Elon Musk takes over Twitter amid a challenging market for digital advertising

Elon Musk, a man who once declared he “hates advertising”, has completed his acquisition of Twitter at a time when digital platforms are facing their toughest market yet for advertising revenue growth.

The Tesla founder’s $44bn (£38bn) takeover comes as Snap, YouTube and Facebook all show signs that advertisers are beginning to pull away amid a tough macroeconomic environment.

Musk first put in his bid to buy Twitter in April, indicating that he wanted to reduce the platform’s reliance on advertising.

“The power of corporations to dictate policy is greatly enhanced if Twitter depends on advertising money to survive,” he wrote in a now-deleted tweet.

The billionaire would later attempt to pull out of the deal to buy the platform, before another U-turn earlier this month. He closed the deal late on Thursday (27 October), less than a day before a deadline which would have seen a court date set if he had not gone through with the acquisition.

Ad sales represented more than 90% of Twitter’s revenue in its second quarter earnings this year, reported in July. In its 2021 fiscal year it generated $4.5bn (£3.9bn) in advertising revenue, nearly 89% of its total sales.

On an advertiser size basis, revenue growth from large advertisers remains challenged while we’ve seen more resilience amongst smaller advertisers.

Dave Wehner, Meta

Now that Musk has gone through with acquiring the social media platform, he is striking a more conciliatory tone with advertisers.

“Twitter aspires to be the most respected advertising platform in the world that strengthens your brand and grows your enterprise,” he tweeted.

However, there are signs that Twitter’s advertising business could struggle amid tough economic conditions going into 2023. In its second quarter, it saw revenue decline 1% on a year-over-year basis, something which it partly attributed to “advertising industry headwinds associated with the macroenvironment”.

Softening advertiser demand

Twitter is not the only digital advertising giant sounding warning bells over the impact the macroenvironment will have on its advertising business.

Meta, the parent company of Facebook, Instagram and Whatsapp, saw its profit fall 52% to $4.39bn (£3.8bn) during the third quarter, largely due to a drop in advertising demand.

Speaking to investors during a call last week, CFO Dave Wehner said “weak” advertising demand was being driven by the uncertain and volatile macroeconomic landscape.

“On an advertiser size basis, revenue growth from large advertisers remains challenged while we’ve seen more resilience amongst smaller advertisers,” he said.

During the third quarter, ad impressions delivered across Meta’s app portfolio did increase 17% year on year – driven by Asia-Pacific and the rest of the world – but the average price per ad fell by 18%.

“Meta continues to be in a challenging position and has historically been among the most affected by the decline in revenues in traditional paid social media channels and by growing competition (i.e. TikTok),” says Vlad Komanicky, CEO at marketing advisory Alchemists.

Media budgets slashed for the first time since the height of Covid

Rival ad platform Alphabet, which owns Google and YouTube, is also showing signs that advertisers are pulling back. In its third quarter, sales rose just 6% to $69.1bn (£60.7bn). By comparison, revenues soared 41% to $65.12bn (£57.2bn) during the same period last year.

YouTube ad revenues were partly behind the disappointing numbers. This declined by 2% to $7.1bn (£6.2bn) compared to the same period in 2021, while network advertising revenues also decreased by 2% to $7.9bn (£6.9bn). This is the first time YouTube ad revenues have declined since public reporting on the numbers began.

“On the second quarter earnings call, we noted a pullback in spend by some advertisers in YouTube and network, and these pullbacks in spend increased in the third quarter,” said Alphabet’s chief business officer Philipp Schindler during the earnings call last week.

While not as big as Meta or Google, Snapchat was once the darling of the digital advertising industry. However, the social media platform has seen its fortunes decline in recent months. In its most recent earnings, parent company Snap reported its slowest revenue growth ever as a public company and forecast no growth for Q4.

In a letter to investors, Snap said it is seeing advertisers reduce marketing spend amid “operating environment headwinds”.

“We experience this on our advertising platform in the form of decreased brand-oriented advertising spending, but also in the form of lower bids per action and lower overall campaign budgets,” the business wrote.

An uncertain outlook for 2023

Meanwhile, data from the Advertising Association and Warc also suggests that 2023 will see brands pulling back from digital advertising. Overall, the AA/Warc Expenditure Report suggest the UK’s ad market will contract by almost 1% in real terms in 2023.

In online display advertising specifically, growth of 6.7% is expected in 2023, representing a 0.7 percentage point decline from the figure previously forecast in April.

Warc’s director of data, intelligence and forecasting James McDonald says “inflation is now starting to bite”, which will see rising pressures on advertisers in the new year.

We knew that this growth rate could not be sustained in the long-term.

Jon Mew, IAB

However, while some digital advertising giants are already starting to see softening demand heading into the final quarter of 2022, others have been more resilient.

TikTok is seemingly bucking the trend of softening growth. As a private company it does not reveal its ad sales publicly, however research firm Insider Intelligence predicts its advertisement revenue is likely to triple in 2022 to more than $11bn (£9.5bn), exceeding the sales of its rivals Twitter and Snap combined.

The social media app experienced huge growth over the pandemic. In its latest filing to Companies House, the app’s owners said its ads business in Europe generated $802m (£693m) in 2021, versus $152m (£131m) the prior year.

However, there are indications that the end of the pandemic is bringing a slowdown to the kind of astronomical growth TikTok was able to tap into. The UK’s digital ad market grew by 15% year-on-year in the first six months of 2022, with spend across the period totalling £12.5bn, according to IAB UK’s half yearly Digital Adspend update, produced with PwC. In comparison, in H1 2021, the UK’s digital ad market grew by 55%.

“We knew that this growth rate could not be sustained in the long-term,” said IAB UK CEO Jon Mew, adding that “we have returned to a point where growth is strong but more sustainable”.

However, he admitted that “digital advertising won’t be immune to tightening budgets as the cost of living crisis takes hold”.

Ad sales figures from the likes of Snap and Meta would suggest that this tightening has begun to take place. Twitter’s new owner Musk will be hoping he can buck the trend; however, advertisers face much uncertainty about what the social media company will look like under the billionaire’s leadership.

A self-declared “free-speech absolutist”, Musk has, in the past, indicated he will loosen content moderation on the site. Brands worried about their reputation may shy away from spending on a platform where their ad could end up beside controversial content.

The new owner has already sought to assert that Twitter will “not be free-for-all hellscape where anything can be said with no consequences”. However, whether advertisers will trust the billionaire enough to invest their ad spend in the platform during these tough economic times remains to be seen.