January 31, 2023

It Was All a Dream

The post-pandemic hangover continues to play out as companies in the tech and media spaces come to grips with the fact that much of their growth over the past couple of years was not sustainable. And as we move into 2023, we realize how much harder things will be as we recalibrate to a new, more realistic norm.

Digiday has a very well-sourced piece, hearing from multiple media executives about how 2023 is playing out for them so far.

January is pacing between 10% to 25% off their projected targets, according to three media executives. Three other execs profiled for this piece said their business is approximately even with Q1 2022.

There is so much uncertainty in the ad markets that what executives thought even two months ago is not playing out now. I suspect that these executives are working at experienced companies, so pacing off by 25% indicates so much bad information in the market.

It also creates a scenario where teams must fight to close short-term deals rather than focus on bigger opportunities. I’ve seen this play out. Ideally, your sellers are focused on the future, but because there’s more inventory in the near term, you have to focus on that. It creates this vicious cycle where you scramble to sell because once it’s gone, it’s gone.

But I think what’s most interesting about this story is the most impacted category of companies.

“Finance was so slow, and the RFPs that we usually get in November, we just got last week,” said the fourth publisher. “That means they might not hit in the first quarter, but we’re just glad that we’re seeing them.”

What’s more, despite seeing these clients go through layoffs and other cost-cutting measures, the budgets on the RFPs were not cut — a pleasant surprise, according to the fourth exec.

On the tech side, the fourth exec said that their team had been dreading the conversation with their top advertising clients Salesforce, Google and Amazon, but despite the layoffs and the headwinds facing tech, they all told the publisher this week that they were committed to spending in the second quarter.

Does anyone remember in 2020 when everyone and their mother was becoming a day trader? I had friends who were making thousands of dollars trading options. Everyone was opening brokerage accounts. When you couldn’t visit friends, what better way to have fun than gamble on volatile stocks?

It’s now 2023, and people are not trading nearly as much. The “democratization of finance” has cooled off. Just last week, Lex Markets, a platform created “to empower wealth creation by solving real estate’s access and liquidity problems,” announced that it was shutting down. Whereas a couple of years ago, many of these “wealth creation” tools were pumping a ton of money into advertising, now they are forced to pull back.

And the same for tech. Salesforce, Google, and Amazon have all announced significant cost-cutting measures over the past few months. Consider these statistics aggregated by Matthew Yglesias:

Alphabet grew from 119,000 employees in 2019 to over 150,000 in 2021.

Microsoft went from 144,000 in 2019 to 181,000 in 2021 and then grew over 20% in 2022.

Salesforce went from 35,000 in 2019 to 74,000 by 2022.

Netflix went from 8,600 in 2019 to 11,300 in 2021.

Meta went from 45,000 in 2019 to 72,000 in 2021.

Did Alphabet need another 30,000 employees to continue powering a great search engine? Did Salesforce need to more than double? The tech world believed that if they invested in a significant headcount expansion, growth in revenue and profit would follow.

They also attached huge advertising budgets to accompany that growth in people. And so, from the second half of 2020 to the first half of 2022, ad budgets were thrown around like there was no tomorrow. Remember how Web3 was the topic du jour for advertisers? Yeah, I do too. That’s probably when we should’ve realized that something was wrong.

And then everyone woke up and realized it was all a dream.

The problem is that media companies did the same thing. Any company that depended on ad dollars from finance, tech, eCommerce, and other trends directly tied to the pandemic is now experiencing discomfort.

So, what do we do? At this point, it’s about recalibration. For many of these publications, 2023 might look a lot like 2022. Things may even pull back a little bit. That’s the message I get when I see that Vox wants to raise money and sell assets. According to Business Insider:

Vox Media, the digital media venture that houses assets including New York magazine, The Verge, Eater, and SB Nation, is looking to raise around $200 million, according to two people familiar with talks. One of them said Vox was discussing a cash infusion from UK-based private equity giant CVC Capital.

One possible spinoff could be some or all of Ben Lerer’s Group Nine Media, a group of lifestyle sites — including PopSugar, Thrillist, and NowThis News — that have not been regularly profitable. A third person who spoke to Insider also suggested the company’s Code tech conference could go under the hammer — though its value may have dipped as it’s no longer helmed by noted tech journalist Kara Swisher.

Vox closed its acquisition of Group Nine in February 2022 for an undisclosed amount, one of several combinations by online media companies to better compete for digital ad dollars. The two companies combined were expected to bring in $700 million in revenue in 2022, The Wall Street Journal reported.

These are both smart moves. Having cash in the bank is the only way to stay in this game. And so, getting a $200 million cash infusion gives Vox power. And despite me being pro the Vox/Group Nine merger because it’d give them the scale to compete, it doesn’t appear to have played out as they hoped. Scale, for the sake of scale, isn’t the answer when the quality of the traffic matters.

We’re in an era of recalibration. This means taking stock of our cost structure, understanding what realistic revenue is, and then building from there. The past few years were a dream, but it’s time to wake up and get back to basics.

Could Google divest its sell-side?

The U.S. Department of Justice announced last week a suit against Google over alleged antitrust issues. According to the suit:

One industry behemoth, Google, has corrupted legitimate competition in the ad tech industry by engaging in a systematic campaign to seize control of the wide swath of high-tech tools used by publishers, advertisers, and brokers, to facilitate digital advertising. Having inserted itself into all aspects of the digital advertising marketplace, Google has used anticompetitive, exclusionary, and unlawful means to eliminate or severely diminish any threat to its dominance over digital advertising technologies.

Google’s plan has been simple but effective: (1) neutralize or eliminate ad tech competitors, actual or potential, through a series of acquisitions; and (2) wield its dominance across digital advertising markets to force more publishers and advertisers to use its products while disrupting their ability to use competing products effectively. Whenever Google’s customers and competitors responded with innovation that threatened Google’s stranglehold over any of these ad tech tools, Google’s anticompetitive response has been swift and effective. Each time a threat has emerged, Google has used its market power in one or more of these ad tech tools to quash the threat. The result: Google’s plan for durable, industry-wide dominance has succeeded.

Reading lawyer talk is always fun. In a nutshell, the DOJ is going after Google for controlling both the buy-side and sell-side of the advertising market. Its goal is to get Google to divest the sell-side assets, more specifically, Google AdX and Google Ad Manager.

Google Ad Manager is a low-margin part of Google’s business. And the only reason to own AdX is that it automatically slots into all GAM accounts. In other words, why would it even want to own the supply if the government forces Google to divest the demand generated by Google Ad Manager?

But I think it’s complicated even if Google divests. The problem I see is that one company can act as the true middleman between the ad buyers (advertisers) and ad sellers (publishers). When you have that sort of influence, you can pressure both sides. If the Department of Justice is serious about this helping both parties, it’d need to split the two up. In other words, Google Ad Manager and AdX couldn’t just go to a new company because you’d have the same outcome: one company controlling too much.

The issue here is that Google Ad Manager would have to get more expensive if it were its own company. Google eats a lot of ad serving costs because it makes all the money on AdX. If you split these two assets, publishers would have to start paying more in ad-serving costs.

I can’t predict if this will happen. Google is putting up a fight; any court battle could take years. However, there’s an argument to be made that Google might want this. According to Digiday:

Prominent ad tech commentator (and ex-Googler via way of DoubleClick) Ari Paparo told Digiday its ad stack has become an albatross around the neck of the online giant, claiming that it would make it a “leaner, smarter company.”

According to Paparo, CEO Marketecture, deprioritizing its ad tech operations, which yield low margins compared to its core competencies while also drawing fire from various corners, will let Google hone in on future profit-making ventures.

That argument certainly has merit. As for publishers, we’re going to have to wait a long time for this to have any impact on our businesses. And so, while it’s interesting to watch, it’s business as usual for the time being.

Thanks for reading today’s newsletter. I’d love to hear your thoughts, so hit reply. Or, become a premium member to receive AMO on Fridays and an invitation to our Slack channel. Have a great week!