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.
"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!
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.
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.
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.
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.
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.
So much pessimism in the comments about the viability of Twitter as a business model. I've heard multiple sources (Chris Sacca, Ron Conway) not only say that Twitter has perhaps the best monetization opportunity of any web 2.0 company but dump as much money as they can into the stock. I've advertised on Twitter for quite a while, and the returns destroy Facebook and Adsense.
Advertising makes a lot of money if the audience is big enough. Twitter's audience is huge, connected, well sorted, and interested.
I'm bullish on TWTR(?), and will definitely buy into the company at some point (likely after their first lockup expiration), but I am, for one, not the least bit surprised that two people who have a ton of money on the line say they think Twitter has a solid business model, and that of course you should buy their stock.
I read an article a few years back about how Twitter could potentially be of great value as a peer-to-peer PSP. It's more of a long shot (and they probably should've started a long time ago) but I did find it an interesting model. I just don't see advertising work at the scale that they'd need to justify a ginormous valuation (just as FB isn't very convincing with their ad network).
We've advertised on Linked In and Facebook but haven't thought of trying Twitter. Would you mind sharing a bit about what you've advertised on Twitter and the type of results you've experienced?
Advertising makes money when the audience has intent.
People search google for "Best washing machine". Google shows them adverts for washing machines, customer buys washing machine.
Where is the intent on twitter? To gossip? I just don't see it.
If someone is about to buy something, they're likely to go to google and search. They're not likely to go to twitter. Google gets them at the crucial point before they buy something.
My guess is that profits will be low. And they should be. Declared profits are basically a way of saying, "We can't figure anything more useful to do with this money than put it in the bank or give it back to our investors."
That's fine for a large company in a stable market. But Twitter is a young company battling to establish market share with products they hope will last for decades or centuries. [1] If the management really can't think of anything useful to do with cash, they should step down and help hire somebody who can.
[1] Yes, centuries. The New York Times started publishing in 1851. It's reasonable to think that the World Wide Web will have a historical place similar to print periodicals. And network-effect businesses are notoriously hard to dislodge once widely adopted.
The web is _very_ churny; waves of people move from service to service over 5-10 year adoption cycles. Eventually people will declare twitter "uncool" (perhaps as a result of abuse problems?) and move onto the next thing.
Ironically, I think this is both the sign to buy twitter and stop using it at the same time.
I no longer trust American companies to do right by the user the moment that their stock becomes public. When wall street is banging on the door for a quarterly result, most CEOs end up listening.
I'm not deleting my account just yet, but I'm wary from everything I've seen in the last decade.
Maybe this will get buried, but as a huge fan of Twitter and the team I can't help but think they can try making more cool stuff? This huge benevolent profitable business with amazing developers has a shot at making more than a web application, I suppose. Others may say it's unfair for the big guy to cannibalize business ideas though.
This is awesome. I use Twitter everyday in a way that can't be replicated by any other service out there - there's zero competition. Once they really figure out monetization, as Facebook eventually did, it will be a home run for investors.
Congrats, Twitter. Another product that was mocked as a "toy" becomes revolutionary and finally going to raise money on public market. I use twitter everyday and it is my primary information network. I'm sure they will be successful!
As one of the people who decides where and how brand marketing budgets are spent - I would say Twitter's advertising product and approach is far more viable and attractive than Facebook's is (or ever has been).
On top of that, the work Twitter is doing with TV networks, producers, and sporting organisations is unique and has a high chance of success because it provides value to those organisations.
While some have tried, nobody else has come as close as Twitter to accessing and disrupting the $180B (annual) TV advertising market.
I wish them luck. I think they're going to nail it.
I think Twitter has a unique opportunity in advertising. I'd be interested in seeing how many businesses are on Twitter and what percentage of Twitter users follow a business. I'm assuming both of those numbers are fairly high. If so, that means that a large number of users expect to see information about businesses they follow in their feed (and thus are ok with receiving marketing/business information/etc.) That in turn means ads are not viewed by a large percentage of the user base as intrusive. I think psychologically that is very important for an advertising company.
In terms of the rumored market cap, all I have to say is there is no way Twitter is worth only 1/10 of Facebook. I'm not sure what Facebook is worth, but I'm sure the gap between those two companies is much closer than that.
I really like the Twitter platform, and while I know they messed up by restricting their API, I think their leadership generally make good decisions.
You should be skeptical about all IPO's. They have a below avg market returns.
The Intelligent investor mentions that many decades ago (maybe the 50's) IPO's were for accredited investors, because they were a known way for the saavy ones to profit from the ingenuity of the common investor.
IPO's are overhyped and hence many people buy it regardless of its underlying asset, and hence drives the price up.
As i mentioned before, IPO's in general have bad performances and the gain is more for the company and early stock investors that cash out, since getting into the market immediatelly gets you lots of fund/index and "silly" money.
Delivering ads could be the lesser half. Realtime sentiment analysis on Twitter's scale will explode and hyper-accelerate advertising in ways advertisers cannot yet foresee -but will surely be willing to pay for. They're just getting started.
Another bubble appearing I see. Their user base to revenue ratio is pretty average. Their revenue by itself is not that impressive and I'm pretty sure they will be priced in tens of billions. Solely because they are visible and known.
[+] [-] sheri|12 years ago|reply
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?
[+] [-] zanny|12 years ago|reply
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.
[+] [-] nashequilibrium|12 years ago|reply
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!
[+] [-] austenallred|12 years ago|reply
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.
[+] [-] mwsherman|12 years ago|reply
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.
[+] [-] drinkzima|12 years ago|reply
There isn't any obvious reason it would drop over time, I think the bigger question is how will advertising evolve over time.
[+] [-] gamegoblin|12 years ago|reply
https://www.datarank.com/
[+] [-] virtualwhys|12 years ago|reply
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.
[+] [-] hnriot|12 years ago|reply
[+] [-] zalew|12 years ago|reply
the same as the future of capitalism. advertising will exist as long as people sell shit.
[+] [-] ub|12 years ago|reply
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.
[+] [-] samolang|12 years ago|reply
[+] [-] yetanotherphd|12 years ago|reply
[+] [-] pbreit|12 years ago|reply
You are always going to see advertising where marginal costs to operate approach zero. It is by far the best way to take advantage of such situations.
[+] [-] austenallred|12 years ago|reply
Advertising makes a lot of money if the audience is big enough. Twitter's audience is huge, connected, well sorted, and interested.
[+] [-] aaronbrethorst|12 years ago|reply
[+] [-] eps|12 years ago|reply
Well, go on already... This is far more interesting than the original subject :)
[+] [-] yapcguy|12 years ago|reply
They would say that wouldn't they!
[+] [-] foobarqux|12 years ago|reply
[+] [-] tinbad|12 years ago|reply
http://www.businessinsider.com/2008/6/how-twitter-will-be-wo...
Also, just realized that Square is set to go into this direction.
[+] [-] wslh|12 years ago|reply
[+] [-] simonswords82|12 years ago|reply
Thanks!
[+] [-] bolder88|12 years ago|reply
People search google for "Best washing machine". Google shows them adverts for washing machines, customer buys washing machine.
Where is the intent on twitter? To gossip? I just don't see it.
If someone is about to buy something, they're likely to go to google and search. They're not likely to go to twitter. Google gets them at the crucial point before they buy something.
[+] [-] wpietri|12 years ago|reply
That's fine for a large company in a stable market. But Twitter is a young company battling to establish market share with products they hope will last for decades or centuries. [1] If the management really can't think of anything useful to do with cash, they should step down and help hire somebody who can.
[1] Yes, centuries. The New York Times started publishing in 1851. It's reasonable to think that the World Wide Web will have a historical place similar to print periodicals. And network-effect businesses are notoriously hard to dislodge once widely adopted.
[+] [-] pjc50|12 years ago|reply
[+] [-] nonchalance|12 years ago|reply
[+] [-] ebiester|12 years ago|reply
I no longer trust American companies to do right by the user the moment that their stock becomes public. When wall street is banging on the door for a quarterly result, most CEOs end up listening.
I'm not deleting my account just yet, but I'm wary from everything I've seen in the last decade.
[+] [-] 6cxs2hd6|12 years ago|reply
[+] [-] unknownian|12 years ago|reply
[+] [-] debt|12 years ago|reply
[+] [-] jchonphoenix|12 years ago|reply
[+] [-] kmfrk|12 years ago|reply
[+] [-] joe5150|12 years ago|reply
[+] [-] dev_jim|12 years ago|reply
[+] [-] tinbad|12 years ago|reply
[+] [-] jmduke|12 years ago|reply
Around 500 million users, around 750 million tweets per day. That data might not be worth everything, but it's definitely worth something.
[+] [-] dm8|12 years ago|reply
[+] [-] aganek|12 years ago|reply
[+] [-] nichodges|12 years ago|reply
On top of that, the work Twitter is doing with TV networks, producers, and sporting organisations is unique and has a high chance of success because it provides value to those organisations.
While some have tried, nobody else has come as close as Twitter to accessing and disrupting the $180B (annual) TV advertising market.
I wish them luck. I think they're going to nail it.
[+] [-] 6thSigma|12 years ago|reply
I think Twitter has a unique opportunity in advertising. I'd be interested in seeing how many businesses are on Twitter and what percentage of Twitter users follow a business. I'm assuming both of those numbers are fairly high. If so, that means that a large number of users expect to see information about businesses they follow in their feed (and thus are ok with receiving marketing/business information/etc.) That in turn means ads are not viewed by a large percentage of the user base as intrusive. I think psychologically that is very important for an advertising company.
In terms of the rumored market cap, all I have to say is there is no way Twitter is worth only 1/10 of Facebook. I'm not sure what Facebook is worth, but I'm sure the gap between those two companies is much closer than that.
I really like the Twitter platform, and while I know they messed up by restricting their API, I think their leadership generally make good decisions.
[+] [-] jlebron2|12 years ago|reply
[+] [-] colmvp|12 years ago|reply
[+] [-] conanbatt|12 years ago|reply
The Intelligent investor mentions that many decades ago (maybe the 50's) IPO's were for accredited investors, because they were a known way for the saavy ones to profit from the ingenuity of the common investor.
IPO's are overhyped and hence many people buy it regardless of its underlying asset, and hence drives the price up.
As i mentioned before, IPO's in general have bad performances and the gain is more for the company and early stock investors that cash out, since getting into the market immediatelly gets you lots of fund/index and "silly" money.
[+] [-] aaronbrethorst|12 years ago|reply
[+] [-] crapshoot101|12 years ago|reply
[+] [-] swalsh|12 years ago|reply
[+] [-] jusben1369|12 years ago|reply
[+] [-] mrgleeco|12 years ago|reply
[+] [-] rplnt|12 years ago|reply
[+] [-] dweekly|12 years ago|reply