After a rough 2022, digital advertising is bouncing back. And tech giants agree on a key reason: AI.
Market leaders Meta, Alphabet and Amazon each posted strong year-over-year ad revenue growth for the third quarter.
"A big earnings week showed that advertising is alive and well," advertising analyst Brian Wieser wrote last week in a blog post.
AI Push In Advertising
This earnings season, tech giants pointed to the boost they're getting from new AI tools.
In August 2022, Meta launched a series of ad automation tools for businesses called Advantage+, which help businesses rapidly create and track campaigns.
The initiative appears to be paying off. Advantage+ reached a $10 billion annual run rate in the third quarter.
"We're seeing strong traction with our Advantage+ shopping solution, particularly around online commerce and (consumer packaged goods) advertisers looking to drive online sales," Meta Chief Financial Officer Susan Li told analysts on the company's earnings call.
Meanwhile, Google executives underlined gains from AI tools in its Performance Max advertiser product. Performance Max offers a central hub for advertising across Google's network, including search and YouTube.
"AI is helping advertisers find as many people as possible in their ideal audience for the lowest possible price," Alphabet Chief Business Officer Philipp Schindler said on the company's earnings call.
Advertising has been Amazon's fastest-growing division for the past three quarters. On the call with analysts, Chief Executive Andy Jassy said the company has invested in "machine-learning expert practitioners, who are honing algorithms to make sure that the sponsored results people get when they search on something are relevant."
"Because of that, those ads perform better for advertisers," he said.
Sales Boost For AMZN, META, GOOGL
These AI efforts are translating into hefty sales boosts.
Meta said its advertising revenue jumped 23.5% year over year to $33.6 billion in the third quarter. That marked the Facebook parent's fastest growth in two years.
Meanwhile, Google parent Alphabet's Q3 advertising revenue rose 9.5% to $59.6 billion, up from 3.3% yearly growth in the second quarter and a 0.2% annual decrease in the first quarter.
Amazon, which is steadily becoming a leading online advertising platform, raked in $12.1 billion in ad revenue for third-quarter, up 26% from the same period last year.
Insider Intelligence estimates that Alphabet, Meta and Amazon will capture about 60% of digital ad spending this year.
Meta dominates social media advertising while Google has a hold on search-based advertising. In recent years, Amazon has captured share as the clear leader in retail search media, or advertising within a shopping platform.
Meanwhile, smaller social media players, which rely heavily on ad sales, are also reporting gains.
Snap revenue climbed 5% year over year, its first quarter of growth this year. Pinterest topped projections with an 11% sales increase, its fastest rate of growth since early 2022.
Advertising Bouncing Back
The trend also underscores how advertising is bouncing back from the turmoil in 2022 when companies cut back on ad spending in response to inflation and a softer economy.
Social media companies also were hit by privacy changes at Apple that made it harder to target ads to users.
Digital ad revenue in the U.S. rose just under 11% in 2022 to $209.7 billion, down from 35% annual growth in 2021, according to the Interactive Advertising Bureau and PwC.
Meta stock shed 65% of its value in 2022. Alphabet dropped nearly 40%. Both companies cut tens of thousands of jobs as overall revenue slowed. But the tech behemoths are bouncing back, aided by gains in AI-powered ad revenue.
ChatGPT Made AI Hot
Companies, especially Alphabet and Meta, have been using AI and machine-learning to boost their advertising businesses for years.
But the introduction of ChatGPT a year ago turbocharged the adoption of and interest in AI as a business tool. Insider Intelligence analyst Jeremy Goldman cited Meta and Snap's efforts to use AI tools to help keep people on their platforms longer.
"That could be talking to an AI assistant, or an avatar based on a celebrity, such as in Meta's ecosystem," Goldman told Investor's Business Daily. "These are things that they believe will open up more surfaces so they can place ads on it in the long term."
Push To Regulate AI
Of course, Meta and the broader tech industry grapple with a serious issue: the growing push to regulate AI. This week, the Biden Administration issued a new executive order calling for the development of "safe, secure and trustworthy" AI. There is a push for even more robust regulations in Europe where strict restrictions on the use of customer data are already in place and where policymakers are looking to curtail the use of AI to influence people's behavior.
But the rush to embrace and expand the reach of AI is bound to continue. And recent trends also show how tech giants have a clear advantage in the race to embrace AI.
Morgan Stanley analysts wrote in an Oct. 1 report on generative AI: "AI expands scale advantages for market leaders, as the value of large, differentiated, first-party data sets, leading distribution, and the ability to invest rises."
Wieser, the advertising analyst, said the tech giants' recent gains underscore the advantages of companies with access to customer data or AI technologies.
"The beneficiaries are digital platforms, whose advantages are likely to grow as data associated with retail sales (like at Amazon) or with AI-driven performance products (like Alphabet and Meta) increasingly drives shares of spending by marketers," he wrote.
