Apple’s Privacy Change Will Hit Facebook’s Core Ad Business. Here’s How.

New feature on iPhones will limit Facebook’s ability to collect data from apps and prove that ads work

Facebook Inc. FB -0.99% will suffer damage to its core business when Apple Inc. AAPL -0.69% implements new privacy changes, advertising industry experts say, as it becomes harder for the social-media company to gather user data and prove that ads on its platform work.

Facebook warned this week that Apple’s new feature, which is expected to roll out this quarter, will pose risks for its business, but the company hasn’t detailed how it is exposed. Facebook in August pointed to a small corner of its business that facilitates ad placements on third-party sites and apps. It has also played up how the change would hit small developers.

The core of Facebook’s business, its flagship app and Instagram, would be under pressure, too. The Apple change will require mobile apps to seek users’ permission before tracking their activity, restricting the flow of data Facebook gets from apps to help build profiles of its users. Those profiles allow Facebook’s advertisers to target their ads efficiently.

The change will also make it harder for advertisers to measure the return they get for the ads they run on Facebook—how many people see those ads on mobile phones and take actions such as installing an app, for example.

“The market dynamics here are going to shift heavily,” said Simon Poulton, vice president of digital intelligence at WPromote, a digital-marketing agency. “If you are marketing on Facebook and the results are going down because the efficiency is going down, you are going to turn that down.”

The chief executives of Facebook and Apple traded public barbs this week over the change. Facebook has aggressively pushed back against Apple’s plan. On an earnings call Wednesday, Facebook Chief Executive Mark Zuckerberg said, “Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work.”

Apple has defended its policy, saying it is giving priority to user privacy. An Apple spokesman declined to comment further. Without naming Facebook directly, Apple CEO Tim Cook condemned “conspiracy theories juiced by algorithms” and tied recent social unrest to an argument that app-tracking tools are turning consumers into advertising products.

The extent of the potential financial impact on Facebook, which generated $86 billion in revenue last year, isn’t clear. The company said it expects revenue to be stable in the next two quarters. In the past year, Facebook’s business has thrived despite the coronavirus pandemic and a boycott by several advertisers over hate speech on its platform.

Eric Seufert, an analyst and marketing strategy consultant who has studied Facebook’s business, said he expects the company to take a 7% revenue hit in the second quarter as marketers spend less and ad prices decline as a result of Apple’s change.

The fight is happening as Facebook and other tech giants are under antitrust scrutiny over their dominance. Companies looking to forestall action by regulators in such situations often argue they face substantial competitive threats in the marketplace.

“As we have said repeatedly, we believe Apple is behaving anticompetitively by using their control of the App Store to benefit their bottom line at the expense of app developers and small businesses,” said a Facebook spokesman.

Part of the power of Facebook’s business is how it gathers data from mobile apps—what people do on the apps, what they search for, what they buy and more. More than 85,000 iOS apps had installed Facebook code that relays data back to the company as of December, according to analytics firm MightySignal.

The data is often coupled with a unique Apple identifier for the app user—a string of numbers and letters that helps Facebook identify individuals, allowing it to add that data to their profiles, or “identity graph.” App data makes up about 15% of user profiles, WPromote’s Mr. Poulton estimates.

Apple’s planned privacy change will mean that apps can’t pass along that identifier without users’ permission, thereby limiting what Facebook can glean.

Ad buyers say Facebook’s insight into app usage is part of its value proposition. That data lets Facebook better optimize ads to the people most likely to become lucrative customers, saving advertisers money in the long run. For instance, a mobile game dependent on in-app purchases can target ads at users with a history of heavy in-game spending.

Many apps are dependent on highly targeted ads to drive downloads. Dating app Bumble Inc. cited the coming Apple change as a risk factor in its filings for an initial public offering and predicted that 20% or fewer of its users would opt to be tracked.

Apple’s restrictions will also strike at Facebook’s ability to show how well its advertising works. Facebook gives advertisers metrics such as how many people who viewed an ad in the past week went on to buy the advertised product. The company relies on Apple’s identifier to get this information on iOS mobile devices—which account for a significant portion of Facebook activity: Among U.S. smartphone users, 45.3% used iPhones in 2020, according to Statista.

Madan Bharadwaj, chief technology officer and co-founder of Measured, a marketing measurement company, estimates that Facebook will only be able to claim credit for about 50% of the sales it currently does, as a result of the change.

“It’s going to have a huge impact on the total amount of revenue, or conversions, that Facebook can attribute to itself, which is basically the signal that all advertisers use for making investment decisions,” he said. “It’s going to drop their performance metrics hugely.”

In August, when Facebook first warned of the coming Apple change, it pointed to Facebook Audience Network, a small part of its business that facilitates ad placements on websites and apps.

Apple’s move is part of a broader tightening of privacy rules in the digital advertising ecosystem, from government regulations in Europe and California to Google’s announced plans to get rid of third-party “cookies,” bits of code used to track users on desktop browsers.

In the fall, Facebook warned its partners that “upcoming digital privacy initiatives affecting multiple browsers will limit businesses’ ability to measure people’s interactions across domains and devices,” according to correspondence viewed by The Wall Street Journal.

The silver lining for Facebook, Mr. Poulton said, is that its competitors will also be hurt by the Apple change, particularly those in the business of serving automated, or “programmatic,” ads in real-time across the web. Marketers who want to shift spending away from Facebook may scan the landscape of options and say, “‘Facebook—it’s not as good as it once was, but it’s better than this,’” Mr. Poulton said.

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