Silicon Valley's pivot to paid

Tech's marriage of convenience to the ad industry hits the rocks

Brian Morrissey

Nov 3, 2022 — 8 min read

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Tech’s pivot to paid

The first story I wrote after inheriting the online advertising beat at Internet News was based off a talk then-Google CEO Eric Scmidt gave at an IAB event in 2002. At the time, nobody quite knew how powerful of a machine Google had created with AdWords. It wasn’t until its IPO in 2004 that the full extent of the power of the paid search model was evident. Schmidt spent much of his time lecturing the assembled to “stop scaring users.”

I think about that a lot because through the years I’d always come across the divide between the Silicon Valley mindset and Madison Avenue. The consumer tech industry viewed the ad industry as mostly an anachronism, waiting to be optimized. Schmidt himself described it as “the last bastion of unaccountable corporate spending.” These were math people. They saw the ad industry mostly as a collection of lightweights. The paid search model was applying engineering rigor to a squishy world where people took seriously the idea of creating “lovemarks” for cereal, staging a parade of Tony the Tiger and fellow ad mascots and having multiple halls of fame for “brave” marketers.

Over the years, consumer tech companies saw advertising as a default business model. Most venture capitalists urged founders to build for scale, then “turn on the revenue faucet” with ads. Tech platforms were able to use the old Wanamaker quote – “I know half my spending is wasted, only I don’t know which half” – to push a digital ad paradigm that was, on its surface, measurable, optimized and, most important, infinitely scalable. Self-service platforms were key in getting around the ad industry’s classic gatekeeper role. Google ads were the rare instance of advertising that was bought, not sold.

Google, Facebook and others built big sales teams, of course. That was the way the game was played with the biggest spenders. But they had millions of ad customers, mostly small businesses that used self-serve tools, which put the platforms in the enviable view of not being very captive to advertisers.

Time and again, advertisers looked to exert their leverage and failed. Facebook’s Beacon debacle, where it misled some of the biggest marketers in the world, was soon forgotten. GM pulled spending on Facebook ahead of its IPO, saying it wasn’t convinced of its effectiveness, only to climb down. Brand safety disasters piled up, one after another, eliciting short-lived “boycotts” like the one YouTube faced in 2017. Needless to say, they didn’t last.

Now, the same dynamic is at play as Elon Musk brings his particular brand of chaotic disruption to Twitter. What’s clear through the flailing is that advertising is not the first priority. Instead, there are plans to charge $8 a month for a Twitter Blue subscription and even an OnlyFans clone. It was telling that Musk’s attempt to reassure advertisers was so clearly not in the same vein of its regular missives. The top ad leadership at Twitter has departed. In their place, Musk has dispatched one of his texting buddies to reassure advertisers – casting aside the people who have actual relationships with these advertisers. As Musk would say: Message received.

It’s no wonder that advertisers are voting with their feet, with big ad buying agencies advising clients to pause campaigns as the dust settles over Musk’s plans to remake Twitter. It’s hard to see how Musk would reassure many with a follow-up Twitter poll yesterday asking if advertisers should be more concerned with “freedom of speech” or “political ‘correctness.’” This isn’t really how advertising works in the traditional sense. As Ari Paparo obliquely noted, what they want is performance. But not at all costs. The biggest advertisers, and particularly their agencies, care about their reputations. No ad buyer wants to get an email from their client with “FW: Screenshot” of an ad placement against some kind of atrocity or hate speech.

The reaction from advertisers so far hasn’t been great. Twitter can’t flex many muscles on this front because it isn’t a must-buy for most advertisers. Taking a stand is easy when the costs are low. Advertising on Twitter was always an awkward match since, despite the outsized influence Twitter wields because it is favored by politicians, journalists and assorted loudmouths, it has little in the way of commercial intent signals. I was always told “chat doesn’t monetize” during the early internet.

The focus on Twitter Blue is part of an overall trend in which consumer tech platforms pivot away from advertising in favor of recurring revenue. That’s not to say advertising is going away from Facebook or Google anytime soon. It’s just that ad models increasingly seem dated and are facing structural and temporal challenges, particularly as advertisers trim spending ahead of a presumed economic downturn. Facebook’s bet on the metaverse is more akin to gaming as a paradigm. And the gaming industry proved that very lucrative models can be developed that go beyond advertising in favor of in-game purchases and direct subscriptions. It’s telling that Musk is focused on subscriptions versus advertising, considering the model he’s put forth for Twitter – who knows if it’s thought out or just a whim – is a super app. The super apps of Asia are not solely advertising machines.

Culturally, Silicon Valley has never liked advertising, with elites regularly joking about the best minds of a generation optimizing for ads. From this perspective, ad tech isn’t real tech but some kind of lesser form.

The overall environment for advertising, while still strong overall, is challenging for the particular type of advertising favored by Silicon Valley. Consumer tech platforms, for the most part, prefer to remove the “friction” that defines advertising. I don’t knowhow many times I’ve been told “this is a relationship business.” Silicon Valley sees that as waste. Self-service platforms trump direct sales. Clicks are tangible, far more than squishy concepts like brand lift, much less babble like “brand love.” What Silicon Valley was able to do is make everyone direct marketers.

But that was dependent on collecting lots of data on users for targeted advertising. That’s a lot harder now, with Apple and governments adding more, yes, friction. (Of course, Musk’s Twitter will need to contend with Apple taking its cut off subscriptions. Silicon Valley loves tollbooth business models.) What’s more, those models depend on massive scale. Social networks’ value isn’t in their tech but in their network. The more people on them, the more valuable they are to users (and advertisers). That could be changing, particularly as the market is harsher on the consumer tech platforms with ad models.

The unknown for Twitter and most legacy social platforms is whether people will shift away from oversharing as a lifestyle. The downsides of massive connectivity are now obvious. And for many people, those downsides outweigh the upsides. I quit using Facebook seven or eight years ago and can’t say life worsened. The future for social apps, as noted by Ryan Broderick, is likely to be smaller and more focused. That will require different business models. Eugene Wei notes this shift in an interview with Ben Thompson:

“It may be that also that advertising being the main source of monetization is a good model for monetizing UGC entertainment-based content, but maybe not optimal for the deterministic types of social communication that we want. And one of the ways I’ve been frustrated with western social is that I think I wish it was more useful as social infrastructure, and I think that it would be if advertising wasn’t the dominant business model there.”

There are plenty of signs of this happening. Substack has taken its anti-advertising stance to position itself as a Twitter alternative. Snap, whacked by Apple’s move to curtail ad targeting, is focused on building on its base of 1.5 million Snapchat+ subscribers. BeReal is looking to subscriptions instead of advertising as it looks to build a business model.

Overall, these are good trends. Social media has treated users as the product for a generation now, and just like publishers, shifting to thinking of “users” as customers will lead to less adversarial business models that tend to optimize to what they can get away with.

Recommendations

The New York Times sees its future growth powered by bundles of its subscription products. There is always an impulse to break apart products to sell individually with the idea of getting multiple bites of the apple. But people end up valuing convenience, and simplicity is a big advantage. The Times now has over 1 million bundle subscribers, with 10 million digital subscribers.

Puck’s reached 20,000 paying subscribers with 200,000 overall email subscriptions. This is good progress, and will be interesting to see what valuation the company gets in the next round it raises in a rough funding environment. The New York Times earlier reported the company is looking to raise $15 million at a $75 million valuation.

The ad market continues to be in a weird space. All the economic indicators are blinking red, but many areas of the economy continue to be robust. GroupM sees continued strong growth in most global markets. Ad prices at the big tech platforms tracked by Insider were down in the third quarter but buyers expect them to rise again. With the Fed again raising rates and promising more to come, this could end up meaning a sharper downturn in 2023.

Insider is shifting its subscriptions strategy, bringing more content from behind the paywall to be monetized through ads. Insider has taken a unit-economics approach to its subscriptions, so I have to assume it has done the math that a good chunk of the content it was putting behind the paywall was not converting. Of course, this will lower the overall value of an Insider subscription. It should help take some heat off complaints about onerous individual subscription targets.

Substack now has a community function. I’m intrigued by Substack’s latest product launch — and kudos to them for seemingly shipping far faster nowadays — a chat function for subscribers. Community is very powerful, but the existing solutions — nobody wants another Slack channel and Discord is not for most sane adults — leave a lot to be desired. I’m going to experiment with this feature soon.