular will become more powerful as the owners of increasingly valuable walled gardens with higher walls. But they may find that the next few years look different to the last decade or so.

    It’s likely that, given the fact that so many companies are laying off employees right now, that money will not be as free-flowing as it has been. With investors breathing down the necks of CEOs, cuts will need to be made – and the most obvious place to start (after workforce cuts) will be with long-term ‘blue sky’ projects. Pulling the plug on these will open the door to competitors, making Big Tech more vulnerable to future competition.

    Another effect of less investment in long-term projects focused on innovation will be a less entrepreneurial workforce: employees who aren’t profitable right now are likely to be let go, possibly to be snapped up by competitors and start-ups. Recruitment will also be more difficult as other industries become more ‘techy’ and require skilled workers – but are less bogged down by the controversies and scrutiny that mire Big Tech.

    Perhaps the most interesting consequence of the changes that are afoot will be the impact on Big Tech’s leadership, some of whom are among the richest and most famous CEOs in the world. Many of them act more akin to start-up CEOs who ‘move fast and break things’, as Zuckerberg famously said. They thrive on innovation and may find that they are not suited to leading in more constrained, sober times.

    A new era in online advertising

    Change is inevitably coming down the line for the tech industry, and by extension the advertising industry. And while any change to the status quo can seem alarming, in this case it could help usher in a better, more grown-up era in online advertising. Constant innovation in the online space has created huge opportunities to reach audiences in new and exciting ways, but it has also created huge complexity and risk to brand safety. Perhaps as these companies move from adolescence into adulthood, they will create a more measured, more easily navigable online advertising space. And that can only be a good thing.

    Image: Shutterstock/LookerStudio

  2. Advertising in a recession: what’s the best approach?

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    With economic downturns becoming a reality across much of the world, we explore what advertising in a recession in 2022 looks like for brands.

    In early June, the World Bank slashed global growth forecasts to 2.9% for 2022, warning that much of the world could suffer a period of stagflation (persistent high inflation combined with stagnant demand and high unemployment) reminiscent of the 1970s. The energy crisis and the war in Ukraine have combined with prevailing negative economic conditions to create an economic downturn, and many economists are now saying that a global recession is all but inevitable.

    In the US, GDP fell in Q1, stocks have tumbled into a bear market and consumer sentiment has dropped off a cliff. Meanwhile, inflation and interest rates continue to rise. Consumer confidence in the US, the UK and in many countries across the world has plummeted; in the UK, it hit a historic low of -40% in May.

    This economic crisis will be challenging for all industries. This is particularly true for the advertising industry which is so closely linked to consumer behavior and concerns. Furthermore, it is still recovering from the turmoil of the pandemic. So what does advertising in a recession look like?

    The ad industry as bellwether

    In decades past, a decline in local advertising was often one of the first signals of a looming economic downturn. Local businesses are often first to feel a decline in revenue and therefore first to cancel their ad campaigns. Now, however, it’s digital advertising that is seen as a bellwether for the economic climate, and never more so than after Snap’s CEO Evan Spiegel admitted that his company’s previous outlook of 20-25% economic growth in Q2 was no longer realistic. He blamed a number of economic factors, such as supply chain issues, inflation and interest rates. An analyst wrote that Spiegel’s announcement ‘suggests that in just a month, the environment has aggressively deteriorated further… Digital advertising is cyclical, like all advertising, and macro headwinds are very likely getting much harder’.

    Responding to the downturn

    Given its proximity to consumers and the brands that serve them, the advertising industry needs to respond rapidly to the downturn, both in terms of what it communicates to consumers, and how it does that. Speaking at Cannes Lions last month, WPP CEO Mark Read said he was confident that advertisers would continue to invest in marketing during the recession and that there wouldn’t be a repeat of the short, sharp shock of 2020. Indeed, he said that many brands learned during the dark days of the pandemic that the best strategy to thrive during a downturn and beyond is to invest in marketing wherever possible.

    P&G’s Chief Brand Officer Marc Pritchard agreed, urging his fellow marketers to keep spending through the hard times in order to reap the benefits when the recovery starts. Many advertisers may be tempted to focus on short-term, sales-focused activity. However, there is a consensus across the industry that they should seek to maintain a balance between short-term activity and longer-term brand-building strategies. Advertising in a recession is the best way of surviving that recession.

    Making the most of difficult times

    When times are tough, the prospect of decreased sales and shrinking revenues hangs over CMOs and CFOs. It becomes tempting to cut advertising investment and/or focus solely on ROI solutions further down the funnel. However, there is a strong case to resist this impulse. Although brands who focus on longer-term branding activity during a downturn may see their short-term sales and revenue affected, there is ample evidence that they will reap the benefits longer term, enjoying stronger growth during the recovery and beyond. In fact, a downturn can be a good time to acquire extra share of voice. With competitors scaling back, media prices will drop, so an effective brand-building campaign could be executed more cheaply than normal. It’s a bold move, but one that is likely to pay off.

    It goes without saying that it pays to be smart about media usage during times of economic uncertainty. Focusing on channels that allow for precision targeting, low wastage and high measurability is a good place to start. It will also be wise to hold back a proportion of your budget for last-minute buys. Media vendors will be eager to sell their inventory, often at lower prices than earlier on in the buying calendar. Another good place to look will be in newer channels such as CTV and digital audio. These channels have good reach but are still in an experimental phase. Vendors are likely to be more open to negotiation.

    Whichever strategies an advertiser chooses, there is one that they should avoid at all costs: going dark. Research after previous recessions has shown that brands that cut their ad spend altogether suffer more long term. They are more likely to lose share of market and take longer to recover from the downturn – around five years. They are also more likely to suffer a significant loss of profit when the market returns to normality.

    Experienced, impartial advice

    Advertising in a recession is an intimidating prospect. Many CMOs will be facing pressure from their CFOs to find savings and cut back where possible. But experts from across the industry, as well as research following previous recessions, all point to one approach: maintain spend where possible and increase it where you can. This will help brands to maintain their share of market and return to growth more quickly when the economy stabilizes.

    Ensuring that advertising investments work as hard as possible to drive higher media value is even more important during a downturn. An impartial, independent media consultant can offer forensic analysis of your media activity and give advice informed by your data and their expertise, so that you can optimize your future activity and maintain media-led growth.

     

    Image: Katjen on Shutterstock

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