Facebook, Google and Snap have found their knight in shining armor as ad spending craters

• As pandemic-related impacts started to cut advertiser budgets with big tech companies in the first quarter, one area of spend appeared to stay strong: Direct response. 
• Direct-response, or DR, advertising includes methods that drive consumers to take an immediate action, like download an app or buy something from an e-commerce site.
• Tech companies like Facebook, Google and Snap said direct response was a bright spot in their ads business. Twitter, on the other hand, has had ongoing issues with its own direct response business. 

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As pandemic-related impacts started to cut advertiser budgets with big tech companies in the first quarter, one area of spend appeared to stay strong: Direct response. 

Direct-response, or DR, advertising includes methods that drive consumers to take an immediate action, like download an app or buy something from an e-commerce site. And though many advertisers in the first quarter began retreating their brand advertising spend — or placements that might communicate more what a company is about, rather than driving immediate sales — tech companies like Facebook, Google and Snap said direct response was a bright spot in their ads business. Twitter, on the other hand, has had ongoing issues with its own direct response business. 

On Wednesday, Facebook's chief financial officer Dave Wehner said on the company's earnings call that the company is seeing a fall-off in more broad-based brand advertising, but other advertisers are focusing more on placements "that are driving direct results today, which isn't really surprising given the economic climate." 

"We're seeing a lot of bidding into the system from gaming and e-commerce as prices come down — it's also more economic and they can get the ROIs that they want," he said. 

Wehner said the company hasn't given a specific number on how much of its advertising business is direct response. "But it's really, for many years, driven our business. It continues to drive our business, and I would say if anything Covid has accentuated the importance of people who are bidding for online conversions," he said. 

Analysts latched onto that theme following the recent earnings results from Facebook, Google, Snap and others.

"The resilience of performance-based [or] DR marketers has been a common theme across SNAP, GOOGL's YouTube, & now FB during [first quarter] earnings," J.P. Morgan analysts said in a note this week. 

Analysts added that some of Facebook's long tail of performance-based advertisers stepped up into auctions that were seeing lower density and lower prices to take advantage of more compelling return on investment. Facebook saw strength in areas like gaming, e-commerce and tech, while areas like travel and autos were weaker. 

Morgan Stanley analysts added that as those "top of funnel advertisers" pulled back on spend, they believe the approximately $40 billion app install market was "likely the most material contributor this quarter" as direct response and performance-driven advertisers in areas like video games and e-commerce came in to take advantage of lower auction prices. 

Earlier in the week, Google said direct response advertising had substantial year-on-year growth through the entire quarter, while brand advertising growth accelerated in the first two months of the quarter, but started to slow in mid-March as the coronavirus pandemic forced lockdowns around the world.

J.P. Morgan analysts wrote that though brand spending has weakened further in April, they believe direct response advertising is proving more resilient. Though advertising overall is pressured, analysts wrote Google's direct-response strength on YouTube, especially in app downloads and gaming, is helping to offset the downturn in other ads. They added their ad commentary lines up with their commentary on Snap's earnings last week.

Morgan Stanley analysts underlined the strength of direct response on YouTube, "which grew substantially throughout [the first quarter] even as branded ad spend slowed."

"While we believe DR remains a minority of YouTube ad revenue (20%-30%), its rapid growth (as auction pricing likely fell) speaks to the breadth of GOOGL's platform and advertiser base," they wrote. 

Snap, which reported earnings last week, saw its direct response business as a star of the show. 

Wells Fargo analysts wrote Monday they believed that Snap won't be immune to Covid-19 impacts on ad budgets, but that it may be better insulated versus its peers because of its strong momentum with direct-response advertisers and more limited exposure to small business and international advertisers. Snap's chief business officer, Jeremi Gorman, noted on the earnings call that direct-response advertising now accounts for more than half the company's overall revenue. 

Unfortunately for Twitter, this all comes as it faces continued issues with its own direct-response business. 

Twitter in October blamed much of its lackluster third-quarter 2019 earnings on its "Mobile Application Promotion" (MAP) suite of products that help advertisers promote mobile apps on the platform, including app installs, conversions or engagements on apps. At the time, Twitter discussed issues with that "legacy" technology and said these bugs impact its ability to target ads and share data with measurement and ad partners.

On Twitter's earnings call Thursday, CEO Jack Dorsey said the company is working to increase its revenue durability by building "world-class performance ads products," beginning with MAP. 

CFO Ned Segal added on the company's call that "an improved MAP product and more Direct Response ad formats would increase our addressable market with more exposure to advertising demand that may be more resilient through an economic downturn, while building on our strengths and helping brands who wants something new and connect with what's happening."

Segal said this reaches a "multi-tens of billions of dollars market to advertise, mobile games, video services, food delivery services and other things."

The company said its ad server rebuild should be complete by the end of the second quarter, with work on MAP continuing throughout this year. 

Pivotal Analyst Michael Levine wrote in a note this week that while the firm sees substantial opportunity for MAP and DR advertising on the platform, "it is still not ready for prime time." 

"Despite questions about if Twitter is viewed as a DR platform, we think that the DR advertiser base is exceptionally nimble in finding incremental DR opportunities as they have with SNAP," he wrote. "We just think it is going to make more time to get off the ground"