State of the Internet
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Follow-up from last week
Some of you commented that Apple is essentially a “better” company because they are leading the way on digital privacy — especially compared to Google and Facebook, who are decidedly NOT. I think this characterisation is a little too simplistic. In one of Ben Thompson’s Stratechery newsletters (which I highly recommend), he coined the term “Strategy credit”:
Strategy Credit: An uncomplicated decision that makes a company look good relative to other companies who face much more significant trade-offs.
Over the last few years, we’ve witnessed a lot of companies “stand up for what’s right” in ways that were — in reality — just demonstrations of their strategic credits. Apple’s relationship with privacy is a great example.
Apple doesn't NEED to collect data, so digital privacy is something they can “stand for” without hurting their business model. They can lean into the issue while making their rivals look bad.
In stark contrast, Google DOES need privacy invasion for a lot of their stuff to function effectively. For instance, if you tell your Google Assistant, “Google, book a restaurant,” the company can analyze your search history, your Gmail messages, and your Google Calendar, before suggesting a place you might enjoy. When Google “invades” your privacy with greater frequency and variety, the more accurate their recommendations will be — and the more you will want to integrate Google into your life. Their invasion of privacy in this case is a GOOD thing (for most customers), but it is still an invasion of privacy.
Conversely, Google CAN take a moral stand on China — since they’re already blocked from working in the country. Apple, however, can't hold the same position; they NEED China, regardless of whether that’s the morally righteous choice or not.
In 1935, American author Upton Sinclair wrote, “It is difficult to get a man to understand something, when his salary depends on his not understanding it!” Companies, just like people, often construct a moral framework that ties very closely to how they earn their money. In this case, Apple enjoys boasting about privacy because their business model doesn’t need transparency. But that position shouldn’t necessarily infer that transparency is bad and that privacy is good (any more than it means the opposite).
As I stated last week:
There is a real trade-off between privacy and convenience. Many people will say they care about privacy, but their actions indicate they will readily give it up for even a tiny increase in convenience. Apple’s focus on privacy is a marketing play (that doesn’t cost them much) in the same way companies talk about their environmental credentials. People like to hear it, but most will not pay more for it (in dollars or their convenience).
We know that “marketing = advertising.” Apple recently proved this point by releasing a 60-second commercial that shows a woman laughing uproariously as she checks her phone. In case viewers missed the (obvious) point, Apple added even more direct language in the description of the YouTube version of the ad: “Your privacy matters. That’s why iMessage encrypts your conversations. Privacy. That’s iPhone.”
Privacy. That’s marketing.
Aware of the growing attention for digital privacy, Facebook upped the ante by announcing a significant new feature — users can clear all of their data history. Variety reported:
For Facebook, giving its 2.32 billion monthly users the ability to clear out their digital history — something the company plans to launch in 2019 — is going to hurt the social-media colossus’ business, according to a top Facebook exec.
“Privacy is a headwind for us in 2019,” CFO David Wehner said, speaking at the Morgan Stanley 2019 Technology, Media & Telecom Conference on Tuesday in San Francisco. “It’s one of the factors that’s contributing to our expected deceleration of revenue growth throughout the year.”
At a high level, the clear-history tool is “going to give us some headwinds in terms of being able to target as effectively as before,” Wehner said.
Meanwhile, during the same session, chief operating officer Sheryl Sandberg claimed that “Targeted advertising and privacy are not at odds,” and she said that one of the things “people fundamentally don’t understand well enough about Facebook…is our business model.” [Emphasis mine]
Those are some curious statements from the Facebook executives. On one hand, the CFO admits that privacy concerns will hurt Facebook’s revenue and hinder their targeting. The COO, on the other hand, claims that privacy and targeting aren’t contradictory concepts. How can both Wehner’s and Sandberg’s statements be true?
Let’s think about this: the biggest “headwind” from privacy isn’t the effect on Facebook’s ability to target — it’s the negative marketing spin facing the company. If clearing all historical data from Facebook would kill their business model, there is simply NO WAY they would take that action (at least without government regulation). Facebook can allow users to clear their personal data because it just doesn't matter that much. Yes, the move will hurt targeting, but the impact is marginal. Far more important are the following points:
Facebook has a ridiculously great ad unit and an astonishingly large number of users who see those ad units.
Facebook can target by location, gender, and age.
Facebook can match names and email addresses from company lists.
Marketers BELIEVE targeting is super important, so they’re willing to pay a premium to target on Facebook — regardless of the effectiveness.
None of those facts will be negated by the ability of users to clear their personal histories.
In simplest terms, digital privacy is a new frontier for corporate competitiveness. Apple markets their privacy features. Facebook responds by marketing their new privacy features. The only real difference here — Apple is playing offense while Facebook is playing defence.
How much is all this privacy going to cost? From the WSJ:
Facebook Inc. said it is ramping up its global advertising spending as it aims to rebuild trust after a series of privacy missteps and other controversies dented the social-networking giant’s reputation.
The push, which Facebook marketing chief Antonio Lucio said could more than double the company’s advertising spending, will involve working with a revamped roster of creative agencies on campaigns for brands including WhatsApp and Instagram.
Mr. Lucio said the Menlo Park, Calif., firm has been tarred by election interference and misinformation on Facebook as well criticism of its privacy and data management.
“There’s no question we made mistakes and we’re in the process of addressing them one after the other, but we have to tell that story to the world on the trust side as well as on the value side,” Mr. Lucio said.
Facebook has already begun its effort to rebuild trust with consumers, according to Mr. Lucio. The company recently redesigned its mobile app and website to shift from an open public forum to a more private network with encrypted communication in closed groups. Last year it aired an expensive apology ad campaign to repair its image among people upset about the proliferation of fake news on Facebook and Russia’s use of the platform as it tried to influence the U.S. election. [Emphasis mine]
As I mentioned earlier, privacy is just a marketing problem. Facebook’s solution? Doubling their marketing spend. Of course, marketing (as I regularly argue) includes far more than just advertising.
Let’s move on from privacy and take a look at the effectiveness of digital advertising. Facebook’s ability to target is excellent (even with increased privacy controls), but it appears that Amazon’s targeting might be even better. The challenge for Amazon? Facebook possesses an exceptionally good ad unit. As I wrote in last week’s post:
Amazon’s ad units are nowhere close to the effectiveness of Facebook’s newsfeed ads, but Amazon possesses a clear superpower: their targeting is much, much better. Ad units may change over time, but the data used to support their targeting? That is a fundamental advantage that’s not going away.
Amazon appears to have recognized their predicament and started pursuing solutions. From Digiday:
Ad buyers primarily see Amazon’s demand-side platform as a way to programmatically buy Amazon’s owned-and-operated inventory and target their ads using the e-commerce giant’s shopper data. Amazon is trying to broaden buyers’ views by pulling in higher quality inventory from outside publishers, including TV networks’ connected TV inventory, for advertisers to access through Amazon’s DSP.
Recently Amazon has been using its DSP and its underlying customer data to secure a foothold in the burgeoning connected TV ad market. In September 2018, the company began to require that ad-supported apps on its Fire TV connected TV platform provide Amazon with 30% of their ad impressions for Amazon to sell without providing publishers a cut of that resulting revenue. Since making that move, Amazon has been pitching ad buyers on using Amazon’s DSP to purchase that inventory, according to agency executives. [Emphasis mine]
One of the best ad units ever designed is the 30-second TV spot. If Amazon can marry their extraordinary targeting capabilities with a more effective ad unit (like the 30-second TV spot), they will become a media-selling juggernaut — more than they already are today. I think you should expect Amazon to expand this concept. (And if you’re a marketer, maybe you should be pitching Amazon instead of waiting for them to pitch you!)
One minor correction from last week. I wrote:
If Facebook targeting is so effective because they control 72% of the social logins on the internet, then the fact Amazon controls over 50% of ALL e-commerce sales, suggests they might be pretty good at it as well. They are.
The 50% number was widely reported, but last week “The Information” provided an update:
A spokesperson for eMarketer told The Information that the firm lowered its 2019 estimate for Amazon’s share of U.S. online sales to 37.7% after getting “new guidance” from data in Amazon CEO Jeff Bezos' shareholder letter.
Whether Amazon controls 50% or 37.7%, the conclusion still stands: the company holds a vast trove of purchase data that can be utilized for better targeting than anyone else.
Mary Meeker’s Internet Trends
During the recent ReCode Conference, venture capitalist Mary Meeker released her annual “Internet Trends” report. As always, her insights prompted lots of debate and reflection.
You can read through the entire 333 slides directly from her website (or on the thousands of media companies that are reposting her work on their own sites, in order to soak up the views). One of Meeker’s most impressive qualities is her ability to distill trends in a broad range of topics, such as remote work, online education, immigration, the US income statement, healthcare technology, or the state of China.
I plan to return to this report over the next few weeks, but right now I want to focus on a few takeaway ideas that stuck out to me.
Internet is still growing but slowing down. Total global internet users grew by 6% last year, a decrease from the 7% in 2017 and 11% in 2016.
eCommerce is growing at a faster rate than internet users. eCommerce was up +12% last year versus +2% for physical retail. For all the chatter about Amazon being a monopoly, eCommerce actually constitutes a small share of total retail at 15% (versus 14% in 2017). If — hypothetically — eCommerce continues to grow at 12% per year and traditional retail at 2% per year, it will finally become the bigger channel sometime in 2036. That said, all signs point to a slowdown of eCommerce growth — it spent most of the last four years in the +15% year-over-year range before cooling down dramatically during each of the last five quarters. I would be surprised if eCommerce was bigger than physical retail when my one-year old starts sending his kids to preschool.
Time spent in front of digital devices continues to grow. In 2018, American adults spent 6.3 hours per day staring at the screen of a digital device, with an expanding share of that time on mobile, which consumed 3.6 hours per day (up +10% from 2017). Desktop and laptop use actually contracted by 5% year-over-year, down to 2.0 hours per day.
If people are spending more time on digital devices, then…where is this time coming from? Interest in traditional television continues its gradual decline, down slightly to 3.7 hours a day; notably, that number is still higher than mobile (but not as high as mobile plus desktop/laptop). Moreover, what is the number one complaint that people have with social media? The platforms erode the quantity and quality of users’ nightly sleep.
Digital Advertising has caught up to usage. Mary Meeker expertly illustrates the relative ad dollars spent by channel compared to the time spent by users by channel. In 2010, advertisers were enormously overspending on print (27% of spend versus 8% of user time), while underspending on radio (11% versus 16%), desktop (19% versus 25%), and especially mobile (0.5% of spend versus 8% of time). Over time, advertisers eventually wised up and matched most of their ad spending to actual usage. Two exceptions: a continued overspending on print (7% of spend, 3% of time spent) and underspend on radio (8% versus 12%).
So even though traditional print advertising has collapsed, it looks like spending on that channel might still be too high. Momentum is helping keep print alive longer than it might deserve. More on this next week!
As advertisers shift to digital channels faster than users’ time spent is growing, we are witnessing the real-time effect of supply and demand curves. Although Meeker’s only slide on customer acquisition costs specifically examines FinTech companies, I expect the pattern will occur almost everywhere: online customer acquisition costs (CAC) are up roughly +20% in the last two years. I’m seeing this phenomenon with my clients who — two years ago — worked hard to optimize Facebook and enjoyed a great marketing channel; today, they are now struggling to make the economics work. It’s not that these companies got worse at marketing, it’s that the crowd has joined them, making the channel more efficient.
Building on #5, we see that most online platforms have remained flat for the last two years, in terms of unique users per month. The two exceptions: YouTube and Instagram, who grew by +23% and +47% in the last 18 months, respectively. Without the Instagram growth, we would have observed even larger increases in CAC on Facebook.
As I always repeat, everything is a marketing problem! Meeker highlights how Spotify and Zoom use free trials and excellent products to drive user acquisition. From Daniel Ek, the CEO of Spotify:
Our freemium model accounts for ~60% of our gross added premium subscribers... the ad supported service is a subsidy program that offsets costs of new subscriber acquisition. Developing a better user experience produced by far the most viral effect & impact when investing in growth. Engagement drives conversion from free consumption to paid subscription. [Emphasis mine]
From Zoom's CEO, Eric Yuan:
...we really want to get customers to test our product... it's really hard to get customers to try Zoom without a freemium product... we make our freemium product work so well... if they like our product, very soon they are going to pay for the subscription. The most important thing is making sure existing customer is happy rather than chasing after new prospects. Our NPS is in the 67-69 range vs our peers in the 20s... we do not want to spend money on the marketing side to generate leads.[Emphasis mine]
Of course, no one WANTS to spend money generating leads if the alternative is acquiring leads for “free.” But most companies don’t have that option. Zoom offers a natural incentive for attracting people to trial the product (because it takes two people to “zoom”).
Plus, companies are never facing a true either/or situation. There is no reason you can’t have a great user experience that drives customer growth AND ALSO paid marketing channels that bring in customers even faster. I’d actually argue that's exactly — despite the CEO’s claim — what Zoom is doing.
SpyFu (a search analytics company) estimates they spend $250K/month on paid search for “zoom.us” (note: in my experience, SpyFu nearly always underestimates by 2x). With some back of napkin math, $250K x2 for understating x12 months totals $6MM per year. That figure is a tiny fraction of Zoom’s 2018 revenue of ~$150MM, but no one would describe $6MM/year as “zero.” I expect the reason that the number isn’t higher is not because SpyFu “doesn’t want to spend money generating leads,” but rather that after $6MM in spend, they are getting diminishing returns bidding on “video conferencing software.” There is only so much of that demand to pick up.
I love the rich details of Meeker’s annual reports. In the next few weeks, I’m planning to undertake a deep dive into her ideas about new “marketing channels” and where we are with “podcasts.” Stay tuned.
Keep it simple,