
The Reality of Missing Out - rememberlenny
https://stratechery.com/2016/the-reality-of-missing-out/
======
xiaoma
> _" Digital advertising is becoming a rather simple proposition: Facebook,
> Google, or don’t bother."_

This is true only for the worst marketers. Due to the law of shitty returns,
the ROI of any given advertising channel declines over time as it gets
saturated with more and more marketing competition. This both drives up prices
for the marketer and desensitizes users to ads.

Nobody gets the returns on facebook ad campaigns that were possible in 2010 or
the returns on adsense campaigns that were possilbe in 2005. Today, if you
want that kind of reach for your money, you're advertising on Pinterest, Vine
or even Plenty of Fish.

If all you use is Facebook and Google, you'll be bidding against a lot of
others like you.

~~~
snowwrestler
And, it ignores the variety in the goals of marketers, and the audiences they
are trying to reach.

For example, on Twitter you can target ads to public conversations among
influencers. You cannot do that on Facebook; there are no public conversations
among influencers on Facebook. Influencers use Facebook the same way you and I
do: to stalk people and avoid their parents.

Or consider the quickly growing content marketing options, like branded
content (the Buzzfeed and Vice model), buying native content slots on sites,
and content "recommendation" systems like Outbrain and Taboola--which are way
cheaper than Google or Facebook.

Want to reach teenagers? They don't use Google and Facebook. You better be on
Snapchat and Instagram (and, actually, Twitter). Etc.

~~~
spangry
Twitter's an interesting case. My very controversial view is that Twitter will
never achieve profitability (of the level that justifies their market cap).
Like Facebook, Twitter is in a two-sided market. Unlike Facebook, it's unclear
what the other side of that market is, or how it could be sufficiently
monetised:

    
    
           User         -->  Facebook <-- Advertiser
        (Stalking)      -->  (Profit) <-- (Eyeballs)
       (Socialising)    -->  (Profit) <-- (Targeting)
      
           User         -->  Twitter  <--    ? 
      (Free expression) --> (Profit?) <--    ?
      (Public broadcast)--> (Profit?) <--    ?
    

There are probably a bunch of other market participants on the right side
(e.g. developers) for both companies. But I think these are the primary profit
engines (and main benefits listed under the participants). Here's the
interesting part. Let's assume the right side participant for Twitter is also
'advertisers'. In both cases, advertising creates a 'negative cross-side
network effect': it subtracts from the user's benefit. But Facebook has a
number of advantages over Twitter:

\- Because of the structured data they hold, it's far easier for them to
target advertising at finely grained demographics. This is beneficial because
it reduces or eliminates the 'user value subtraction' from advertising, and
increases the value of placing an ad for advertisers (so Facebook can charge
more for it). _Twitter have far less scope to do this, as they can only make
general inferences about their user based on sentiment and relationship-
network analysis. Also, because the data is public, advertisers can analyse
and target (via company /brand accounts) for free._

\- Facebook enjoy increasing returns to scale. On the user side, if more
people use facebook there are more people to stalk or socialise with. On the
advertiser side, more users means more eyeballs, more targeting data and more
advertising niches. _For Twitter, users gain far less from increased scale (as
user-base size is not related to 'free expression', and only weakly related to
'public broadcasting', given non-twitter users can read twitter walls). Even
worse, because Twitter data is public, they can't charge advertisers for the
(less structured) data they generate._

\- Although an ill-defined concept, Facebook has increasing returns to scope.
That is, as they acquire new types of data on their users, they can offer even
better targeting and find more granular marketing niches. For example: imagine
if Facebook acquired LinkedIn. It's fairly easy for them to link Facebook and
LinkedIn users, as most use their real names on both. So now, in addition to
knowing someone is a single 28 year old white guy who enjoys scotch, they now
also know he earns a high income. This means that where they used to target
him with generic scotch ads, they can now target _high-end and expensive_
scotch ads at him. _Twitter 's users, on the other hand, mostly interact
behind unlinkable pseudonyms._

As heretical as these sound, I think there are only three ways for Twitter to
generate significant profits (and they all carry significant drawbacks):

\- start charging for API calls above some threshold (i.e. charge for market
research)

\- start charging commercial entities based on number of followers (or volume
of tweets)

\- use adsense (better user data linkability)

tl;dr - Twitter creates significant value. But it's difficult for them to
capture at least some of that value as profit (unlike Facebook).

------
rubidium
I'm new this this, so help me out.

If this is true (particularly the reference to advertising=1.27% of GDP) then
an expectation of future revenue of all FaceGoog-advertising will be in the
range of 1.27% x (GDP of US) x 50% of advertising market. This works out to
115 Billion per year. Google+FB's market combined current revenue is $93
Billion.

Is that reasonable? If so, isn't FB's market cap a little silly?

~~~
wodenokoto
Their valuation isn't based on monetizing the US market, but the entire world.

~~~
rubidium
Ok, so that's a x4.2 difference. Of course, globally they face some stiffer
competition.

~~~
mathattack
A couple thoughts:

1 - Market cap is (theoretically) the Net Present Value (NPV) of future cash
flows. You have to be careful about comparing this NPV (discounting forever)
with a 1 year slice. When interest rates are low, the future cash flows have a
lot of value.

2 - Facebook's value is likely based on other things too. Advertising is just
1 way to monetize their users. Imagine hijacking all of voice communications
as an example.

~~~
rubidium
Thanks, that is helpful additional info.

So to summarize, the market value of facebook assumes 1) It becomes co-
dominant web-advertiser with google in the US

AND

2) It finds another way to make some money (either by other advertising
markets OR other products/features that people pay for).

~~~
mr_luc
Which is pretty plausible, right? (Becoming co-dominant with google).

The other thing to consider is the competitive/strategic landscape. It's not
so much that the market 'assumes' that Facebook will invent new ways of making
money, but rather that regardless of who figures it out, facebook is so
incredibly well positioned at the moment (ubiquitous social network) as to
give it a large competitive advantage, and let it eat other companies' lunch.

The market has examples of other similarly well-positioned companies, like
Microsoft in the early 90s, to draw on.

------
dcole2929
From a business perspective this makes a lot of sense. I have said time and
time again that Facebook has absolutely deserved it's valuation (when a lot of
others disagreed), and have made similar comments in regards to Snapchat. In
short I'm a fan. That said, is a world in which all ad revenue is basically
being filtered through 4 or 5 companies necessarily a good thing? There have
been a few studies that have shown that millennials, and whatever there
calling the generation after them are already largely immune to Ads. So isn't
there likely a point in time as these generations become increasingly larger
percentages of overall population when Ad Revenue starts to fall. If the
people you want buying things in 15 years don't pay attention to ads what
happens to the industry?

And in the meantime if it's Facebook, Google, Verizon, Snapchat or nothing,
what happens to all the other apps and webpages currently only surviving on
meager Ad Revenue if advertisers abandon them wholesale? Can something like
Reddit even exist when it makes very little money on it's own and can't
subsidize with Ad revenue?

~~~
adTechGuy
Something from your first paragraph answers the question in your second
paragraph!

Yes, all advertising will be filtered through Google, Facebook and someone
like a Verizon (or whichever Telco can weaponize its data best, currently
looking like Verizon).

What that means is that sites like Reddit can still make ad revenue, but only
by filtering it through one of those players. That could mean using Google's
ad server tech, or integration with Facebook's audience network, or whatever
Verizon comes up with.

But yes, most digital ad revenue currently flows through those few players and
that will only accelerate.

The true future of Reddit and other publications is as marketing vehicles to
sell stuff directly to their readers/audience. Ads are basically just a
stopgap along the way to content-driven commerce.

~~~
dcole2929
But doesn't that just seem unsustainable and like a recipe for disaster? In
the example you mention Reddit the company is basically tieing it's entire
existence to Google's adtech. If google suddenly decides it wants to come out
with a competitor and shuts down Reddit's access to the adnetwork, the games
over for them as a company. They have no ability to build 1-1 relationships
with advertisers because they aren't one of the big players?

This also seems like something ripe for abuse. You use Google's AdNetwork
because it's the only way to access revenue for advertisements. But google can
keep upping the cost of it and companies are left with no choice but to pay it
or fold up shop.

Maybe this is a good thing and companies shouldn't be relying on ad revenue.
This is basically what I tell everyone who comes to me with a startup, mobile
app idea. But at the same time, there are companies that provide real value
that don't have a lot of other good avenues for revenue.

~~~
adTechGuy
It's not quite that extreme. Google needs publishers so they won't try to
squeeze out "reddit" in this example. It's more that they or Facebook or
whoever will charge a tax on every impression our hypothetical publisher
sellers, reducing their take home revenue slowly over time as the fees add up
and increase.

------
vdnkh
I wonder how a future dominated by Facebook/Google advertisements will affect
the multitude of adtech startups. They all aim to solve problems that the two
giants air aiming to accomplish by gaining control of the whole funnel.
Combined with the rise of adblockers, will there be enough money left?

~~~
adTechGuy
AdTech companies are completely fucked. Just totally and utterly fucked.
Google and Facebook are kicking their asses left and right.

Google "worked with" 3rd parties for the better part of a decade while they
improved on their products, but now they are working to muscle them out by
taking their best products and blocking them to adtech companies. They took
youtube inventory out of their Ad exchange last year. It cost them nothing to
do so but crippled a handful of video ad companies and exposed them as
powerless.

Criteo has long been held up as an example of a company that managed to forge
its own way, but eventually they've started running out of gas too. Their
stock price has been tanking since last summer. It's not surprising either.
Criteo's bread and butter are dynamic ads, which show specific products to
retail shoppers. Well Facebook rolled out its own version of that and it's
pretty tremendous. Criteo has to resell that product or lose relevance to its
customers but now its just a reseller instead of providing the ad serving and
inventory for its customers. This destroys its value proposition majorly.

------
hitekker
I've heard the line that, for most startups, advertising is where business
models go to die.

~~~
beat
I saw a great presentation once that put a slide up with several well-known
companies - Google, Facebook, Yahoo, etc. The presenter asked what business
they're all in. The answer is advertising. Then he put up a slide with over
200 companies. What business are they all in? Advertising.

Then he pointed out that advertising is only 2% of the GDP, and internet ads
aren't even a majority of that.

The point was to consider enterprise and medtech for startups instead, places
where real businesses will pay real money for your products, rather than going
out to find a million eyeballs and trying to sell them.

------
nostrademons
I would bet that the dominant form of advertising of the 21st century hasn't
been invented yet.

First off - take a look at the historical technologies he calls out in the
post. Radio and TV didn't even exist yet at the height of the Gilded Age. The
dominant media was newspapers (Pulitzer & Hearst, etc.), which ran a scaled
up, largely self-service, mass-media form of the advertising which worked in
the 19th century. Much like how Google/YouTube/Doubleclick, Facebook, and
Craigslist run scaled up, personalized, carefully tracked forms of the
advertising that worked in the 20th century.

The concept of "brand advertising" at all didn't exist until the early 20th
century. Why? Because "brands" as a concept were enabled by the technologies
of mass production, mass consumption, and mass media. Before it becomes
economical to spend millions of dollars building awareness, need to have an
audience of millions of people with the disposable income to buy your product,
and you need the capacity to make & distribute millions of them. The capacity
to build them became available in the 1870s, the capacity to distribute them
in the 1890s and 1900s - but the audience of millions of people who could
afford them didn't happen until living wages started to become a thing in
1914, and it took a generation to spread throughout the population.

I'll predict that the 21st century will see a trend to toward smaller firms,
hyper-personalization, local manufacturing, and custom services over products,
much as described in The Refragmentation [1]. The technologies of cheap solar
energy, 3D printing, the Internet, self-driving transportation, and pervasive
computing (beyond mobile - the wearable market will dwarf mobile to the same
extent that mobile dwarfs PCs) will make it much more economical to build
small production runs tailored tightly to individual preferences than mass-
market consumer goods. The forms of advertising used to make people aware of
these goods will shift as well, creating a new category on top of "brand" that
is to brand advertising as brand is to coupons, but who knows what that
ultimate form will be? If you can figure it out, it's probably a trillion-
dollar market.

I think that Etsy, Kickstarter, Yelp, LinkedIn, AirBnB, etc. are all
harbingers of the type of company that will dominate the 21st century, but
they're struggling now because they're early. People haven't yet let go of the
old ways of thinking of social & economic organization, so they evaluate 21st-
century business models in terms of 20th-century industries. Yelp and LinkedIn
in particular are in trouble, because their customers are all embedded in old-
economy value chains (local businesses, employment), and so they're in this
weird position where their own business model assumes a networked, hyper-
personalized world but their customers will disappear if that world comes to
pass. It'll be interesting to see whether these first-generation marketplaces
can hold on and prosper in a few decades, or whether they'll go under and be
replaced by companies that build on their ideas but with new value chains.
Historically, most of the first-movers in the industrial revolution died out,
and the household names of the 20th century were large conglomerates formed by
their carcasses.

[1] [http://www.paulgraham.com/re.html](http://www.paulgraham.com/re.html)

~~~
beat
I have such high hopes for pervasive solar power to drive new markets. Fossil
fuels are an increasingly ugly hole - they're becoming increasingly expensive
and destructive to extract, and resource wars over energy extraction sites and
transportation routes will become more and more violent and contentious.

Cheap clean power plus 3D printing allows for unique new markets to happen.

~~~
nostrademons
I think we will see widespread migration of people, driven by cheap solar
energy, global warming, water shortages, self-driving transportation,
3D-printing, fast mass transit like the Hyperloop, and hopefully holographic-
videoconference based telecommuting.

When you no longer need to live close to work and you no longer need to be in
a major population center to get a wide variety of consumer goods delivered to
you, there's little reason to live in _either_ cities or suburbs. People are
free to form autonomous communities connected to the global economy by the
Internet, and will likely do so in areas least impacted by global warming and
water shortages.

~~~
reality_czech
A comment combining solar energy, global warming, self-driving cars, 3-D
printers, the Hyperloop, and telecommuting? That's it, we have reached peak HN
for today. Thanks for playing guys.

------
mbrock
Twitter is valuable in non-economic terms. Maybe it isn't a viable business.
Then we'll build something else to chat on. Maybe it'll be hard to get Kanye
and Bernie and everyone to all use the same thing. Too bad. Maybe the
diversity will be interesting. I don't really enjoy Twitter that much lately.
It got too big. The features made to appeal to the mainstream just make the
core users feel unwelcome. I'll gladly use a more elitist Twitter. From my
perspective there was a boom like 5 years ago when people really got to know
each other on there; it was a kind of intimate setting, and kind of non-
mainstream. Now it's just bleh. People are on there out of inertia. Or because
they want to get famous.

------
tryitnow
We're seeing the same consolidation that happens with any new industry.

There used to be a hundreds of automobile manufacturers, eventually that
shrunk to the Big Three in the US.

------
petra
So how will that affect the smaller sites (content , etc)? or they have
already adapted to most such effects and there will be no change ?

