Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Apple rolls out expanded ads business, jobless claims hit new low, quant funds stage a comeback, and Google’s new privacy policy. To sign up for the Capital Note, follow this link.
Apple Ads
Apple is reportedly expanding its advertising business, adding to the App Store’s sponsored-apps offerings just as it institutes a new privacy policy that makes it more difficult for competitors to target ads. At present, Apple generates $2 billion by boosting the placements of certain apps in its search function. The Financial Times reports that it will now add a “suggested” apps feature that gives app sellers a wider scope for advertising in the App Store.
In tandem with Apple’s new privacy policy, it’s sure to stoke controversy. For the past decade, much of the $400 billion digital-advertising sector has relied on third-party cookies that collect information on users and equip companies to optimize ad targeting. These tools provide the lion’s share of revenue for Facebook and other consumer-Internet businesses that advertise to Apple’s mobile and browser customers.
After years of debate, Apple is finalizing changes to its privacy policies that could kneecap advertising competitors. The Financial Times explains:
Apple has said the changes will improve the privacy of its users, but some critics have accused the company of hoping to boost its own fledgling advertising business. Mark Zuckerberg, the Facebook chief executive, said: “Apple may say they’re doing this to help people, but the moves clearly track with their competitive interests.”
Under the new privacy policies, a pop-up will show Apple users an “ask app not to track” option that limits data collection. That spells trouble for Facebook, which generates a significant portion of its revenue from ads targeted to Apple users. Facebook CEO Mark Zuckerberg warned investors in January that the change would threaten its business model, and alleged that Apple was interfering with Facebook apps. The company plans to encourage users to opt in to cookies with in-app pop-ups, but there’s no easy work-around.
New privacy policies have the potential to reshape the business model of the Internet. Apple generates revenue the old-fashioned way, by charging customers for goods and services, whereas Facebook aggregates eyeballs and monetizes them through targeted ads. Until recently, the two business models coexisted: Facebook creates much of the software that Apple’s hardware users spend time on, and Apple provides a platform for Facebook to reach users. This relationship is symbiotic but ultimately unstable. As the industry matures, tech firms are increasingly going head-to-head in the same businesses, no longer content to cede ground to competitors.
The changes also highlight how two of the central grievances against Big Tech – privacy and antitrust – often cut against each other. An Apple that protects user privacy is one that has complete control of its users’ data, and therefore faces less competition. Lawmakers have taken note, as Senator Mike Lee expressed recently: “This feud sits at the nexus of privacy and antitrust. We don’t want to impose regulation that just ends up protecting incumbents and entrenching monopolies.”
Lawmakers and regulators face a host of competing interests in their approach to the tech industry. As antitrust lawsuits play out, we’ll see which of these competing values wins out.
Around the Web
Jobless claims hit their lowest point since the beginning of the pandemic
Initial unemployment claims, a proxy for layoffs, fell 39,000 last week from an upwardly revised 586,000 the prior week, the Labor Department said on Thursday. That put new claims on a seasonally adjusted basis below 600,000 for two consecutive weeks in mid-April, their lowest levels since early 2020. The four-week moving average, which smooths out volatility in the weekly figures, was 651,000, also a pandemic low.
The justices on Thursday unanimously said the FTC can’t seek consumer redress when it invokes a provision that lets the agency go straight to federal court to try to stop an alleged fraud. The ruling is a triumph for business trade groups, which urged the court to curb the agency’s powers.
The FTC in 2012 dramatically ramped up its use of the decades-old provision to recoup money. The agency reported winning so-called restitution and disgorgement of almost $12 billion in 2016 alone, including $10 billion in a settlement with Volkswagen AG stemming from its diesel-emissions scandal.
Quant funds are making a comeback after a spell of poor performance
Few firms were hit as hard as AQR in the “quant winter” that chilled the performance of quantitative investment strategies in recent years, with the firm shedding $86bn in assets from its 2018 peak. But AQR’s $1.4bn Absolute Return fund — which combines a lot of its strategies in one wrapper — climbed 21.6 per cent in the first quarter, and is now up by a third since the end of September. About 65 per cent of quant mutual funds have surpassed their benchmarks in 2021, according to Nomura. If sustained, that would be the second-best beat rate in at least a decade.
Industry insiders are cautious about declaring a definitive “quant spring”, but the rebound suggests that the long winter might be fading, and that many flagship strategies are regaining some of their mojo.
Random Walk
Google has joined Apple in altering its privacy policies. Tech blogger Ben Thompson broke down the company’s changes last month. It’s a helpful primer on the evolution of the consumer Internet:
Cookies, at a fundamental level, are about cloud-based tracking. It is as if you have a name card such that you show up at a website, where they take down your information, and send it on up to a centralized server along with information about the site you are visiting, what you did on the site, etc.; every website collects the same name card and sends the same sort of information to the same centralized server. Let’s suppose this centralized server is called “Google”. This information is attached to your profile, along with whatever data points Google can collect on its own properties (which is a massive amount: everything from searches to Maps data to mobile app activity via its SDKs to Android and a whole lot more).
Google then turns around and sells inventory to advertisers, both on its own properties and also 3rd-party ones. Notice that I said inventory, and not data; advertisers don’t know you, what websites you visited, or anything else — in fact, they don’t care. The goal of an advertiser to achieve some sort of business goal, from app installs to e-commerce to brand awareness; the way it works is that an advertiser tells Google the goal it wishes to accomplish, how much it is willing to pay to accomplish that goal, and then Google harnesses its mountain of data to find the exact right users to advertise to. Incredibly enough, this happens in fractions of a second the moment you arrive on a website — your name card is also how Google knows which ads to show you.
Rather than creating profiles for each user, Google will now create “cohorts”:
Here is how this works:
- Given its huge amounts of first-party data, Google has the ingredients to create the best machine learning training sets in the world. The company will use these training sets to create machine learning models that fit data to some arbitrary number of cohorts. The company says the cohorts will contain thousands of people.
- Google will then place those machine learning models in Chrome and Android, both of which have overwhelming share.
- Chrome and Android will keep track of every website you visit, run the resultant data through those machine learning models, mark you as being a part of one of those cohorts (you can’t be a part of multiple cohorts), and report your cohort to whatever website you visit.
In other words, whereas cookies were used for cloud-based tracking, cohorts will be used for browser-based tracking, and instead of matching ad inventory to your profile in the cloud, Google will match ad inventory to your profile in your browser (which never uploads your personal data).
— D.T.
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