While an old-time science fiction writer once said “There ain’t no such thing as a free lunch”, consumers of online services have been binging on free stuff from the first. Of course, “free” really means “ad sponsored”, and since everyone is used to ad sponsorship through TV commercials, applying the concept to online experiences doesn’t seem bad. The challenge is that, not surprisingly, ad spending tends to be related to total retail sales and grows at slightly less than the GDP. Not only that, the growth rate for online ad spending has been declining every year for the last five years.
If online services are to be ad-sponsored exclusively, it doesn’t take a statistical genius to realize that the number of new services, the total time spent online, and the profits of over-the-top providers are all at risk. We’re already in a situation in the social media space where the success of a new platform like TikTok comes at the expense of an established one, such as Facebook. What can be done, if anything, to release the constraints that online experiences now seem to be under?
One piece of good news is the increased reliance on online shopping. A retail product sells through a chain of players and processes, and traditionally the goal of advertising has been one of marketing, in this case generating a trip to a storefront retailer to buy something. With increased online fulfillment, the focus of advertising has been shifting to include direct execution of the purchase. You regularly see links to a given product on Amazon, for example, rather than just an ad targeted at making the prospect want to seek out a place of purchase. By cutting down on the number of players involved in a retail sale, it’s possible to spend more on the players that remain, which in this case includes advertising. Growth in ad sales, which had been generally tracking GDP growth, are now growing faster than GDP, and in some markets nearly twice as fast.
Additional adspend is good news for the OTTs, but of course it is a temporary process, and in fact it may be self-limiting. Direct ad-to-online-purchase links make buyers comfortable with online purchasing, and less dependent on advertising. If advertising leads someone to Amazon (for example) to buy something, it makes sense to simply go to Amazon for purchases and ignore the ads, which most of us do for most ads anyway. In any event, the positive impact of direct ad-to-purchase links on adspend is already dipping, as the slower growth in adspend overall proves.
A better option for OTTs is to follow the pattern of television and offer paid-by-consumer services. We have cable channels that don’t take advertising but charge for their programming, and people do subscribe to them. However, it’s difficult to get an audience to start paying for something they’ve traditionally gotten for nothing (ad sponsored). Even for material never aired in ad-sponsored form, there’s constant pressure to get people who have ad-sponsored options to pay for content. Netflix is now going to offer a service tier that includes ads to broaden its audience.
We need to look deeper at the issues here. All online experiences don’t have the same food chain from production to consumption, and in particular the production mechanisms of the material vary significantly. In content, we have material that’s now not subject to copyright, material that’s syndicated for consumption after its primary release, and original material. Obviously the first of these types of content is less expensive to deliver and requires less ad sponsorship than the last type. Within our last type, we also have different types of content—music or video—and different models of creation. A reality show is less expensive than a Hollywood movie, and a multi-player game less expensive than either of those.
Social media is a form of content that’s self-authoring. The users provide their own reality show cast and script, and that means that production costs are lower and that ad revenues build profits faster. However, social media is really a form of communications, and people tend to focus on a platform because there’s only so much communicating they are looking to do. It’s one-dimensional, which is why companies like TikTok can create angst for older platforms like Facebook. Nobody wants to watch TV when only one series is playing, and eventually they change channels.
Taken in this light, we can perhaps understand why Meta rebranded itself after the metaverse concept. Properly done, a metaverse is almost self-authoring content. The cost is in the development of the software and the deployment of any necessary compute/network infrastructure. A metaverse is an alternate reality, not just a way of communicating in the real world. You can create different metaverses (or spaces within one) to reflect different issues. You could have a virtual world that mimicked some imaginary scenario, and let the users/members interact within it. Instead of watching a show, you’re a character in it. We pay for watching shows, so why wouldn’t we pay for being a character in one?
You could also work in a metaverse, be educated in one, even be examined and diagnosed in one, and all these are things that don’t rely on ad sponsorship to work. The point is that by creating a virtual world, you create a value framework that can be worth spending something explicitly, because it replaces something that’s already being paid for directly.
Another strategy is to leverage assets used to create ad-sponsored services to build other for-fee services. Obviously, Meta could create a social-media-like framework built on the metaverse but with expanded immersive interaction (which is what I think they intend to do), and charge for use, leveraging its customer base. Companies like Google, whose ad-sponsored services required the building out of massive databases, data centers, and networks, have already used that infrastructure to offer paid services like cloud computing.
The challenge with this approach is that you need some target service in mind, and the most obvious one is cloud computing. That service has way too many incumbent players already, and price commoditization is already a factor there. Service targeting would have to include framing some specific cloud mission, and even the current cloud giants have had challenges coming up with credible new missions that could be used to refine their feature set and improve margins.
There’s another basic truth at the end of this trail, which is that in the long run, revenues and profits for the sum of products and services in a market define the components of GDP, which means that growth is going to be constrained by the size of the economy. You can see the truth of this in Wall Street’s recent behavior, which I’ve been talking about in the TMT Advisor “Things Past and Things to Come” podcasts. The financial industry is distorting and exploiting the markets to build gains, instead of supporting things that are really gaining, because it’s become easier. That means there is a real danger in not facing the facts about ad sponsorship, and working hard to find credible alternatives.