Two years later: what we got right and wrong...
Emerging trends in retail and new commerce.
📰 Two weeks ago, Thrasio, the leading Amazon Aggregator which raised $2.3Bn in equity and $2Bn in debt to acquire more than 200 Amazon businesses, filed for Chapter 11. That prompted me to re-read the Retail Chronicles we published two years ago when Aggregators were the darlings of the investment community.
✅ We correctly called that selling on Amazon was a matter of operations and that Aggregators were overpaying assets.
But while it’s tempting to brag about how right we were for dismissing the Amazon Aggregator as an investment thesis, it’s far more interesting to dwell on what we got wrong, and why.
In that issue of the Retail Chronicles, we also talked about the impact of Apple App Tracking Transparency (ATT) on online advertising, and this was our conclusion :
❌ The really bad take is the first bullet point.
Let’s have a look at Meta’s stock price. When we published that post in January 2022, Meta’s stock was priced around $325. It then quickly collapsed and reached a low point at $90 in November 2022. Afterward, it rose steadily and just passed the $500 mark. Revenue-wise, Meta experienced a decline in Q2, Q3, and Q4 of 2022 but then turned around and closed 2023 with a 24% year-on-year growth rate.
So we were right in the short term but wrong in the long term.
Sure Meta took a big hit, but they quickly recovered and are now stronger than ever.
So, what happened?
ATT de facto prevented iOS apps from sharing info with third parties. Concretely, Facebook or Instagram could no longer match users who had clicked on their ads with users who had made a purchase. This killed Meta’s deterministic model of advertising performance. What followed was a drop in ad performance hence the decrease in revenue. That’s what we anticipated and why we thought ATT was going to be very bad for Meta.
Meta had to react and they did.
They cut costs.
They increased impressions through various means including pushing for Reels adoption.
They completely rebuilt their advertising model, scraping the deterministic model that was no longer working and building a new probabilistic model on the fly.
Two years later, we’ve come full circle and Meta post-ATT is once again operating a highly-performing advertising platform.
Their competitive position is stronger than ever for two major reasons.
➡️ First, Meta managed this transition better than its competitors. ATT struck everyone identically and Meta suffered the most because they were the largest player. But they also were in the best position to recover. They had the most resources and a massive audience to help train their ML engines to build their probabilistic model. Their smaller competitors lack that audience and are lagging in the new post-ATT world. For instance, Snap’s revenue stagnated in 2023 (compared to Meta growing by 24%) and their stock price dropped by 30% in early February and didn’t recover.
➡️ Second, Meta is in a stronger position to negotiate with advertisers. To them, Meta’s new probabilistic model is a complete black box. They no longer decide to target this or that market segment, they ask for an amount of performance and Meta guarantees a level of ROAS (Return on Ad Spend). They have far less leverage and Meta can keep for themselves any excess performance. And to add insult to injury, Meta also keeps any learnings and the advertisers get none.
So where is this going? How is the market going to evolve from here?
➡️ Meta’s competitive position is very solid, anchored in a unique and massive audience that is not going anywhere;
➡️ Advertisers are facing a strategic risk, losing control of the way they address their customers and communities;
➡️ We believe they will welcome any tool allowing them to somehow see through the black box, to better understand how their ads are working and give them leverage on their ad spend;
➡️ We already invested in that broad domain and are actively looking for more opportunities.
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About us
Spring Invest is a European investment fund dedicated to companies shaping the future of commerce. We champion doers who build innovative companies making commerce better, from enabling technologies to new commerce models and everything in between. More info about our investment thesis 👉 here.
