Memo: Apple’s Property Tax

For Apple, hardware is the afterthought. Content, digital land, and privacy is at the forefront.

Two announcements in the past 24 hours confirms as much. This week, Apple won its first Oscar for best picture. And according to Nikkei, Apple is lowering the output of iPhones and Airpods as inflationary pressures and supply chain issues persist. From where will the margin come?

The answer can be found in Apple’s recent investments. Between 2017 and 2021, Apple’s ad revenue climbed from $300 million to $4 billion, mirroring Facebook’s steep climb from $750 million to $4.2 billion between 2009 and 2012. Apple is nowhere near the size of Meta’s advertising business (the company reached $115 billion in 2021) but there’s reason to believe that Apple could grow a considerable business in a timeframe comparable to what was seen at Facebook (now-Meta). In Linear Commerce and Content Fortresses, I explained:

Apple’s intentions appear straightforward at first glance. The company wanted to improve the privacy of its end users. This virtuous effort came with a few additional outcomes.

By upgrading its privacy practices, Apple will impair large ad networks that have grown with the help of those end users. This could potentially cripple Facebook’s current model with its new privacy demands. Apple has also opened the door to an unintentional adjustment to its privacy mandate. In doing so, the Mark Zuckerberg-led advertising company (and social network) will adopt a new way to accomplish its most critical objectives: revenue growth and user utility.

Apple understands that the web isn’t private and at its core, whether through Apple’s ATT (App Tracking Transparency) or newer privacy initiatives, they are prioritizing the end user and her privacy. In June of 2021, iCloud+ was announced as a premium subscription service that featured a service called Private Relay. It is designed to encrypt all connections (even the ones not using HTTPS) to hide your IP address and prevent anyone from knowing your location or your identity (including Apple). From iMore:

The connection uses QUIC, which is meant to be like TCP but with lower latency and HTTP/3, and because Apple encrypts the connection, even your ISP can’t see where it is on the web you want to go. All they see is the connection to Apple’s ingress proxy server. So, Apple knows your IP, but not the website you want to go to because that’s encrypted.

At that point, Apple will strip away your real IP address and replace it with a temporary IP address from a pool of available addresses.

Now, consider the pace in which Apple captures ground in industry. Over the previous four years, Apple’s advertising grew as quickly as Facebook’s between 2009 and 2012. There’s an even greater example. In September 2019, it was announced in the New York Times that “Apple steps into the movie business.” In March of 2022, Apple TV+ became the first streaming service to win best picture. Apple has built a fortress; it’s using content and commerce as its bricks and privacy as its mortar.

Private Relay has the potential to have a major impact on the advertising industry. As The Information explains, the feature was released in September to Apple iCloud+ customers who could elect to turn the feature on for Safari browsing and a small percentage of “insecure app traffic over port 80.” For now, users can still use Chrome or any other non-native browser. Additionally, platforms that have you logged in: Gmail, Youtube, Facebook, TikTok can track your movements through the first-party data that the platforms collect.

But one thing is certain, when third-party technology companies circumvent Apple’s new policies on privacy, it is likely to precede another drastic measure taken by the hardware manufacturer. When turned on, Private Relay creates a virtual private network, meaning the internet provider can’t track what websites a user is visiting, and the websites can’t see any identifying information about the visitors. With Apple’s recent pivot to privacy, there’s reason to believe that this feature will be rolled out more aggressively to more users, which would be yet another blow to other platforms like Meta and Google who are currently relying on IP addresses to workaround the existing privacy crackdowns that Apple implemented last year. From The Information:

If the Private Relay service expanded beyond Safari to stop the transmission of user IP addresses across mobile apps, ad industry executives say it would hobble the efforts many ad networks and ad tech companies have made to adapt to Apple’s earlier changes, known as App Tracking Transparency. Many of the workarounds that firms including Meta, Snap and Google developed in the wake of Apple’s changes rely in part on having access to groups of user IP addresses to measure whether ads the users saw led to sales.

These workarounds include using an IP address to determine if a visitor to the site then took further action, like making a purchase. There’s evidence that these workarounds were effective. A recent report from 9to5Mac noted Facebook’s success in identifying (short-term) workarounds, noted for a sudden surge in advertising performance:

In a company statement, a Meta spokesperson said it has “continued to adapt our systems to help businesses succeed while honoring privacy and shared extensive steps they can take to maximize performance and measurement on our platforms.”

While Apple said it would pull apps who violated its new privacy policies, there’s been no action against this type of workaround. It might have been biding its time, knowing that harsher restrictions to user visibility were coming, which would take a further hit on these tech companies’ advertising businesses. Regardless of Apple’s stated motivations, these moves are benefitting its own ad business while hampering others. At the same time, Meta and Google are not going to lay down without a fight – each company is equipped to build more counters to Apple’s moves. But the owner of the hardware ultimately controls the hosted content. This poses a problem no matter how big and mighty the advertising duopoly might seem.

And that’s not where Apple’s actions end. Email addresses are a critical currency for brand marketers who want to establish closer relationships with their customers. Discount codes and branded newsletters are pushed hard to visitors who go to a company website. Apple’s new Hide My Email feature, rolled out in December to iCloud+ customers, randomly generates an email for customers to share with a site to unlock access that hides their real email. Another marketing cornerstone and key touchpoint for advertisers is severed. That complicates future targeting efforts and obfuscates a clear view on who’s coming to the website and browsing and buying what.

And this means that while Apple continues to build a new identity around the importance of privacy, advertising efficacy on other platforms may continue to diminish. It’s also likely that we will see something similar from that other hardware / software company. Google may adopt similar strategies; the iOS vs. Android arms race tends to work like that. The loser in all of this seems to be Facebook and the many brands reliant on their advertising service:

It is unlikely that Apple reverses course on its ATT changes and its diminishing of the IDFA but an entire industry is in need of a middle ground. For many founders and executives, their livelihoods are on the line and it isn’t Facebook that will be remembered as the culprit. Apple must either resolve its decision in favor of the advertisers reliant on sales-driven marketing.

Facebook anticipates a $10 billion impact on its own advertising sales, a sum that represents tens of billions in goods and services traded. It’s unlikely that the hole left by the degraded performance of Facebook advertising will be filled by another digital platform.

 

Apple will need to continue growing its content marketplace; Tim Cook’s digital fiefdom will require greater (user-generated) content engagement. As such, it’s not leap in logic that Apple will build a platform for user-generated content (UGC). Don’t be surprised if Apple acquires one in the process. Twitter, anyone? Without greater advertising opportunity within the Apple ecosystem, digitally-native businesses will suffer from the collateral damage. Apple has become the solution for handheld consumer privacy; business owners deserve a capable alternative to the services that Apple is crushing with its new practices.

When Apple shuttered the iAd Network in June of 2016, few could have predicted how successful a second iteration of it could become just six year later. If Apple expands its iCloud+ offering to all users, it’s pursuit of digital advertising dominance will be official. The writing is on the fortress wall, built atop the land that Apple owns. That land is due to come with new property tax for all who enter.

Memo: Apple and Performance Marketing

Though founded in the 1960s, Walmart came into its own as a “mom and pop” store killer by the late 1970s. Overnight, independently-owned stores folded as Walmart sold products with greater efficiency and lower prices. Product marketers worked tirelessly to place their products on Walmart shelves. Sixty years later, the company’s grasp over physical retail remains.

We will remember the Apple iOS privacy changes as a similarly transformative moment for retailers. Like then, it is beginning to separate the haves from the have-nots.

For a small, small selection of brands, performance marketing is not essential. This essay is about two of those companies and everyone else who seems to be playing a different game all together.

Two digitally-native brands are in the press for their growth; their founders are two of the most visible human beings on the planet. First, Robyn “Rihanna” Fenty is floating a $3 billion IPO for her brand Savage x Fenty.

Savage x Fenty was launched in 2018 and has since collected a healthy stash of venture capital to support its growth. The brand has raised $310 million to date. Most recently, it raised $125 million in January in a round led by Neuberger Berman and other existing investors L Catterton (LVMH’s investment arm), Avenir, Sunley House Capital and Marcy Venture Partners. Positioning itself as an anti-Victoria’s Secret by embracing all body types, genders and customers who have felt excluded by the mainstream lingerie giant, Savage x Fenty has become a formidable industry force. Owned by TechStyle Fashion Group, the brand built up hype around its eCommerce store with annual fashion shows airing on Amazon Prime. Last year, Savage made moves into physical retail, with five stores now open and plans to hit 10 this year. Though IPO plans are not confirmed, as reported by Bloomberg, they’re on the table for 2023.

Meanwhile, Kim Kardashian is expanding the Skims brand to include swimwear. In a recent report in Business of Fashion, she and co-founder Jens Grede (also behind brands including Frame and Good American) eschew performance marketing for a brand like hers:

Skims’ brand work, plus Kardashian’s promotion on social media, have made performance marketing all but unnecessary.

“[Performance marketing] would be very ineffective for us because we’re always running out of stock,” Grede said. Besides, he doesn’t believe it suits Skim’s long-term goals.

Instead, the report says, Skims spends on “brand-building” marketing efforts that include billboards, high-profile photographers and Kardashian tagging the brand in her own Instagram posts. Skims is on track to add 2 million customers by the end of this year, and it’s biggest restraint is fulfilling orders and keeping items in stock as supply chain disruptions drag on. It’s a problem and a curse, but overall, the brand’s in a healthier position than other DTC brands that are now trying to grow outside of paid marketing.

But most brands do not have the visibility or influence of a Kardashian on their cap tables. That leaves two options for many: partner with a celebrity that reduces the cost of marketing and improves cash conversion cycles or build systems to reevaluate how the brand measures marketing conversions.

A recent report by Catherine Perloff of AdWeek covered the strategies employed by Ben-Zvi, an agency-based performance marketer with brands like e.l.f. Cosmetics, Etsy, and Revlon. The report explained how he built strategies around third-party tools (and his agency’s proprietary technology) to identify correlations between active campaigns and conversion outcomes.

Before identifier deprecation, measuring a campaign’s effectiveness depended a lot on statistics from Meta, said Ben-Zvi, who works with brands such as e.l.f. Cosmetics, Etsy and Revlon. “It was all about figuring out what is the proper attribution window based on what Facebook is telling me,” he said.

Now Ben-Zvi relies on various tools, including looking for correlations between when a campaign was active and certain conversion outcomes, leveraging his agency’s proprietary technology. For example, when the campaign was active, did the advertiser see a lift in direct sales on its website or an increase in branded search via Google? Ben-Zvi said he has also looked to third-party tech, such as Blackcrow.ai, which helps brands build their own audiences to target without Meta.

Another strategy mentioned in this AdWeek report was the collection of first-party data:

Ashley Karim-Kincey, vp of media at creative agency Dagger, said she uses tech such as floodlight tags on the brand’s website to track who has visited and double-click tracking tags within their ads to cross-reference the data, both of which are Google ad-tech products.

In a series of essays devoted to the likelihood of this type of disruption, in April 2021 we highlighted the utility of first-party data as iOS changes were due to disrupt the performance marketing industry. From On First Party Data and Media:

First-party data will define the next wave of advertising and sales. American businesses are now in a race: They’ll build, acquire, or market to the audiences that have it. The independent media industry is quick to discuss outcomes but rarely do we dissect the early steps. As more pursue first-party data, audience development will become one of the most coveted skills on the market.

To acquire targeted customers, first-party audiences are replacing third-party collections.

In our follow up on content fortresses, I continued:

First-party data was well on its way to becoming the key asset for advertisers; Apple’s decision further moved advertisers to prioritize its collection, refinement, and monetization. Apple will eventually eliminate data sharing across vendors, a long-time complaint of many of its users. In doing so, walled gardens will take the place of the open web funded by this data practice. Media companies and commerce companies will become indistinguishable, in many ways. The law of linear commerce is no longer just about brands and their content strategies or publishers and their eCommerce development.

But how did we get here? Wayne Ma of The Information published an inside look into Apple’s decision to “blow up the digital ads business.” Apple’s pivot to privacy has had serious implications for Meta, Facebook’s parent company, which “ expects the changes to shave $10 billion off its revenues this year because of their impact on the company’s prodigious data collection practices,” according to Ma.

But in interviews with The Information, people with direct knowledge of Apple’s privacy deliberations stressed that Meta wasn’t the primary target of the company’s changes, despite a long history of thinly veiled rhetoric from Cook viewed as critical of the company’s practices. Instead, Apple was going after the most egregious forms of abuse—for example, weather apps that sold data about users’ locations to brokers, the people say.

Apple is now trying to close the “Pandora’s box” it opened with its data sharing that was upholding entire surveillance and advertising industries. While one is more nefarious than the other, they are inextricably linked. And performance marketing is in the crosshairs of the crackdown. Already, marketers have become aware that over-reliance on Facebook and Instagram ads spelled bad business. But weaning off of the platforms has gained a new urgency thanks to Apple’s decision. With it, Meta has learned its own lesson in reliance on outside businesses. And while Apple’s driving motivation is eliminating bad actors who abuse its user data, something else is true at the same time: it no longer serves Apple to prop up Meta and other platforms’ ad businesses. Google is now following Apple and will introduce similar privacy changes for Android. Brands that relied on performance marketing are now at a disadvantage in a way that the Skim’s and Fenty’s of the world are not.

So here we are, two worlds represented within the same category of brands. One is highly dependent on the advertising methods of the last decade or so and the other seems to scoff at them as if they were never necessary. Skims’ Grede told Alexandra Mondalek of BOF:

You cannot advertise your way to success. Advertising is certainly important as a part of it, but sales-driven marketing has never built brands.

Meanwhile, a founder of a venture-funded brand that, itself, is nearing a potential IPO chimed in on the report published by The Information:

What this [The Information] article doesn’t do is analyze the downstream implications for DTC brands and small businesses, which have been catastrophic.

It is unlikely that Apple reverses course on its ATT changes and its diminishing of the IDFA but an entire industry is in need of a middle ground. For many founders and executives, their livelihoods are on the line and it isn’t Facebook that will be remembered as the culprit. Apple must either resolve its decision in favor of the advertisers reliant on sales-driven marketing. Or the company needs to partner with major social media platforms and media companies to offer its own advertising network (fueled by Apple’s first-party data, coincidentally). In either situation, Apple will face pushback for hypocrisy. But the digitally-native brand industry, as it stands, may not survive the privacy changes attributed to Apple. That is unless, a global icon is on the brand’s founding team.

There’s never been a greater disparity between the haves and the have nots for brands growing in the age of Apple’s privacy power moves.

Por Web Smith | Editado por Hilary Milnes com arte de Alex Remy e Christina Williams 

Memo: Retail’s 2021

Year two of the pandemic, 2021 saw what can be best be described as sustained disruption throughout the world of retail. Wave after wave of pandemic variant and ensuing outbreak continued a chaos that we was supposed to be over in 2020. And yet, retail found ways to make its products easier to buy, more experiential to discover, and more available than projected (whether physically or digitally). We’re looking back at the main themes from this past year that will influence the year ahead.

The prolonged effects of Covid-19:

The pandemic is far from behind us. While we didn’t see mass lockdowns like 2020, the retail industry continued to form around new ways of shopping, new customer needs, and developing behaviors. The pandemic is woven throughout the rest of the year’s themes, with the Delta and Omicron variants making it clear that new disruption is never off the table. From a December memo on “Resilient Retail”:

The pandemic has caused a substantial shift in how consumers behave. It has begun to impact brand preferences, the decrease in impulse buying, a reduction in non-essential purchases, and a 35% increase on the reliance of online shopping.

Winners and losers have been born along the way. Major retailers proved most resilient, with the ability to skirt around supply chain back-ups (which we’ll get to in a moment) and get inventory on shelves ahead of the holidays. One example is Target, who found a way to keep digital shelves stocked in case their physical ones came up short.

The supply chain delays

Supply chain backups dominated retail headlines this year. As a result, major retailers responded with 2021’s holiday season starting earlier than before, with customers hoping to get ahead of out-of-stock notices. Agile, digitally native retailers were able to compete as well. But no one was immune. With COVID expected to continue disrupting the supply chain, impacting staffing and inventory availability, retailers will continue to develop omnichannel and staffing strategies that provide enough flexibility and control to outlast another year or two of these consumer behaviors. In October, we broke down the year in cascading effects caused by supply chain disruptions.

Atualmente, há mais de 90 navios à deriva na costa de Los Angeles e Long Beach, na Califórnia. Nacionalmente, os motoristas de caminhão estão empregados em níveis historicamente baixos. Internacionalmente, os varejistas estão preocupados com a notícia de que a China começou a limitar a energia em suas muitas fábricas e instalações de transporte, prejudicando ainda mais os cronogramas de importação. E algumas das marcas mais afortunadas estão comprando os navios necessários para transportar produtos de A para B com alguma aparência de confiabilidade.

But Lowe’s and many of the retailers in its class are no longer optimistic that any of the current issues will find resolution in the coming weeks. That may mean that we will see an uptick in top CPG brands as some of the top gifts of the season.

Even so, the holiday season saw retailers in a better position than many analysts believed. Some of them found new ways to consolidate supply chain management, other brands and retailers opted to buy their way out of supply chain disruption. Here is American Eagle Outfitters for example, the company also acquired Quiet Logistics:

The AEO pattern of acquisitions breaks a decades long cycle of reducing costs by off-shoring blue collar business functions. Historically, the market punished companies looking to build more robust, fully vertical systems. But no longer. If this two-year period has taught us anything, it’s that inventory control is a necessary function for brands. But also, that eCommerce operations are no longer on the fringes of big retail. The largest companies are building systems for direct-to-consumer growth.

eCommerce kept growing

Online retailers and their enablers, including Shopify, benefitted from the shift from in-store to eCommerce shopping that continued in 2021. What was reactionary in 2020 became more intentional this year and that’s expected to continue in 2022. From August:

So here we are, back again. Though government mandated shutdowns are far from likely, corporations are instituting their own versions of them. CBS News reported that Walmart and Kroger will require masks as the second wave of worry is anchored by the spread of the Delta variant. Whether more or less dangerous than the first model of pandemic, businesses have to respond proactively. Few industries are as preemptive as retail; other industries will follow.

This means longer lines, shorter in-store supply, and a decrease in consumer satisfaction as customers lament the persisting inconveniences of mainstream physical retail. Like before, eCommerce will be there to pick up the pieces. It will look something like a j-curve.

The rise of the Metaverse and Web3:

One of the biggest stories of the year is the rise of interest in the metaverse and Web3, both will continue to develop into next year. I mean, Oculus Quest 2 was the number one gift for Christams 2021 according to the free app rankings in the Apple app store. The shift from Web2 to Web3 finds internet users delving into digital-first and digital-only spaces, where their avatars and PFPs define their status. Consider it the new country club.

Brands are going to join in more in the new year, following a lead well established by Nike, which has led retail brands into metaverse presence development (MPD). MPD will define the next generation of marketing and brand equity; these are the companies leading in the digital world. For Nike, it’s been a worthwhile play so far.

This trend will continue. In one prediction from this year, we explored the shift from eCommerce to simply “commerce,” which will account for any purchases made in any space – physical, online or digital. When goods can be bought digitally and their inherent value is also digital, that means new competition in retail that overrides physical demands and disruptions. Just look at what’s happening to the supply chain – it’s all connected.

DTC’s new store strategy

It was a big year for first-generation DTC brands. Of the many that went public was Warby Parker, whose growth strategy belies a more significant trend that will define the paths for other mature DTC brands going forward. Warby Parker is going to continue opening more stores, along with other brands including Allbirds, which also went public this year. In August:

No, DTC was never meant to be online only. Warby realized over the years that its customers wanted to shop for glasses in stores, and it built the infrastructure to meet them. Now, the question is whether they can leverage their growing consumer-base to achieve operating leverage. And can Warby Parker continue climbing the chart?

Expect more similar brands to expand their store networks in populated areas where they can boost their online business simultaneously.

And last, the acquisition boom

It was an even bigger year for exits. Companies including Manscaped, BuzzFeed, Milk Makeup and more went public with the help of special purpose acquisition companies. In March, retail vet Art Peck launched a $200 million SPAC to acquire emerging retail brands. Good Commerce Acquisition Corporation will focus on e-commerce and data-led companies that also have ties to wholesale and retail. What became clear this year is that retail is not a funding race, it’s an EBITDA one. From October:

Over the past few years, several categories have benefited from the tailwinds of the shift towards online retail. Suddenly, SPACs were interested in direct-to-consumer retailers. Private acquisitions became a popular headline. Companies like Figs, Warby Parker and Brilliant Earth debuted on the public markets; each share market capitalizations north of $1 billion. Warby Parker and Figs, both north of $5.3 billion in market cap, are setting the market for the brands suspected to follow: Allbirds and Away are but a few in the pipeline. Now, companies like Gymshark are mulling an IPO, signaling a final stage of sorts.

All of these themes will influence the next year and beyond for retail. Covid is still here, the supply chain ripple effects will be long lasting, and the metaverse will become more mainstream. What’s been proven at the same time is that retail is resilient, and DTC is a viable model with its biggest practitioners moving to the next stage. It makes sense – it’s a long game. We’re still in the thick of it.

By Web Smith and Hilary Milnes | Art by Alex Remy and Christina Williams