Three of the largest, most influential and defining technology companies of our lifetime (Google, Facebook, Twitter) make money pretty much solely through advertising. Is there no other way companies can use this data to generate revenue other than to sell ads?
I don't have anything against ads, but I'm just trying to understand how (if at all) this could change in the near future. What is the future of advertising? Will it continue to remain relevant 10 or 20 years down the line in its current form, allowing so many massive companies to be built on its back?
My personal impression is that the rise of advertising has emerged from the collapse of disposable income. In a world where everyone has wealth to spend, it is better to just make more goods people want to buy as efficiently as possible. In a world where everyone is poor, and losing money to capital siphoning through the rich (who do not evenly reinvest this capital into the economy, and expect reliable returns meaning more long term concentration of money), advertising becomes more relevant because you compete over scarce dollars and more so need to motivate purchases through psychological breaking down of a targets resistance to splurge buy something of yours.
When actually making more goods doesn't make you more money (at least commodity goods, there is a growing market for the absurd luxury goods targeting those that own dividend stocks and have multiple houses and personal chefs) your alternative is to use psychological manipulation to drive the limited dollars towards your goods, even if it means the per-unit cost is higher. You make the gambit - persuade someone to buy, or don't sell at all because your product isn't really that competitve anymore when you are spending upwards of 30% of your budget on ads.
Look no further than the evolution of the video game industry - since it is so new, it also shows this effect strongly, where the biggest titles like the CoD games can see 80% of their budget spent on advertising (cursory google search to get these numbers on the latest title, Black Ops 2, turned up nothing citeable). If you spend $28 million making a game, and $120 - 200 million on ads, your economic model must be fucked.
So because you compete for scarce dollars, customers aren't coming to you, you need to manipulate customers into spending money they don't have. Hence why advertising is so huge, even with 1% click-through rates. All that concentrated wealth getting reinvested has limited alternative options of where to go, so you just try to pry more money out of people through bombardment.
>the rise of advertising has emerged from the collapse of disposable income.
No way. The rise of advertising to pay for internet stuff stems from a) the inherent network effects present in the most successful internet software, and b) the historically difficult problem of ubiquitous, safe, secure online payments.
Network effects: if you offer a paid and a free version of a product, more people will take free.
Online payments: if payments were really easy then people would pay for more things. Currently, solving this problem requires captive audiences (App Store, iTunes, in-app purchases, Facebook). But YouTube, for example, only hurts itself the more closed it becomes.
> My personal impression is that the rise of advertising has emerged from the collapse of disposable income.
The rise of the advertising industry actually happened in the 1950s and 60s, when the American middle class was at its peak.
Advertising today is just moving to the Internet, and by dollar amount that means it is falling. Advertising on the Internet is way cheaper than on TV or even in print.
> Advertising today is just moving to the Internet, and by dollar amount that means it is falling.
Do you have a reference for that? I would be extremely surprised if aggregate advertising budgets were falling down. It might be cheaper on the Internet but my gut guess is that more companies are advertising or are advertising in more places.
> Look no further than the evolution of the video game industry - since it is so new, it also shows this effect strongly, where the biggest titles like the CoD games can see 80% of their budget spent on advertising (cursory google search to get these numbers on the latest title, Black Ops 2, turned up nothing citeable). If you spend $28 million making a game, and $120 - 200 million on ads, your economic model must be fucked.
I highly doubt your 80% figure is anywhere near the mark. Even movies don't spend that much in promotion in %. You shouldn't bring out numbers if you cannot back them up, because that just makes the rest of your post less credible as well.
I make mobile games, and don't have money to.advertise the level we calculated we need. Our competitors we discovered talking with drunk employees saying too much that the advertising budget is usually from 1.5 to 2.5 of the game development cost. New franchises from new companies then this go to 5x the dev cost.
who do not evenly reinvest this capital into the economy
Huh? Do most rich people have their money under their mattresses?
Rich people try to maximize their returns as much as anyone else, which typically means a mix of stocks (that's capital for businesses to grow) and bonds (capital for cities, states and nations as well as businesses).
I'm not saying a wealthy person is hoarding money, I'm saying that 1. they reintroduce that money for the purpose of further profit generation (meaing that over time the goal is to accumulate more ownership of productive goods or businesses) rather than exchange that money for goods and services directly.
This means you favor 1. non risky ventures and 2. likely growth centers. If in an entire economy you only have this one way wealth ciphon effect, that means that money can be caught in an independent economic loop (especially after legislative manipulation makes some markets no-risk, like mortgages in the early 2000s, or military contracts, or telecom monopolies) of the majority of the population.
The wealthy aren't buying your small town trinkets from the general store, or even hiring anyone living in most rural areas. They interact with a small subset of society directly, and in most cases the money they exchange won't end up at your mom and pop shop, it is much more likely to end up back at walmart peppering the rich guys pocket again.
It is more about recogition of the game of economics we are all enveloped in. Most wealthy people actively engage and play the game to make a profit. Most people are ignorant to their participation and don't understand that every purchase they make is a power transfer from themselves to someone else. On topic, advertising helps manipulate that exchange in the marketers favor because most ads attempt to illicit an emotional response drive to purchase.
Do most rich people have their money under their mattresses?
Apple has a hundred billion dollars sitting around not doing very much.
Landlords in The Bay Area are capturing extra money available to FaceLinkGoogTwitIPO Heads and pocketing it themselves.
Most rich people aren't investing in startups. Most rich people are probably corrupt doing borderline, if not flat out, illegal things, and are only interested in hoarding more wealth for themselves.
Yachts and mansions don't build themselves. Jobs are created by their construction. Then that money is spent somewhere else, etc. Multiplier effect. Better that things are bought than the money sitting in a money market account.
In regards to the island purchase in Hawaii, it sounds like he is putting funds into improving the infrastructure on the island. (I don't want to get into an argument on whether that is a good or bad thing. Just pointing out that money is being put into the economy by him doing so.)
Sure the money is spent paying people to build those yachts, etc., but then the benefits of that labor, once spent, continue to accrue only to the owner. In other words, the yacht builders are paid once; the owner benefits continually from ownership of the finished product.
Your keyboard is probably used to produce new value for yourself and others, and represents a very small fraction of the economy. A yacht (to continue the example) is a much larger chunk of economic output frozen in the control of a single owner.
I'm not saying nobody should have yachts, just that the argument that the yacht builders were paid only addresses part of the economic effect of concentrated wealth.
We had this 'Trickle Down Effect' with Maggie Thatcher in the UK - it does not work!
Looking for a convenient link, the Wikipedia page is rather nifty. Seems people have fallen for 'Trickle Down Effect' many times, although it was called the 'horse and sparrow theory':
There is a clear race to the bottom in so many technology industries, but advertising has been a major cost for most industries for some time, especially premium brands. I recall how surprised I was to learn that 1/3 of the cost of making a box of Tide detergent was the advertising getting you to buy it. Then again, you could just not click the ads. I think I've clicked one in the last 12 years.
We're all aware that this doesn't matter, right? Unless you believe that years of TV and radio had no impact, then clearly an impression has value.
The difficulty is that valuing that impression accurately and linking it to outcomes is hard, while linking clicks to outcomes is much easier. So people (especially in tech) tend to believe that impressions are meaningless, which is clearly not the case.
Yeah, but cookies are a really bad way of tracking people over multiple sites. They're cheap and ubiquitous, but not actually very good. Logins on the other hand...
> "the rise of advertising has emerged from the collapse of disposable income"
I respectfully disagree and argue for the opposite. It is the increase in disposable income that creates a bigger market opportunity, which in turn drives more competition from sellers that want a piece of the market. Because consumers already have too many choices and little attention span, they need advertising to get in the door in the first place.
While word of mouth is the holy grail of advertising, many underestimate how long it takes to generate this type of growth engine in a sustainable way, even for the best products.
As for the video game industry, a product's typically life cycle is 1 to 2 years, and the entire market changes every 5 to 10 years (e.g. think about how fast the transition went from arcades to home consoles to online/social to mobile phones). The majority of profits come from the first few months' of a game's release; so aggressive advertising is almost essential to success.
I wanted to reply with an off handed comment but i checked myself because this is a good and thoughtful comment which doesn't take the discussion off topic.
Unfortunately your comment is not applicable to this scenario, as someone who has worked in marketing at Procter&Gamble i can tell that it is about the shift in attention from tv and radio to the internet. Search was the first big disruption and it's measurability was par to none. This caused a shakeup in brand management and companies now had to focus on the zero moment of truth, a step up from the first moment of truth and the internet owns the zero moment of truth for products. Startups/Entrpreneurs and VC's enticed by the windfall profits of google and yahoo started pushing for ideas that could attract more eyeballs and as a result the younger generation have grown into the facebook era and have not been trained in other forms of business.
So what we have is a vicious cycle where entrepreneurs create attention grabbing startups, where the measure of success is x amount of users and then sell this advertising demand to google,yahoo, etc since they have the ad inventory to make use of that demand. This is why yahoo bought tumblr. This is also why most(not all) VC's don't really care about actual businesses that generate revenue by selling goods or services, it's too hard and it is too hard to get aquired. Basically you reduce their probability of a win, since two of their three exits are taking off the table, being exit to bigger ad comapny or aqui-hire leaving creating a profitable business on the table.
The bottom line is this, you are the spaghetti that the VC throws to the ceiling to see what sticks, thier appearance at tech conferences and startup competitions are to align you with their vision of what they want you to build. You have the illusion of choice, they say wearables or food tech and startups lineup to be the spaghetti.
This is a winners take all game, where VC's are chasing black swans like facebook, instagram, tumblr and the more of you that lineup to be spaghetti, the better their chances unless the "price" of spaghetti goes up. Pls read this book or the comments at least to understand the effects of this, http://www.amazon.com/The-Winner-Take-All-Society-Much-More/... .
At this point we are all trampling over each other to be the one that takes all and this has tipped the balance in the VC's favor until we have a shakeout, the hype dies down and entrepreneurs move on to other industries like banking. I would argue that this is the time to get into finance mabe use all the data science tools and start a Hedge Fund because those guys that left the HF industry before 2008 for tech probably had it easier. Bottom line, ask yourselve how many photo startups have been started vs sold for a $billion dollars, instagram will be the only one "winner takes all".
If not then pls watch this guy from startup school 2008, it is the highest probability for you to succeed in this overcrowded goldrush. https://www.youtube.com/watch?v=Y2UXPfz_Kgk
> since two of their three exits are taking off the table, being exit to bigger ad comapny or aqui-hire leaving creating a profitable business on the table.
VC's don't generally see an aqui-hire as an 'exit', rather as a soft landing to ward off impending failure or as an early abort where it might still have worked.
Aqui-hire's are sometimes good for founders, rarely good for VC's unless the business was about to go bust and they recoup their original investment. That's definitely not a win.
VC's do try and recoup from a soft landing unless it was really a disaster. If you buying call options to capture a black swan, which is what vc's do, then the options that break even make a huge difference to your return distribution over time.
Of course they do. A soft landing is better than a total-loss. But it's not generally termed an 'exit' with a degree of success unless there is a multiple on the investment.
> "this is the time to get into finance mabe use all the data science tools and start a Hedge Fund"
It might be a BIT easier without all the noise, but starting a successful hedge fund at a young age is no walk in the park either. Think about how many John Arnolds, Chase Goldmans, Ken Griffins etc. are there comparing to all the traders out on the street try to make it big. The markets are equally as out of your control as the market where your product wants to serve.
"Three of the largest, most influential and defining technology companies of our lifetime (Google, Facebook, Twitter) make money pretty much solely through advertising."
lol, a couple weeks ago i got into real deep thought about this and realized the same thing. The question i asked was what spurred this, companies relevant from the eighties and nineties like apple, amazon, microsoft all sell something. Then i realized that it may have been the huge success of google and adwords that spurred this. Since every entrepreneur would use this excuse about how google just focused on product and thought about revenue later, yet implicitly these entrepreneurs already know that they will focus on ad revenue. All the companies making headlines today are or will be ad focused, snapchat, tumblr, vine, frontback, instagram etc.
This has also created a situation where users expect a product for free and if you charge someone will make a clone with a slight twist and offer it for free, so developers rather offer it for free and not attempt charging. I find this phenomena mainly with social products but this is what VC's and guys like Mike Arrington find exciting. They find enterprise boring because you have to be methodical, know the business and sell! The one thing modern tech can take from wall street is the excitement in sales. I believe snapchat is worth around 800mill if this is the case then we should take TV series model for creating companies because we are in the business of making entertainment shows to last a few seasons.
I am very excited when i hear about companies like nest, jawbone, pebble, nike fit, etc!
> Three of the largest, most influential and defining technology companies of our lifetime (Google, Facebook, Twitter)
That's so funny it hurts. If Google, Facebook and Twitter would all disappear tomorrow the world would continue to revolve and productivity in general would likely be up.
Techology companies that defined our lifetime exist (Intel, Microsoft, Apple, Sony, Samsung, etc) but are of a completely different kind. Google has the potential to become such a company, facebook and twitter not so much.
The harsh reality is that at the moment advertisers will pay more for your attention than you will pay to use things.
I remember when popcapgames did a kickstarter to make all of their games ad-free. It was basically, "Look, we're making a great profit, but if you pay enough to cover our costs we'll take the ads off." It wasn't anywhere close to covering the costs, let alone to what the advertisers would pay.
There probably are some exceptions to this; people who have a passion or a love for some product, but for most consumer-facing products it's easier to tolerate a few ads than to shell out for everything you use.
>pay more for your attention than you will pay to use things.
I don't think we're given the choice very often. If there was a Facebook Premium that was no ads, no status filtering, and opted you out of the backend data-selling, would you consider it? I would.
>I remember when popcapgames did a kickstarter to make all of their games ad-free
I don't! That's awesome! But I didn't hear about it at all. See, that's an example of being given a choice, but not even knowing about it. (Pop Cap was probably not very serious about it - if they were, they would have pushed an ad)
Yep - I want the impossible. I don't mind seeing the ads that I want to see. It's a fairly narrow range of things, but at least I wouldn't find them intrusive.
First, 99% of advertising, at least in terms of impressions we see on web pages, fail to convert. Which tells me that this waste has to be squeezed out over time. Which tells me that a lot of people overpay for ads and perhaps ad sellers are in for a surprise, not unlike that experienced by print media.
The other thing that comes to mind is that Twitter has the attention of celebrities and influentials, and they value what Twitter offers in terms of reach. Seems to me these are the people that will sustain it. It’s a specialized form of advertising, I suppose, but perhaps less buckshot.
Not all advertising is direct response (ie: looking at dollars in vs dollars out in specific advertising channels). There will always be a Coca-Cola or a P&G that care more about eyeballs than direct sales.
I second that. Working for a publisher, I know, that it is most valuable for us, if any big brand covers our front page with a big eye-ball-grabbing-wallpaper.
Something like a Yelp or Tripadvisor seemingly has made it seem possible for restaurants (or hotels) to not advertise anymore. If you provide good food and good service, your restaurant/coffee-shop should bubble up to the top and be seen consistently by a lot of people. This is a simplistic take on the restaurant business of which I know nothing about, but at least that seems like a plausible scenario.
As someone who ran a restaurant I can say that being well-known, in a prime location, and easy to google does not completely remove the need in ads, much like it doesn't remove the need to have a signboard.
For a known brand ads serve as a means to say "we are here, we are alive, we do well". That's why Coca-Cola or McDonald's keep running ads, despite the fact that everyone in the world is aware of them. This is not unlike wearing an expensive necktie on public, or having a gold watch 100 years ago; it's the same sort of signaling a peacock uses his tail for.
If you stop putting your ads before public's eyes, sales start to slump. Maybe this is not so for a brand with a small cult following, but such brands are few.
So advertising is not going to go away, as much as luxury items market is not going to go away. It may shrink a bit when times are hard, it may migrate to different media (from paper to TV to computer screen), but not disappear.
A YC13S company (Datarank) is using twitter data (among others) to try to quantify the general public's attitude towards certain products. So that's a possible revenue stream. Rather than a company paying to advertise, they pay to find out what people think about their products.
I've thought a good bit about alternative revenue models for Twitter—Pro accounts that show statistics and keep your entire history, have developers pay for access to their API—I'm assuming they have gone through these ideas and realized they could make the most money from ads.
I think that just means DataRank is a market research tool. It won't mean companies that use it will spend less on advertising, but it will help them target specific demographics, perceptions, etc more efficiently. Not less spending, just different.
Twitter sells its tweet data exclusively via Gnip, DataSift, and perhaps one or two other authorized data providers (i.e. they alone have access to 100% of Twitter's data pipeline, both historical and real-time).
Using Twitter's public search API you can get a max of 1% access to their data pipeline.
It's a racket, one that is making the authorized providers (and Twitter) heaps of cash.
So, yes, advertising, but also data; those are the revenue streams that social media are creating IPO-able companies out of.
Huh? Tweet data is not free for public use (well, less than 1% is), although the public provides the very data that they are monetizing.
We have a client who's willing to pay $10K/month for real-time tweet data pertaining to 20 search terms in the pharmaceutical industry, which is a small-time job for Gnip and Datasift. Check their pricing and tell me if you think Twitter is giving this data away for free. More likely they're taking a decent piece of the pie in exchange for access to the data.
Social media data is crucial for companies to stay on top of current (and past) trends -- Twitter knows this, and are profiting, presumably hugely as they have the market cornered with deep pocket clients willing to pay, repeatedly, month after month.
I would argue that these are not the most influential technology companies of our lifetime at all. Google, yes, but what about Microsoft who put a PC on every desktop, or Apple maybe for taking the smartphone that Blackberry had invented and brought it to masses, or IBM for Watson, or Oracle for the Relational Database, or even Wordpress. Google revolutionized the internet, they did to data what MSFT did to computing, but FB and Twitter are essentially the same, one's a photo sharing site, the other wordpress for the twitch generation. What about GPS, hasn't that touched more lives in more meaningful ways that Twitter?
I have thought about this long and hard. Advertising seems like a necessary evil. Free services help to democratize the internet to some extent. Imagine if you had to pay for Google searches! Today, a kid in India can use the same search engine as a kid in the US. However, to address your question, advertising will not be able to support all the businesses of the future.
The reason for the reliance on advertising for revenues is because of the shift of ad dollars to the internet from old media such as radio, print etc. Advertising seems like this massive source of revenue waiting to be tapped. It is really a temporary illusion of growth. Overall ad spending is not increasing dramatically, it's only being reallocated. Once the shift to digital is complete, digital advertising will track GDP growth (similar to offline advertising today). But complete allocation will take several decades more.
A second reason for this reliance is lack of competition. Only a few companies have the scale needed to be attractive to advertisers. Hence, all ad dollars go to these companies. The success of these companies creates a lot of me-toos. Once there are a few more companies with the scale of Google/FB fighting for the same dollars, advertising will cease to be as attractive.
It's similar to television. All of these companies have relatively fixed costs. When adding a new customer is super cheap, and your product has the potential to be super popular, then the optimal business plan is to maximize the number of customers even if revenue per person is tiny.
Ads are a proxy for micropayments. For various reasons, Google cannot charge you directly for their services. Instead, they show you an ad, which is effectively you paying them in attention, and they then sell this user attention to the advertisers.
Advertising will continue to exist but it will change forms. Once upon a time TV and Print media was the main source then it was desktop web. Today it is mobile and in future it will be something else like Google Glasses.
During the iron age the most successful companies were those that exploited iron, during the silicon age its companies that most successfully exploit information. That seems somewhat logical to me.
As a species we're driving the costs out of creating things so everything becomes a commodity, and the value isn't in the making, it is in finding the one which meets your requirement in a sea of things that are all very similar, hence the value is in the finding, aka advertising (and to a lesser extent information distribution).
We need a good feedback mechanism. Of the major forms of advertising (TV, radio, web, mobile), which allow you to respond to the ads? None so far. But I don't think it'll be that way for long.
Facebook? Much as we all love to hate them, they do in fact offer the ability to remove ads from both the right hand side and the feed. I have no idea if this matters, but it is an attempt to allow feedback (at a relatively imprecise level).
Three of the largest, most influential and defining technology companies of our lifetime (Google, Facebook, Twitter) make money pretty much solely through advertising. Is there no other way companies can use this data to generate revenue other than to sell ads? I don't have anything against ads, but I'm just trying to understand how (if at all) this could change in the near future. What is the future of advertising? Will it continue to remain relevant 10 or 20 years down the line in its current form, allowing so many massive companies to be built on its back?