>"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.
For performance marketers, sure. But lots of marketers are lazy or are big brand spenders just looking to do whatever gives them the most reach and the richest targeting they can sell to their boss. That spend is migrating from TV/Radio/Print to digital and once it goes digital it goes to Google/Facebook.
There's always going to be new channels that open up and present short term opportunities. Those channels will get acquired or subsumed by Google/Facebook. That's what the next 4-6 years look like in terms of advertising.
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.
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:
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).
Yes, that's what I wanted to say too. Perhaps LinkedIn's value of advertising is lower than that of Facebook, but it is still worth something. If the demand for ad slots drop on a particular network, the price of those slots will drop and this would attract marketers back to the ad network again.
If anything, Facebook is in a worse position than LinkedIn when it comes to coping with an economic downturn.
Financial crashes kill hype, not value. The article's pro-Facebook argument is centered around hype, not value.
Worst in terms of return, but not all marketers care for return that much. Most just care for audience reach. At least you seldom see all the big lucrative accounts advertising in non mainstream channels.
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?
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.
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.
> Is that reasonable? If so, isn't FB's market cap a little silly?
Facebook's market cap is $267.7B, which would be totally justified at $115B in revenue.
Also keep in mind that the 1.27% is not fixed. Advertising has fluctuated as high as 2% of GDP, which leaves plenty of growth potential for Facebook and Google.
Yea, I agree if its revenue reaches $115B. I guess I question that happening if it has to share the pie with Google. But I see more now why it's valued as it is (I don't think it's silly).
Why only 50% of the ad spend? I think the article makes the case that all ad spend is moving to digital. Probably not ever reaching 100% but a lot closer to 100 than to 50.
Each generation of advertising takes over more, but magazine, radio, are remarkably robust. TV will remain too (even if some transfers to Hulu/Netflix/etc...).
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?
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.
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.
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.
You'll move when your biggest advertiser requests that you start hosting your ads on whatever new thing Google/FB tells them is crucial to tracking the performance of your campaigns.
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?
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.
Facebook is keeping a tight lid on their core metrics around how effective their mobile advertising platform is. IMHO nobody really knows yet how effective mobile advertising is in the large, we're still in the early days. It'll all come out in the wash over the next decade or two.
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.
If you have a lot of high quality page views (like at least 10M per month, more if they are low quality) and you don't have a business model, maybe consider advertising. At a CPM of $3.00, you could pull in 30k revenue per month. As long as you are seeing good user growth, you can build a decent business, but not an "up and to the right"-style startup.
Otherwise the economics just don't work out, and it is a painful road.
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.
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.
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.
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.
We'd also have to address the corruption of the system, or else you wind up in place like here, where the electric company that the incumbent congressman got privatized refuses to buy solar at reasonable market rates while overcharging the public and various other shadyness. If we allow the international bankers to continue robbing us no one will be able to afford solar panels. Now they are prepping to take control of the water market as well.
I don't know how anyone can have this conversation without mentioning global economics, demographics, and debt. In short, everything matters. The dynamics are complex and the dominant policies have been nothing short of "extraordinary" e.g. negative interest rate policy (NIRP) implemented in various countries around the world.
If the bulk of the US population are one paycheck away from financial disaster[1], the advertising-based service providers have a lot more to worry about than aggregation theory.
In revenue terms. In units sold, cell phones outsell PCs 3:1. I'd bet that we see similar ratios when wearables (in all their forms - smartwatches, glasses, VR, implants, smart clothing, tattoos...) hit their stride; maybe 3B wearable computing devices sold at an average price of $100 or so. The lower price drives higher volume.
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.
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.