Former Facebook insiders explain why the company is making such a big fuss over Apples upcoming privacy change – CNBC

For the past few weeks, Facebook has been running an ad campaign in defense of personalized advertisements, arguing that targeted ads are key to the success of small businesses.

The catalyst for the campaign has been an ongoing battle between the social media company and Apple. The battle focuses on a unique device identifier on every iPhone and iPad called the IDFA. Facebook and others that sell mobile advertisements rely on this ID to help target ads to users and estimate how effective they are.

With an upcoming update to iOS 14, apps that want to use IDFA will have to ask users to opt in to tracking when the app is first launched. If users opt out, it will make these ads a lot less effective. Facebook has warned investors that these looming changes could hurt its advertising business as soon as this quarter.

But while Facebook has been loud about how harmful this change will be, rivals like Twitter and Snap have said the change will be good for user privacy and could even benefit their businesses. Google, the leading advertiser on the web, has not said nearly as much about the changes, while simultaneously introducing its own privacy-related changes to its Chrome browser and pledging to stop tracking individual users entirely.

CNBC spoke with a handful of former Facebook employees who have worked on the company’s ad products and businesses and explained why the social media giant is making such a loud fuss about Apple’s upcoming change. 

Most critically at stake for Facebook is what’s known as view-through conversions. This metric is used by ad-tech companies to measure how many users saw an ad, did not immediately click on it, but later made a purchase related to that ad. 

Think of view-through conversions like this: You’re tapping through your Instagram stories and you see an ad for a pair of jeans. You don’t tap the bottom of the ad for more information because you’re busy checking out what your friends are up to, but the jeans were cute. A few days later, you go on Google, search for the jeans you saw on Instagram and buy them.

After the purchase is made, the retailer records the IDFA of the user who bought the jeans and shares it with Facebook, which can determine whether the IDFA matches with a user who saw an ad for the jeans. This shows the retailer that their Facebook ad worked.

Losing that type of measurement could be a big blow for Facebook. If advertisers are unable to accurately measure the effectiveness of their Facebook and Instagram ads, they may feel compelled to shift more of their budgets to other apps and services where they can see the exact return on investment for their ads. 

Facebook is the number-two recipient of online ad dollars, behind Google. One particular threat is that advertisers will pour more money into Google’s search ad business, which Facebook cannot duplicate, and which targets users at the time of conversion.

In terms of specific businesses, the IDFA change will particularly hurt its Audience Network. 

The Facebook Audience Network provides advertisements in non-Facebook apps, and it uses IDFA numbers to determine the best ads to show to each user based on Facebook’s data. For instance, a soft drink maker could decide to target 18-to-34-year-old gamers in the San Francisco Bay Area with a new promotion. The company could use the Facebook Audience network to have those ads placed before the right audience within mobile games; Facebook would split the ad revenue with the game makers.

But if users opt out of IDFA tracking, all of that personalization Facebook has built will be rendered irrelevant outside of the company’s own apps. In August, Facebook acknowledged that Apple’s upcoming iOS 14 could lead to a more than 50% drop in its Audience Network advertising business.

Nearly all of Facebook’s revenue comes from advertising, but Facebook’s Audience Network contributes only a small portion of that — well less than 10% of the company’s net revenue, a person familiar with the numbers told CNBC.

Besides view-through conversions, Facebook may lose valuable data about what its iPhone-based users do on their devices when they’re not in Facebook-owned apps. Already, Facebook collects a lot of data about its users from its apps, which include Facebook, Instagram, Messenger, WhatsApp and others, but every additional bit of data makes its algorithms better at what they do, which includes ad targeting. 

Although Apple is letting users decide if they want to opt into IDFA tracking, it will still allow app-makers and advertisers to collect some data through its SKAdNetwork API without explicit user permission. But the information shared will be much less granular — Facebook has warned in developer documents that it won’t support breakdowns of activity in buckets like region, age, or gender, for instance.

Facebook knows that it won’t be able to convince Apple to change its mind regarding IDFA, but it has pushed forward with this campaign in support of small businesses anyway. Why?

Reputation repair could be one reason. Facebook’s reputation has been in the gutter since the March 2018 Cambridge Analytica scandal, in which a data firm improperly accessed the data of 87 million Facebook users and used it to target ads for Donald Trump in the 2016 presidential election. 

Since then, Facebook has endured numerous scandals, it has alienated Democrats and Republicans and it has fought a never-ending battle against misinformation on its services. 

By taking the moral high ground and saying that it is standing up for small businesses, the IDFA debate presents an opportunity for Facebook to rebuild goodwill, even if it’s with just a portion of the general public, one former Facebook employee said. 

In addition, IDFA tracking isn’t going away — users will simply have to choose to allow it. This means that Facebook and other app developers will have an opportunity to plead their case to every Apple user. 

Facebook’s marketing campaign is a key part of its case. The company wants users to associate device tracking with personalized ads and with supporting small business. “Don’t opt in for Facebook, do it for the coffee shop you care about,” is the essence of the message. 

Within a small subset of its users, Facebook has begun showing prompts asking them to opt into the IDFA tracking. This is what’s known as A/B testing. Among tech companies, A/B testing is a popular strategy for figuring out the most effective way to do something. In this case, Facebook can show different prompts to different users to determine which prompt will be the best at convincing the most people to opt into the IDFA tracking. 

Asked if the IDFA change will actually impact small businesses as Facebook claims it will, the former employees gave mixed answers.

With less tracking data available at its disposal, Facebook and all of its clients, including small businesses, will not be able to target ads as effectively as they once did. So in that sense, yes, small businesses will be affected. 

However, for many small businesses, the change may not be noticeable at all. 

If you’re a small coffee shop in Austin, Texas, for example, you may not need too much data to target your ads, said Henry Love, a former employee on Facebook’s small business team. A business like that typically limits its targeting to fairly broad categories — for instance, an age range and a distance range from a specific zip code would let them target ads to Facebook users in their proximity. That’s the type of data Facebook would be able to collect from its own apps, without needing IDFA to track a user’s activity elsewhere on their Apple devices. 

“If you talked to any restaurant owner anywhere and asked them what IDFA is, I don’t think any of them would know what that is,” Love said. “It’s affecting Facebook at scale. Not the small business owners.”

Among the few “small business owners” who might feel the effects of the IDFA change are start-ups backed by venture capital money who have hired professionals with the skills to target users with sniper precision, Love said. 

“The only people targeting across mobile, web and Facebook Audience Network, they’re not really small businesses,” he said. “They’re sophisticated, VC-backed startups. They’re not your typical SMB.”

In addition, while the change isn’t slated to happen until early this spring, Facebook has known about it for a long time, and has been rolling out a number of alternative solutions for businesses.

Most notably, the social media company in 2020 introduced Facebook Shops and Instagram Shops. These features make it possible for brands to list their product catalogs directly on Facebook’s most popular apps, and sell goods directly on Facebook and Instagram. If a sale happens within Facebook’s walls, IDFA tracking won’t be necessary. 

You may already encountered a few brands selling directly on Facebook and Instagram. Expect to see more moving forward.

Megan Graham contributed to this report.