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Ugh, the walled gardens again
The big just keep getting bigger
Google became the world’s largest search engine in 2000, only two years after it launched. Today, its parent company Alphabet has a market cap of nearly $1.5 trillion, and its 2021 revenue, at $257.6 billion, is on par with the economic output of New Zealand and Portugal. Meanwhile, Apple, which has been around since the 1970s, went from unprofitable quarters in 2000 to a $2.2 trillion market cap this year. Apple’s 2021 revenue — $378.35 billion — easily tops the output of Hong Kong, Chile, and Finland.
In the first two decades of this century, we’ve seen the rise of massive technology platforms that have quickly consolidated power, both economically and in terms of the influence they wield. Case in point: Apple’s App Tracking Transparency (ATT) policy, which requires app publishers and marketers to get consumer consent before they can be tracked across the web for advertising purposes. The policy, introduced a year ago, unleashed a public market bloodbath that had at one point wiped out $315 billion in market value from just four companies: Meta, Snap, Twitter, and Pinterest.
Thanks in part to ATT, Meta — itself a huge walled garden — lost more than 26% of its market cap when it nosedived $232 billion at one point. That Apple could help precipitate the largest one-day drop in value in the history of the stock market with a single policy says a lot about the power of technology companies today.
On one hand, their dominance has spawned larger conversations about the value of an open internet. But on the other hand, the walled gardens don't particularly care about these discussions — nor do they need to — because they collect the lion’s share of the world’s digital ad dollars.
We believe this imbalance is creating an internet and media landscape that consumers may perhaps enjoy for another five to 10 years before we wake up and realize that our shrinking choice of options for what we can consume doesn’t work for us. This appears to be the direction we’re heading in.
The consolidated economic power of the platforms is the elephant in the room, as Ana recently discussed with Keith Hernandez in The Changeup podcast, but there is a lot of innovation taking place on the edges.
Two big stumbles
How did we get here? There are many factors, but we believe the ad tech industry, in particular, made two major missteps. The first, as we’ve previously discussed, is that ad tech has failed to articulate how advertising provides real value to consumers. Watching content for free, in exchange for listening to a sponsored message, for example, is a bona-fide value exchange. Yet because of how digital advertising has evolved, we've managed to create entire generations of people who place zero value on advertising and can’t wait to tap the skip-ad button.
The second thing ad tech has gotten wrong is the customer experience. It’s often terrible. If you're a platform making 50 cents more by serving me bottom-feeder ads even though I am an authenticated logged-in subscriber, you are choosing to provide – and should get the blame for — a bad user experience. Although there is little consensus on who owns customer experience at platforms and media companies, we would argue that it should be the purview of whoever owns revenue. If you're alienating your users through bad policies, whether they’re related to advertising or awful product recommendation widgets, that’s not the best long-term strategy. You may hit your short-term goals, but if your customers aren't coming back or renewing their subscriptions, you’ll suffer in the long run.
Between these two pillars, we've created a perfect storm for consumers to loathe advertising of any kind and perceive it as a nuisance or an invasion of some sort.
Some of this connects to language: Are we tracking you or are we trying to personalize your experience across the internet? Consumers like personalization but not tracking, which is the conversation that Apple and Google really want to have right now.
Publishers that serve bottom-feeder ads do not want to have this conversation. Due to their legacy business structures, no one in their operations has clearly owned and championed the customer experience in a way that makes sense for the consumer.
We’ve seen some efforts to show fewer, better ads, but it's hard to pull off that kind of transformation when the car is driving 80 miles per hour and your company’s sole source of revenue is advertising. The unfortunate reality for many media companies is that some of the lines of business they operated on the side to diversify and bolster their revenue, such as live events, fell off a cliff during the pandemic or they had to drastically change their models by investing in digital capabilities. The pandemic changed the calculus for many media companies on the business lines that could have, in theory, supported an advertising transformation. Instead, they’re left sacrificing the customer experience to eke out more money on the advertising side, and they also don't have a diversified revenue stream to fall back on.
It's tough out there for publishers. But it’s not looking great for consumers either.
Despite the doom and gloom, there are some reasons for optimism — and even excitement.
As suckers for really good impactful advertising campaigns, we think out of home (OOH) and digital OOH are flying under the radar right now. It was once very difficult to transact in OOH, and the space was quite opaque. Marketers needed to do a lot of legwork to locate the assets that made sense for their campaigns, and it took time to design the right creative. But it’s such an interesting medium because it works both on a hyperlocal and global level. All it takes is people to start snapping photos of a cool billboard to create a halo effect on other potential channels.
Another area to watch is innovation in software, which is helping marketers simplify things like ad buying, analytics, and attribution. But these tools are facing a challenge in that many of the buyers who grew up in digital and are now graduating to executive SVP and CMO roles spent their careers buying on Facebook and Instagram, so they don't know what to do with other channels or how to fit them into the media plan. Another area to watch is creative optimization. After hitting the scene about 10 years ago and not much progress since then, we're at the stage now where interesting solutions and capabilities are actually being tested to shed light on which creative is working well in search ads, keyword targeting, and even visually speaking.
New (sort of) players like Microsoft are throwing their hats in the ring. Obviously Microsoft is trying to execute a major gaming play while also leaning into its strong advertising DNA. To see Microsoft make big bold moves like this reminds us of when Adobe entered the marketing space. These old but newly invigorated large players come in, and they have the resources that would be required to reinvent what a walled garden looks like or take advantage of some other post-walled garden structure that is just beginning to emerge on the horizon.
We believe brands and agencies can be bolder in their advertising efforts, but as we’ve previously discussed, it’s hard to make material changes at legacy brands because of short CMO tenures that seem to be only getting shorter. On the agency side, they’re not staffed or organized in a way that allows them to push the envelope for clients. With their legacy technology stacks and massive marketing budgets, they face challenges in actually being able to spend that much money in a way that makes sense. Maybe they’re using attribution in a very channel-specific way, and if they're spending a ton of money with a platform already — like most big spenders — they may be tempted to buy into the platform’s metrics, which, of course, always favor the platform.
The platforms have made the most of all of these advantages, and their dominance at this point is staggering. Google, Facebook, and Amazon alone captured 64% of all US digital ad spend last year, and that doesn't include the smaller but still large walled gardens such as Twitter, TikTok, Spotify, Snap, Pinterest, and so on.
The walled garden challenge is so pronounced that US regulators and lawmakers are taking notice and attempting to do something about it. A group of bipartisan senators recently introduced another bill, for example, that aims to curb the dominance of the largest walled garden platforms by reducing conflicts of interests in digital advertising. But until Congress manages to push through any kind of meaningful antitrust legislation, the largest walled garden platforms will continue to be the elephant(s) in the room.
Programming note: Sparrow One is moving to a summer schedule during June, July, and August. You can expect a monthly cadence likely alternating between pieces that are company specific and that examine industry connective tissue and context, which we so love to explore. We may also throw in an ad-hoc issue here or there, but mainly we want to make sure that our stellar little team has some more open bandwidth over the summer on top of client work and non-work pursuits. And if you happen to be reading One on a beach somewhere, please do send in photos of said beach.
How do advertisers, technology companies, and everyone in between effectively compete against the level of economic power the platforms hold? And do consumers want to live in a world where there are only two or three mega companies that provide the services they use the most?
Thanks for reading,
Ana, Maja, and the Sparrow team
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.