Saturday, July 23, 2022

Early-stage venture investor says Apple's app tracking 'might bear as much blame for a recession as inflation', harms small and medium-sized businesses

As I've said on other occasions, Apple used to be about creative destruction, but by now is mostly about the non-creative destruction of business models through its abuse of market power. On Thursday, Alex Gurevich--the managing director of early-stage fund Javelin Venture Partners--raised a fundamental concern in a Twitter thread that deserves a closer look. Mr. Gurevich noted the "massive adverse effects" that small and medium-sized businesses (SMBs) as well as "innovative companies everywhere" suffer from Apple's app tracking rules, which "might bear as much blame for a recession as inflation":

Mr. Gurevich then explains that "[o]nline brands, small merchants, local SMBS, and the like have been able to leverage [Facebook]'s micro targeting to compete and acquire customers in a capital efficient way." But as a result of Apple's changed policies, customer acquisition costs (CACs) "have doubled across the board, leading to massive drops (sometimes as much as 60%) in revenue for SMBs. In this context, Mr. Gurevich points to a Meta (Facebook) webpage on the impact of Apple's privacy update on small businesses, but later he also references a Harvard Business Review article.

The fourth part of the thread puts this into a wider economic context:

My initial assessment is that Mr. Gurevich is indeed onto something, and I absolutely agree that it is in the interest of the economy at large not to let Apple get away with this. However, there is one sentence in the tweet I just quoted that I consider an overstatement:

"A 50-60% revenue drop is massive for such a large swath of the economy."

"A 50-60% revenue drop is massive" for everyone, not just SMBs. But the "large swath of the economy" that he refers to (SMBs, which account for 44% of GDP) doesn't experience that drop across the board. It's not an average, or a median. It's unclear how many companies are hit to that extent.

That inaccurate wording (which is attributable to Twitter-style brevity) changes nothing about the facts that

I'd like to add that many online companies--including app makers--are experiencing a terrible squeeze as their user acquisition costs go up while their revenues from selling their so-called ad inventory go down.

It's definitely not a stretch to express major macroeconomic concerns over all of that.

One common misconception is that the impact of Apple's app tracking policy is limited by the fact that there are even more Android devices in use. This here is a particularly good response I found on Twitter:

It's not just that Android ads are "getting more expensive." There was an immediate meteoric impact on Android ads when Apple's ATT rules took effect. On some ad networks it was even impossible for a few weeks to start new campaigns because there was so much demand.

Also, let's never forget that the average spending power per iOS user is far greater.

Then there are some Apple apologists who argue that it's a good thing if consumers buy only what they really need, and that product makers should simply adjust to the situation and/or make better products. The best response to that one that I've seen so far is this:

It's simply not realistic to assume that the world of commerce is totally meritocratic and the best products will get all the word of mouth they need.

Some harp on the theme of Meta/Facebook being no better than Apple--just another monopolist that SMBs would depend on. But it doesn't make sense to assume that each Big Tech player uses its market power in equally problematic ways. Apple is the most arrogant and aggressive abuser of its power, followed by Google. There are reasons to assume that Facebook is fundamentally more benevolent. I remember an interview in which even Senator Ted Cruz (R-Tex.) was talking about his experience in discussing tech policy issues with Big Tech CEOs and gave Mark Zuckerberg credit for being receptive to certain concerns--and constructive.

From a competition policy point of view, I'm one of many people who think--and I already thought so at the time those deals were announced--that Facebook shouldn't have been allowed to acquire Instagram and WhatsApp. But that's water under the bridge, and didn't really hurt SMBs. So I also concur with the following tweet by Mr. Gurevich:

Some people may gloat over how Meta/Facebook was impacted by this. But that's a case of cutting one's nose to spite one's face. In the end, the economy at large depends on innovation, fair competition, and healthy SMBs. I don't care how many or how few Hawaiian islands Mr. Zuckerberg can afford--but I do care about Facebook's ability to serve companies of all sizes, especially SMBs.

On Thursday, Snap Inc. (Snapchat) announced its Q2 figures, and its Investor Letter accurately notes that "[p]latform policy changes have upended more than a decade of advertising industry standards."

In a way, Snapchat "deserved" it as its CEO attempted to help Apple on the last day (apart from closing argument) of last year's Epic Games v. Apple antitrust trial. But again, I refuse to cut my nose to spite my face.

This tweet promotes a free 14-day trial to access an expert Q&A platform, but I'll share it nevertheless because the highlighted part is really instructive:

The first highlighted answer says:

"[App tracking has] wrecked the whole ecosystem, not just Facebook. Facebook, TikTok, Google, everybody has felt it. I've seen businesses go out of business. I've seen multiple companies go under. I've seen agencies go under jsut because it was such a bold move on Apple's side, and it's fake. All they're doing is keeping the data for themselves to release what it is that they're going to release. It's not about privacy. There's no privacy."

Now, some Apple apologists say that one shouldn't complain about Apple's rules but convince users to allow app tracking. But that's unrealistic as Apple simply doesn't allow it on iOS. Users are systematically scared away from granting that permission to third-party apps, but it sounds rather different when Apple itself requests access to user data:

That tweet by Shopify founder Tobi Lutke is spot-on. It's a Russell conjugation type of hypocrisy. Shopify is an excellent example of a big company that's affected by those rules in a way that hurts many small companies: SMBs relying on Shopify to sell products online. The alternative to Shopify or its competitors would basically just be Amazon...

I noted last year that Apple's privacy hypocrisy is also evidenced by the fact that it asks for location data to sell music (even in the Android version of Shazam, an app it once acquired) while Apple didn't let governments use voluntarily-provided location data for COVID tracking purposes.

This tweet correctly explains how Apple leveraged "privacy" for the purpose of monopolization:

Apple's app tracking rules are structurally similar to its long-standing practice of "Sherlocking."

There was an early attempt in France to thwart Apple's plan. But what happened is that the French antitrust authority (Autorité de la concurrence, Adlc) couldn't order interim measures because the country's privacy watchdog effectively vetoed it. That case hasn't been definitively decided yet, and meanwhile Germany's Federal Cartel Office is looking into abusive self-preferencing in connection with app tracking.

Let's come full circle back to the question of whether Apple's ATT rules "bear as much blame for a recession as inflation." There can be no doubt that the economy at large is increasingly suffering from Apple's abuse of market power. Lawmakers, regulators, and the courts of law must combat this problem. Privacy activists and watchdogs must be educated that it's largely a pretext in Apple's case. And it would be good if a renowned economic research institute could undertake to quantify the impact of ATT on the wider economy as well as, more specifically, on SMBs and on certain categories of startups.

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