OTTAWA — A long-simmering data dispute between two tech giants in Silicon Valley could have significant implications for Canada’s own digital titan. 

Apple has curbed developers’ ability to track the behaviour of people who use their iOS devices. That’s made Facebook and Instagram parent company Meta’s money-spinning ad-targeting system less effective. And that in turn has created marketing challenges for Shopify’s client base of merchants who sell their goods directly to consumers. Some analysts now expect the commerce platform to step in with its own solution to match its clients to shoppers.

At its annual developer conference in June 2020, Apple announced it would require apps running on the iOS operating system that powers its iPhones and iPads to get users’ permission to track them across other software and sites, including to target or measure the impact of ads. The Cupertino, Calif.-based firm framed the change as a move to protect its users’ privacy. Just over a dozen miles northwest at its Menlo Park headquarters, Meta took it as an attack, launching a website and newspaper ads claiming the move would be “devastating to small businesses.”

Meta’s targeting tools used “galaxies of data and information” to automate and enhance the process of identifying an advertiser’s current customers and finding similar people who might also buy their products, said Eric Schmitt, senior director analyst at the research firm Gartner. Independent brands spotted the marketing potential early, using Shopify’s software to launch their stores and ads on social media platforms to drive shoppers to them. “You put a dollar into Facebook advertising and you’d get two dollars back out [in sales],” Schmitt said in an interview with The Logic. “It wasn’t that much more complicated.”

But Apple’s changes, which it began enforcing in April 2021, made it harder for advertisers on Facebook and Instagram to target ads and track their effect, reducing the efficiency of the dollars that direct-to-consumer merchants were spending. Such businesses typically don’t have a shopper base built up over years to whom they can hawk more products, and instead rely on constant customer acquisition to keep growing, said Schmitt. Social ads also got more expensive last year, as marketers spent more even as the number of eyeballs on the platforms grew less than the demand for ad inventory. 

That could turn into a problem for Shopify. The Ottawa-headquartered company’s revenues are closely tied to its clients’ sales; the firm makes much of its money by charging fees to process payments. Company executives have acknowledged in earnings calls that Apple’s changes reduce the efficacy of Shopify merchants’ ads, but the company has not reported any impact on gross merchandise volume, a measure of orders. 

Shopify did not respond to a request for comment for this story.

“This is out of Shopify’s hands,” said Mark Mahaney, head of Evercore’s internet-research team and a longtime tech analyst. “This is in Facebook’s hands and other players in the ad industry.” Given the enormous amount spent on marketing economy-wide, he believes platforms are significantly incentivized to come up with “a post-privacy ad attribution model.” On an earnings call last month, Meta CFO Dave Wehner estimated the iOS changes would cost the firm “on the order of US$10 billion” in 2022; the company made US$114.9 billion in ad revenue last year.

Still, Shopify has taken an active interest. In June 2021, Insider reported that the firm was pitching some developers on a test of a tool called Shopify Audiences, which would use information from across its merchant base to let them target likely shoppers on Facebook and Google. On an earnings call the following month, CEO Tobi Lütke acknowledged the test, but described it as “a very early representation of early attempts.” Shopify has yet to publicly announce the service. 

Analysts see an opportunity. “Now that Facebook is handicapped by Apple, Shopify should step up to provide substitute functionality and build its own advertising network,” wrote Ben Thompson, whose Stratechery newsletter is widely read and appreciated within the company. He recommended the firm become a large-scale ad buyer on behalf of its merchants.

Unlike Facebook’s social network or Amazon’s marketplace, Shopify hasn’t historically run a consumer-facing platform where it could host ads. But in April 2020, the company relaunched its order-tracking tool as Shop, an app with search and checkout functionality. As users open the app more often to browse and buy, Shopify will “start to get some visibility into the consumer,” said Ken Wong, managing director at the investment firm Guggenheim Partners. Combining that information with merchant transaction data could allow the firm “to get involved in a more meaningful way on the advertising front.” 

That might not come in Shop itself—Wong cited “a lot of friction” generated by the February 2020 introduction of ads on the Shopify App Store, where merchants can buy themes and plugins for their stores from third-party developers. 

In the meantime, businesses that are getting less out of Facebook and Instagram ads are turning to other channels. Wong cited one merchant “using influencers as a path to targeting in social media,” which they told him delivered a much higher return. Some direct-to-consumer brands will spend more on Google search and on Amazon ads, said Mahaney. “They’ve aggregated all the audiences.” In the second half of 2021, Alphabet’s Google search revenue was up 39.5 per cent year over year, while Amazon’s advertising services sales grew 40.5 per cent; Facebook ad revenue increased a more modest 25.7 per cent.

Shopify itself has emphasized its ever-growing network of integrations, which last year made both TikToks and Spotify artist pages shoppable. “As customer-acquisition costs rise and new privacy restrictions reduce the efficacy of advertising, embedding commerce into more apps and digital services is critical to help our merchants discover new buyers,” president Harley Finkelstein said on a February earnings call.

The firm has also financed developers working on novel marketing tools for its clients. In March, Shopify participated in a US$20-million Series A for San Francisco-based Disco, whose plug-in for e-commerce stores advertises products from participating brands on each other’s post-purchase pages.

The social media and commerce platforms have also deepened their ties during the COVID-19 pandemic. In June 2021, Shopify opened Shop Pay, its express checkout feature, to businesses that don’t already use its software but that sell on Facebook and Instagram. And in May 2020, Meta CEO Mark Zuckerberg and Lütke shared a virtual stage to launch Facebook Shops, through which Shopify merchants can set up storefronts on the two social sites.

Ten months later, the two founders met up again digitally, this time on the “PressClub” show on the live-audio app Clubhouse. Asked about Apple’s changes, neither betrayed much concern about their own firm’s earnings, focusing instead on the merchants whose sales ultimately drive their own. “For the small and medium businesses, this adds up in a prominent way,” said Lütke.