Marketing Spend Cuts Are Making Tech Investors Jittery

Marketing expenses have always been the most expendable line item on Income Statements, and are usually the first to be sacrificed during a business slowdown.

As businesses prepare for a slowdown, marketing costs are being cut by companies across the board. Several big-tech names derive a significant portion of their revenues through online advertisements, making them dependent on others’ marketing spending.

Unsurprisingly, Alphabet, Meta, Snapchat, Microsoft and several other tech companies have reported revenue shrinkage or sharp declines in ad-revenue growth rates.

Crypto ads, which received criticism for often being misleading, have declined drastically as the sector goes through tough times. The slowdown in crypto ads along with other financial services such as insurance, loan, and mortgages was responsible for Alphabet’s revenue slowdown, according to Alphabet's Philip Schindler.

Google reported an overall ad-revenue growth of 6 per cent, which was among its worst growth performances in the last nine years. Its video arm, Youtube, saw its ad revenue decline by two per cent, compared to the previous year—a bad performance even on a relative basis.

Fast Moving Consumer Goods (FMCG) is another category which saw a decline in ad spending as companies like Reckitt Benckiser saw a decline in sales volumes in the last quarter—indicating that customers are cutting down on the usage of essential items as well.

Microsoft and LinkedIn saw their revenue growth decline to 16 per cent and 17 per cent respectively—which is in contrast to the 40 per cent and 41 per cent growth they’d seen the previous year.

Snapchat, which has been struggling since it got listed, has reported 6 per cent growth while investors expected a growth rate north of 8 per cent. Snapchat is expected to be significantly affected since its ads cost much lower, in terms of average cost per thousand impressions—exposing it to people and businesses with small budgets.

During a downturn, smaller businesses have a harder time when compared with well-established businesses.

Meta, like Youtube, witnessed a decline in revenues from $28.85 billion to $27.4 billion—a four per cent decline over the previous year. However, declining revenues are only of Meta’s investors’ concerns. The company’s profits have nearly halved compared to the previous year.

Reality Labs, Zuckerberg’s new pet project is the main culprit for the decline. Reality Labs, which is working on the metaverse project, reported a $3.672 billion loss, which is being funded by Meta’s cash cow ad business.

Meta, which has managed to gain good traction in reels, is working on developing separate short-form content like TikTok. Instagram reels remain one of Meta’s key growth drivers, which saw more than 140 billion reels played each day, even as Meta struggles with user growth.

The last quarter had seen Instagram Reels cross the $1 billion revenue run-rate, which tripled to a $3 billion run rate in the current quarter. Nevertheless, the Reel format is still inferior to Stories and Feed in terms of monetisation.

With the ad business under pressure and the difficulty in creating and monetising the Metaverse, investors are becoming finicky about Meta’s capital allocation practices.

If Reality Labs’ cash burn continues at a similar run rate, without any significant revenues, investors would have to change their models to accommodate for years of cash burn—resulting in a much lower valuation for Meta.

Both Meta and Snapchat have reiterated their focus on using more developed machine learning and artificial intelligence technologies to help augment user experience. In the longer run, investments in technology would translate into better ad-targeting and increasing the time users spend on the apps.

With these results, it isn’t surprising that even big-tech names are cutting down or freezing employee headcount growth. Zuckerberg has indicated that apart from teams working on high-priority areas, there will be a reduction in headcount.

Microsoft has reportedly cut 1,000 jobs recently—which is the third round of layoffs after it fired nearly 2,000 employees in two rounds over the year.

Other casualties of lower marketing spending are influencers, mass-media companies, digital marketing firms, and players who are dependent on ad revenues for growth.

Zee Entertainment Enterprises Limited, a leading Indian television entertainment company indicated that it had seen headwinds due to the macro scenario, and lower expenditure on advertising.

FMCG companies in India had a painful beginning in the current financial year, resulting in slower advertising spending growth. However, with inflation expected to taper off, marketing budgets could perhaps go higher.