Small Businesses Take Big Hit from Apple’s Privacy Regulation

When tech giant Apple introduced its App Tracking Transparency (ATT for short) in 2021, many celebrated it as a win for consumer privacy. Apple’s policy requires all iOS apps to ask users for permission to share their data via a popup, prompting many iPhone uses to opt out of device tracking. But it also makes it harder to target online ads, which has had some dire economic repercussions.

“Small, direct-to-consumer businesses are significantly harmed by this,” says Daniel McCarthy, a marketing professor at the University of Maryland’s Robert H. Smith School of Business.

In new research, McCarthy and his co-authors find that ATT made digital advertising much less effective for platforms such as Meta’s Facebook and Instagram. Less effective ad targeting means fewer people will click on and purchase goods and services featured in the ads. Small e-commerce firms that got most of their new customers through Facebook ads saw the biggest hit to revenues because of ATT, says McCarthy.

Those small, direct-to-consumer businesses saw a whopping 60% drop in revenue relative to firms that were less exposed to digital advertising, on average, according to the research.

“It’s one of the unintended economic consequences of tightened privacy, and it leaves a mark on firm revenue,” McCarthy says.

Across the board, McCarthy and his co-authors find that ad effectiveness fell significantly. They estimate that ATT caused click-throughs on ads to fall by 37.1% because consumers are being shown less relevant ads. Fewer click-through means fewer sales for companies doing the advertising. The drop in click-through rates translated to an average 37% decrease in revenues for all advertisers after the policy was put in place, and it didn’t get better over time.

Small firms had much larger revenue drops than larger firms, in large part due to new customer acquisition being more negatively impacted than repeat orders, McCarthy says.

“No matter how we cut it, small e-commerce firms more exposed to ATT – higher percent of revenue whose source is Facebook, higher percent of spending from iOS devices -- experienced larger revenue drops,” wrote the researchers.

The researchers also found that Meta saw a 6.8% decline in ad spending – losing out largely to Google – as firms shifted their ad spending away from Meta when it became less effective because of Apple’s new policy.

“While there are undoubtedly benefits from consumer privacy, our results suggest large negative economic consequences,” say the researchers.

McCarthy likens the economic implications of ATT to the way new legislation might impact industries, but without government checks and balances.

“It was like legislation in terms of its effect, but it was decided upon unilaterally by a single company. And that company is now also doing a lot of its own advertising, begging the question of whether they are solely doing to protect consumer privacy, or to further their own financial interests.”

Many economists likely missed the impact of ATT, chalking up the decline in online purchases to things getting back to normal after online buying spiked during the pandemic, says McCarthy.

“When things got mostly back to normal, many online companies were suffering,” he says. “For firms that struggled, it could have been – at least in part – not because of the return to normalcy but because of this ATT event.”

The researchers were able to isolate the economic effect of ATT by comparing firms that had different levels of exposure to digital advertising but were otherwise relatively similar to one another. They were surprised just how pronounced the effect on revenue was. “I don’t think that I was expecting that the effect would be that much worse for the small businesses.”

The research also shows Facebook’s power as a marketing channel, says McCarthy.

“For there to be such a pronounced revenue effect implies that small companies were getting a lot of value from Facebook. Even when that plan went down the tubes with a drop in ad effectiveness, they weren’t able to just rotate their marketing dollars to some other marketing channel to stabilize their business. They just took the hit.”

Read McCarthy’s working paper, "Evaluating The Impact of Privacy Regulation on E-Commerce Firms: Evidence from Apple's App Tracking Transparency,” with Guy Aridor (Northwestern University), Yeon-Koo Che (Columbia University), Brett Hollenbeck (UCLA), and Maximilian Kaiser (The World Bank).