“Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.
Today’s column is written by Martin Kihn, research director at Gartner.
Despite what you've heard, this is not the first generation to face the rush of disruption, crumbling institutions and fortunes made by mysterious engineers. We are not the first to see a raft of dreamers paddling into San Francisco and New York with beatific visions of venture capital – even as the real money seems to be flowing into fewer hands.
Last fall, PayPal founder Peter Thiel wrote a pointed essay in The Wall Street Journal titled, "Competition Is for Losers," which argued that Google deserves a monopoly because it is better than other companies. He echoes the famous quote dubiously attributed to John D. Rockefeller, the pious Standard Oil Company monopolist: "Competition is a sin."
Standard Oil, the Union Pacific and New York Central railroads, AT&T, Western Union, David Sarnoff's National Broadcasting Company radio and television network, the Hollywood "studio system" and many regional newspaper and cable oligopolies started in a kind of democratic disorder and ended up so highly concentrated that the government dismantled them.
Is the past a prelude for ad tech?
Of course, ad tech is not a single industry. It is a complex cluster of technologies, services and media. It resembles a smart machine, connecting buyers with companies that have something to sell. But there are signs that two players – Google and Facebook – may be turning into pre-1948 Paramount Pictures.
Global digital ad spending was $134 billion last year, according to PwC. About 40% was paid search, a 20-year-old channel. A single company – Google – owns nearly 70% of that market. So by virtue of its search engine alone, Google captures nearly one-third of all global digital ad dollars.
Display is less focused. The top six in this space in the US – Google, Yahoo, Microsoft, Facebook, AOL and CBS – saw on average 570 million unique visitors a month last year, according to comScore. The next six saw 310 million unique visitors.
But if we look at the faster-growing mobile and video channels, the outlook is clear. Google and Facebook snag about 60% of US mobile ad spending, according to Ad Age, even as mobile's growth put it on a trajectory to overtake display in three years. And Google has search-like dominance of video views, with 16.6 billion views on YouTube last year. Everybody else had 6.7 billion views, with Facebook responsible for a fast-growing 20%.
And then there is the tech stack itself. The demand- and supply-side platforms along with ad servers and data vendors together can snare 50% or more of the advertiser's dollar. Google also has a horse in every race there, while Facebook's Atlas and LiveRail acquisitions are booting up a formidable rival.
Where are we going? Might we – amazed – end up in a media space of the 1970s, when a single advertiser could reach 80% of the country with just two or three insertions? It is too soon to say. But a brief tour of four forces may help us make our historian’s prediction:
1. Ad-supported industries seek scale
Originally, radio and television were appliance businesses. Working at RCA, David Sarnoff realized the best way to market radios was to turn them into "radio music boxes." In this, he foreshadowed Apple and iTunes. It was a good model for manufacturers, such as RCA and Zenith, but a separate business was needed to create the content itself. It was not obvious who would pay for it. AT&T had a station in New York City and thought it would sell time to companies, infomercial-style. Others saw ads as an intrusion; they were “full of insidious dangers,” said an editorial of the time. Nonetheless, the ad model triumphed and became the engine of national networks, as in ad tech today.
Ad-supported industries seek scale, as profits are driven by audience size. Even in a data-rich digital world, where reach is complemented by accuracy, bigger companies win. They have more data, too.
2. Control of the supply chain is ideal
In a blistering 1949 satire of Hollywood, Raymond Chandler quoted a studio mogul who admitted: “The motion picture business is the only business in the world in which you can make all the mistakes there are and still make money.” The secret? “You have to have 1,500 theaters.”
In the Golden Age of the 1940s, Hollywood studios controlled their supply chain, from the talent and scripts on exclusive contract to the distribution factory, or those “1,500 theaters”. It was a profitable setup, one in which it was hard to lose money. Until it was broken up by the government in 1948’s Paramount case and again in the 1960s under Robert Kennedy, and challenged by unionization, this end-to-end lock-up built a magical money machine.
Google and Facebook own their own content factories – provided by you and me – as well as distribution. And they’ve acquired their way into an almost end-to-end ad tech stack. It’s a position Samuel Goldwyn and Darryl Zanuck would admire.
3. Network effects are real
As everyone knows, networks get more valuable as they grow. Size in itself is an asset, as illustrated by the telephone system and Internet.
Historically, newspapers had a diversified revenue model, including advertising, subscription and classified sources. But the real source of profitability was classified advertising, a classic example of network effects in action. More sellers attracted more buyers, which attracted more sellers. Classifieds were a goldmine until about 2000, when Craigslist shoved them off the island. Of course, consumers could quite easily defect from Facebook or YouTube, but it is difficult to see how a new network could somehow attract 70% of my friends or 11 million videos.
In addition to these, other advantages abound. Google and Facebook, for example, are magnets for talent. They could find themselves riding the swell of history, on top of the thundering tide, cresting the wave and finally seeing – like Xerox and Westinghouse and MGM before them – that their only real enemies are themselves.