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In a note to investors on Wednesday, Pacific Crest Securities analyst Evan Wilson warns that the disappointing advertising revenue generated by both internet companies during the first three months of the year could hint at a more worrisome trend:
Twitter’s comment about a relatively healthy overall ad environment, but a slowdown in tech ad spending, is somewhat worrisome on the back of similar comments from Yahoo! This very well may be the weak performers in the space pointing fingers, but we were watching for the potential impact on the end of VC welfare on ad spending. We now potentially have two data points. We continue to have a cautious sector view as we believe fundamentals, with a few exceptions, are weak.
The “VC welfare” Wilson refers to is the venture capital funding that has been plowed into Silicon Valley tech startups over the past couple of years. Many of these tech startups have been using that money to grow at all costs, and that usually means a spending lots of money on advertising and marketing.
The biggest beneficiaries of this startup advertising spending are consumer internet services like Yahoo, Twitter, Facebook and Google.
But some of these tech startups are starting to run into difficulties and looking for ways to control their costs. The worry is that if the VC-funded startups start cutting back on ad spending, that means less revenue for internet companies whose businesses are based on advertising.
As Wilson points out, Twitter and Yahoo are both struggling companies with plenty of problems that could account for the weak revenue results.
And Google and Facebook are very large businesses, with a broad and diversified base of advertising customers.
But Facebook’s app install ad business, which has been one of the engines of Facebook’s revenue growth, is particularly dependent on startups who pay to promote their apps on the social network. Google has started offering various versions of its own app install ads, and even Apple is now reportedly exploring paid app promotions.
If tech startups stop advertising the ripples will be felt across a lot of companies.