Meta vs Amazon.com
Hello! This is my first tech post, which is somewhat exciting. I did not expect to be writing about this specifically, but it's what ended up happening, I guess! I want to write about business models. An alternate title might be: "Why Meta has to show you (somewhat) annoying ads."
Any solution that wants to be sustainable needs a business model. The business model could be "taxpayer's money," but such a model still needs to exist. I use business model somewhat abstractly to mean a model that generates sustained cashflow for solutions. Building, maintaining, and improving on solutions incur costs. How do you keep a positive cashflow, and keep that ongoing?1
How to generate positive cashflows, sustainably, in order to keep our solutions going?2 3
One of the most popular ways of generating positive cashflow for an internet business is to serve ads. Ads are a popular business model, especially if you want to offer a solution for free to reach as many people as possible.4 This option could be enticing when you're trying to maximize impact on the world.
I have strong feelings about ads. In fact, I've written a manifesto named "There will be no ads" largely because I think ads tend to harm the user experience. As an economics junkie, though, I love ads. They are the Invisible Hand made into an algorithm that plugs the gap of imperfect information in the market and matches consumers and merchants. The Invisible Hand Algorithm has signals on your preferences, as well as traits about the merchants and who they want to target. It is a wonderful set-up to drive down costs, by facilitating the competitive market to run its course and erode inefficient monopolies or oligopolies. As evidence, we've seen a flourishing of small online businesses since the advent of ads. There were many tailwinds (the internet, Shopify and Stripe making retail costs obsolete), and digital ads were one of them. With ads, small businesses could compete and reach customers ahead of better-capitalized conglomerates or big department stores.5
A claim I made in "There will be no ads" is that ads are indistinguishable from content. Ads on Google are search links, which are the same as the search links they serve you, just artificially boosted to the top. Ads on Instagram are posts, which are basically the same as other posts, just artificially occupying your feed when you didn't ask them to. Now, why did Google and Meta need to worsen your experience artificially when they're already doing valuable work giving you the top search results and serving you content you most like? That was my question. Google and Meta were clearly already creating value, without ads. Why did they have to capture value via ads, instead of directly? For example, why could they not threaten site owners or content creators that they would not be shown if they do not pay a regular fee? One case in point is that news websites, while originally hostile to Google News, soon realized that they get even less traffic if not for Google News. The bargain of power should exist in favor of Google and Meta, even without ads. If we can remove ads, we can restore the user experience!6
Google and Meta already create significant value purely by giving the top search results and most relevant content. Why could they not monetize it directly, but had to do so via ads, which worsen their core user experience?
Here comes Amazon.com. I was listening to an episode on Acquired, when Ben and David said that Amazon ran an "ads" business. My antenna immediately went up–I work in digital ads. The business is Amazon Marketplace. To be super honest, I'm not sure I would have called it an ads business, but I'm glad they did, because it allowed me to connect the dots. Amazon Marketplace is a way for Amazon to have 3rd party merchants sell on Amazon and gain access to Amazon's customer base. Amazon takes a fee on these transactions and today they are over 50% of all orders on Amazon.com.7
Now, Meta (I'm going to use Meta as the example, but you can intuit the case for Google) allows content creators, including merchants, to post on Instagram and Facebook and gain access to their audiences. These are organic posts, not ads. Why can't Meta take a fee on these posts today, and remove ads altogether?8
The simple answer is this: Meta needs organic posts to survive, but Amazon doesn't need 3rd party merchants. Amazon has a viable business selling its inventory, which has maintained the strength of its business until the growth of 3rd party ramped up through intentional investments by Amazon. Amazon will be less valuable as a shopping destination if it has 3rd third party sellers, just as Meta will have less valuable feeds if it has less content creators. However, the reliance of Amazon on 3rd party sellers is not existential, but that of Meta on content creators is.
The reliance of Meta on content creators is existential. Meanwhile, Amazon survives regardless of having 3rd party sellers.
Speaking of existential, that is one reason why Apple and Android are able to extract a 30% cut from all app sales. It's a behemoth business.9 App developers have the opportunity to access the audience for Apple devices and Android. If not for these devices, those apps will not exist. For the apps, their reliance on Apple and Android is existential. So, they pay a 30% tithe on their revenue.
So, as market works, these are the prices we've reached. Meta cannot charge their content creators (in fact, Meta courts them), but they will charge the advertisers. For them, the advertisements will not exist if not for Meta. Similarly for Google. Meanwhile, Amazon.com can charge their third party sellers. Apple and Android can take a platform fee.
Conclusion
I find the perspective of "is this existential?" very useful in thinking about pricing power in businesses. The cool insight is that Meta would be able to charge content creators, if they are already a content business, but are giving their audience more options–that's my face value application of the Amazon analogy here. But then, Meta will be a very different business, maybe more like Netflix. In any case, that's the end of this piece about figuring out a sustainable business model for solutions of the future.
Fun footnotes:
Btw, it occurs to me that if you have positive cashflow in perpetuity, and if the valuation of a company is the present value of discounted cashflow, it means that no company is expected to have positive cashflow (well, a divergent series of positive cashflows) forever since no company's valuation is infinite. It's sobering on some level, because most companies don't think about how they will be out of business, but it's kind of implied. Almost like how we think about our own mortality.↩
First time using a quote syntax in bearblog.dev! I know people have other conventions for using quote syntax, and I'm trying this one. Let me know what you think (if you can contact me)?↩
Presumably, one way you run out of positive cashflows is that you no longer solve a problem, either because the problem doesn't exist (like a vaccine for an illness that no longer exists or an Instant Pot for a market that already has Instant Pots that don't happen to ever spoil or your solution got out-competed. It's, surprisingly, almost a good thing if you run out of positive cashflows at some point, if it's for the reason that you've solved a problem so completely that you've made yourself redundant. From a company perspective, you can obviously have a portfolio of solutions and pivot to other solutions. But it'll almost be amazing if you outmode yourself by being so effective. Of course, this is all resting on the premise that some problems can be forever solved; but with death, comes birth (see Spirituality posts), so, even if that is possible, it's probably not forever.↩
I don't think it's necessary that offering something for free is the only way to democratize solutions. Another way is to simplify UX of existing solutions, or make existing but complex solutions more approachable. I am thinking about Shopify where Tobi Lütke really prioritizes good UX and legible interfaces, which simplified setting up online stores, and personal computers designed by Apple and others. Both Shopify and personal computers have crazy penetration and adoption, without offering a free service.↩
So, there's actually value in serving customers things that they may not have explicitly asked for (e.g. content from accounts they may not have followed, products from merchants that they did not request for), if you think that you know better. Because markets have imperfect information between customers and merchants, it's definitionally possible to know better. To be honest, I don't think digital ads is exactly fixing an imperfect market problem, if incidentally it's approximating a solution as such. It makes me wonder if there's a space for us to build something with the express goal to make this market better. If so, you could potentially have a cut for every transaction that takes place in this superior marketplace. That's a very big market opportunity, depending on the market you pick. Crazy. This is not the idea I've developed yet. I'd like to know how much of this problem has already been solved.↩
All this is making me think that we're maybe far from some platonic "end-game," because the way the world is how it is now is very path-dependent. Google and Meta monetized with ads because that's how you monetize a site that has a lot of engagement and traffic. I am not saying that this is not a good way to make money. I'm just curious why the way they capture value is so indirect, which sets up a lot of mixed incentives. For example, privacy concerns, and I, as a consumer, feel like I have to defend myself against these companies that I'm supposed to love, because their interests are misaligned with mine. P.s. However, I also want to imagine that they definitely considered alternatives, like capturing the value directly, and realized it couldn't work. At least, not easily (which is what I'm writing in this post). Hence, they did what they did. P.p.s. Moreover, it seems like some links from Google get these "?blahblah" strings appended to the end of the links. I'm sure it helps Google do tracking internally to know me as a user. I also wonder if they also use it to ask site owners to pay a fee... outside of Google Ads?↩
Reading the 2018 Letter to Shareholders, Amazon actually can charge more than just the fee. I'm sure if I set up as a 3rd party merchant, I'll be able to know for sure, but I don't want to do that right now. Amazon is famously private about their internal metrics, and tend to report the least information possible, so I'm using that as an excuse for why I won't be able to find their 3P and 1P revenue breakdown in their 10-Q (I looked, and didn't find it, but I didn't look super hard).↩
I hope the parallel is clear. If not, please tell me.↩
It frankly discourages me from building a mobile app... I'll need to dig into the structure more to see what's included in that 30%–perhaps just subscriptions and app sales. I'm sure Apple and Google don't collect 30% of Instagram's revenue, though Instagram is an app on iPhone and Android, for example. There is still a platform risk, being a mobile app in this way, though.↩