a16z Podcast - a16z Podcast: Advertising vs. Micropayments in the Age of Ad Blockers

Episode Date: September 25, 2015

Apple included support for ad blocking in its recent iOS 9 update, and for many that prompted discussions around an age-old question: Is traditional advertising a viable business model for content -- and if it isn’t, what has a shot at replacing it? In this segment of the a16z Podcast [and one of our first podcasts 'by request'], Chris Dixon (who led our BuzzFeed investment and has previously shared his thoughts on the topic) and Benedict Evans (who has also been an independent content site producer himself and has shared some of his thoughts on the topic) discuss the future of advertising; why micropayments have been mostly a non-starter until now; the chicken-egg issue; and which alternative forms of advertising -- native ads, for example -- are showing promise. Finally, why quality media outlets will do extremely well once the industry comes out on the other side of this wrenching transitional period. The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments and certain publicly traded cryptocurrencies/ digital assets for which the issuer has not provided permission for a16z to disclose publicly) is available at https://a16z.com/investments/. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.

The content here is for informational purposes only, should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, this is Chris Dixon. This is the A16C podcast. I'm here with Benedict Evans. Let's talk about, so a lot of people I'm talking about ad blocking lately. iOS 9 allows you to down to, download ad blockers or content blockers, which are mainly ad blockers. I guess the first question I have is, is this, there's a lot of talk about it. Is it actually a big deal? It's an interesting one. I think there's several ways you can look at that. One is obviously the majority of time spent online on a smartphone actually isn't inside

the web browser. It's inside Facebook and it's inside other apps. This would also, though, does it affect it when you're in the web view? So yes and no. If you implement the new, faster, cooler web view, then it's affected. But if you're actually just looking at stuff actually in your newsfeed, then obviously it's not. But if you tap on a link and they implement the web view, then it's affected. A lot of content is viewed that way.

Yeah. So there's that kind of wonky question, well, how much content is this affected by? Then there's how many people are going to install these things? And right now, you know, clearly you're going to have a search of people who really care about this stuff. It's always seemed to me that there's kind of several different, there's a portion of people who really get upset. about tracking, and I'm not sure how broad a percentage of the overall population that is. And then there's another percentage of people that get really, really upset about the principle of advertising. And again, I'm not sure how many people that is. The interesting thing on

mobile, I think, is that the actual, just the amount of code and the amount of JavaScript and ad tech stuff that's happening actually slows down your experience. So there's actually like a real user benefit, as opposed to like a kind of a theoretical benefit to installing this stuff. I mean, I've always assumed it's just sort of the power of defaults here, which is if Apple were to make this the default that it stripped out advertising, that would be a big deal. If it requires people to go and download a special thing and it's actually quite wonky right now, you have to go in or Kluji, you have to go in in the settings and install it, yeah, like 10% of the pop, what, five to 10% typically do things like that that aren't default.

And those five to 10% are probably, you know, in their basement screaming at the computer and, like, they're the types who don't buy stuff anyways. And, you know, I don't know. So, like, is it actually going to affect? So I think, like, the kind of high watermark here would be Google Maps on iOS, which has something like 100 million active users out of maybe 400, 450 million iPhones. And I think that gives you a pretty good indicator. The power of defaults.

Yeah, here is like an actual really, I mean, it's not like Apple Maps is a vastly better product. And yet only, your point is that only 100 million people use what is clearly a vastly better free product. Yeah, only a quarter of the base have installed it. I wouldn't say it's vast. I mean, it's like Apple Maps isn't terrible, and most people don't use it that much. No, it's not bad until it tells you to drive off of it. of a bridge Yeah, most people

don't use maps that much most people don't actually care that much and there you are even where that's a quarter of the base so how many people will install this

and then how much does it flow through and there's a kind of a broader kind of set of questions here around well as a publisher is advertising really sustainable anyway

is this just like a catalyst for saying you know well screw this stuff this isn't working very well how do you get read you know should you be thinking about micropayments

should be circling back on apps should you be thinking about other ways to get distributed. And so, you know, at the same time as Apple launched this, obviously they launch their Apple news, news aggregation app, and then you have Facebook doing instant stories inside the Facebook. Like one argument, which I think I believe is it's a diversion to worry about what's happening Safari when the real ad blocker is called Facebook, right? And it's not that they actually block the ads, is that the stuff, if they want your stuff to get shown pretty soon, you're

going to have to use instant articles. And instant articles is not going to let you show your ads. I mean, it's going to, if they're not native ads. And that's what, you know, in some ways that's what you should, you know, if you're a publisher, you should keep your eye on that ball, not. Yeah, if half your traffic is on Facebook, then Facebook's already going to be blocking the ad to say, you know, this other stuff doesn't matter. Yeah, I mean, I've, in some ways Facebook is the new browser. It's the new RSS reader and it's the new ad blocker, all combined into one.

And what's happening in Safari with plugins is a sideshow. I think that's right. I mean, there's a kind of, I wrote a blog post the other week, kind of starting with the chart of the traffic to my blog, which now gets like 100 to 200 to 300,000 views a month, depending on what I've written about. But I started in 2010. For the first three years, I basically got 100 views a month or 200 views of months. And the point of that is, it's like, yes, you can write stuff.

You could write stuff in, you could code the stuff in notepad and put it on an FTP server, but actually, you're going to get you, what you want is to get read. And if you want to get read, you've got to be in some kind of a platform that's giving your audience. And increasingly that means Facebook or it means medium or it means LinkedIn or it means some other intermediate platform that kind of comes with an implicit ad blocker, a revenue model, a filter, some other set of stuff that comes between you and your audience, which is always like the problem for big publishers looking at Facebook's like it's kind of a deal with the devil issue. They can give us traffic, but it comes on their terms. So a lot of the ad blocking discussion has then led people to say, well, what if it's not, you know, does this, Does this mean we should be thinking by different advertising models for, you know, for example, for newspapers, etc. Or micropayments or some other thing.

Micropayments, which we were discussing, and actually what triggered this podcast was a discussion with Startup L. Jackson, a fictional Twitter character who apparently dictates what we discussed. I can't believe Mark has time to tweet under two characters at the same time. No comment. So Startup would like us to talk about micropamines. So you, I think, are skeptical micropayments. Well, I'm not skeptical. It's just we've kind of, we've seen 15 years of people wishing that you could do this. And the frictional barriers to having one platform on every site, having people enter their credit card, having some sort of identity platform that would make it work.

It's always been one of those things that's like, if we'd had the information superhighway instead of the internet and it had been built by, you know, AT&T and people like that, and it was like a system that happened on your TV. then yes, you'd have micro payments, but, you know, in fact, we have this permissionless, you know, completely open, deep fragmented environment, and it's really hard to make something like that work. I mean, when Apple launched the iPad and things like Newsstand, people thought you were going to be able to do micropayments on the iPad, and everyone was going to make an app on the iPad, and everyone was going to read stuff in there, and there'd be micropayments and subscriptions, and it kind of didn't work for a whole bunch of reasons. And I think the question would be, it's like it's easy to say you should be able to build one

cent for each article or 10 cents for each article. But getting that frictionless payment platform in there and having everybody use it has just been too hard so far. That's not to say it it won't be. So you walk around New York City and you have these little sort of small casual payments. And actually if you read, it's always worth reading like the original Bitcoin paper. There's a lot of discussion around Bitcoin. But the original paper is actually, first of all, extremely well written, very interesting from a technical perspective. But also the first paragraph is very clear about what the point is. It's small. casual payments is the point, right? So you walk around New York City and I, you know, I am late to a

meeting and I go to a street vendor and I buy a cup of coffee. I don't want to have a long-term relationship with that vendor. I don't want to fill out a form. It's very useful to give the guy, whatever it costs now, $2 for a cup of coffee. Well, $6.50. Maybe these days. But, you know, it's very useful. Cash is a very useful way to make small casual payments, for example, walking around a city, right? So the argument is we never, you know, it would be nice to have, it would be great to have that online. And so, and I'll give you a practical example. Spotify, in many ways, is a payment bundler. You could imagine if we were to start over today with the entire music industry and everything else starting from scratch, how would you architect music service?

You might architect it where I give, put $10 into my browser and it charges me every month. And then my browser tells me, my music browser, whatever it might be, you know, it looks at what music I listen to that month and then it divvies up my $10 and pays it directly to the artist and there's no label and there's no Spotify and it's a relationship between me and the artist and you know this kind of clay shirky argument that no one will ever adopt micropayments because of the mental friction that that that I think is based on what I think is a flawed assumption that micropayments presumes that a human is deciding every single time you pay something well they have to look like micropayment if they look like micropamins it might's one thing but if you can package it in some

other way. Well, and I think that's, I mean, I always assumed, I guess, for me, micropayments always meant the infrastructure supported small casual payments. So two entities could make a transaction of a small amount without incurring transaction fees that make it prohibitive and without having to have an ongoing relationship the way you currently do with a credit card and without having a 20% charge back rate and like all these other and like the charge denials. And so you had a way to, you had sort of internet cash, right? And you could make small cash payments. There's no reason that can't be software assisted, that you can't have, you know, bots and other things assisting how you divvy out those micropayments. There's no reason a human has to be saying,

let me decide who to give 10 cents to and 10 cents to. Those are two, that's just, that would just be an old-fashioned architecture to me to have a human making those decisions. So to me, the argument that sort of a human has, will never want to, you know, the mental cost of making the decision, that's just a very old-fashioned assumption that there's a human deciding how everything's done. Architecturally, it seems to me that having the ability to have sort of something the equivalent of cash, low transaction costs, no ability to have fraud, not having to have an ongoing relationship between the two entities, would be a very useful architectural thing. Bitcoin is one very promising example of that. There could be others.

The existing credit card system seems extremely flawed. PayPal is extremely flawed. I mean, the way PayPal deals with many issues is they simply block about half the world from transacting, right? I mean, there's a, on eBay, 20% of all international transactions are blocked because the way they deal with the fact that their system is not built for the internet is they tune the algorithms to just block almost everything that looks remotely suspicious, right? It's, it's, if you, if you submitted PayPal to your CS 101, you know, class as your, as your ideal payment system, you'd fail out of, you'd fail out of the class. PayPal must have been complete idiots, you know, there. Well, no, I mean, the PayPal is a great, you know,

They're obviously smart people, but the point is it was an extension of the credit card system, which was built for a different era. It was not built for this. It simply wasn't built. These things were not built for the kind of the way the modern Internet works. I would argue. Yeah, I think there's a sort of observation like Mark likes to point out that it's the, what is it, 403? 402. Yeah, well, this is, yeah, this is the payment.

There's also no identity. So this is the error code 404 is no web page. There's also an error code 402 built in HTTP spec, which is payment required. And you're saying, yeah, identity is, except that we never want to building that. And I believe, so like, I believe that we, so you go back to you rewind in 1993 and you had different possible futures of the internet, right? And one possible future, you would build identity and you had built payments into it. And to me, that would have been, I mean, I love the internet and it's awesome. And thanks to Mark and all these other great people who did it.

And I'm not complaining and looking gift towards them out. That said, rewinding it, it would have been really nice to have built identity and payments in the first place. So my first, my first job, like I think in my 1990s. In 99, I joined an investment bank. And I think in my first week, I was sent along to sit at the back of the room in the IPO drafting session for a company called Trintech, which makes chip-and-pin payment terminals. And they were one of the companies behind something called SET, which, and the idea of SET was it was basically an escrow system for your credit card. So your browser had your credit card, but the e-commerce site never got your credit card. It was kind of passed through, like, kind of tokenization.

It's actually kind of how Apple Pay works. Exactly. It's exactly, I thought Apple who was, yeah. And of course, they... Which is, by the way, a far better system. You don't pan... Like, the credit card system, you hand the password over. Yeah, exactly. Which is just... I mean, you literally fail out of class if you submitted that in the project. Exactly. And this was the SEC, which was like 98, 99. And this was like the idea for how you were going to get people to be comfortable putting their credit cards in. And it turned out that the answer was, you just put your credit card in and the credit card companies eat the fraud costs and PayPal blocks off the transactions and so on. So you just deal with it that way. but you know to your point if you if you could there's always this sort of um i mean it's you say about going back to 1992 we kind of look at what happened and we presume it's inevitable

and we look at all the micropayment things that failed and presume well that's just because micropayments aren't going to work just like we know we look at the failure of the portals in america and think well portals didn't work you look at china portals did work and a lot of the things that look inevitable as failures it's just that's just kind of how it turned out and the technology didn't quite work out like that and it's certainly possible that we could have, you know, whether it's Bitcoin or something else, a micropayment system of some kind or subscription system of some kind that did work. The challenge is always like, well, how do you get everyone to adopt the thing and all the publishers to adopt the thing? It's a

massive, massive. It's the mother of all chicken neck problems, right? It's like, it's the big chicken and egg problem. It's the biggest one of all. And the thing that comes in parallel is you have Facebook or BuzzFeed or Medium creating, solving it from the side. So Facebook has both the distribution and the business model for third parties. well, the business model for themselves, the distribution for third parties, and BuzzFeed has the distribution and the business model for themselves, and Medium right now has a distribution for third parties, but no revenue model, although presumably that will come.

And I thought it was interesting just to look at how BuzzFeed in particular comes to this, going right back to advertising and ad blocking, in that what they haven't done is kind of slap a banner ad as invented by Wired in about 1996 or 1997 and put 10 meg of JavaScript on the back of it, try and work out who the hell you are, which is my point about identity, is the reason the advertising is 10 mega JavaScript is because they don't know who you are, and they won't have some vague sense of who the hell you are to show you, so they know what kind of ad to show you. Whereas if your BuzzFeed or your Facebook, if your Facebook, you have that identity

because it's in the Facebook profile, if your BuzzFeed, you build native advertising, you build advertising. Well, and the native advertising inherently doesn't, the identity is built in by who shares it. Exactly. Right. So the person who likes cats shares with another person who likes cats and that and that targeting quote unquote is happening by humans not by yeah so you're not building 10 mega kind of crappy JavaScript to try and guess as to who this person is it's actually inherent in the product and that's actually also much better revenue model and so it may be that you know you come at this from that other angle which is you build it as a single site you solve it as medium you solve it as Facebook you solve you solve identity as Facebook rather than open ID well to that

point like you know one way to look at this is you go to the new york times and it's you know New Times is a, you know, it's a beautifully, you know, from a journalism perspective, it's, it's an amazing product, right? It's great writing. They spend tons of money on research. And so you're looking at, you know, if you go to just a desktop web and you go to the New York Times, you're looking at the page of the text, and you've got an A-plus product. And then you look around the text. And you've got literally, like, I have screenshot, I always screenshot whenever I see these kinds of ads. It's like the Tahiti diet or teeth whitening, right? It's the lowest of the low, crappy ads, like sitting around on these banners, which I guarantee you on mobile, if there

any clicks on those ads, I bet you 95% of them are fat thumb, fat finger accidental clicks. Like nobody is willing, like the odds of somebody reading an article about, you know, whatever, something, you know, foreign policy in the New York Times, and then clicking on a Tahiti diet, I'm sorry, that is not, that it's, if it's happening, it's actually. Banner ads are like Yahoo. It's like, you know that hundreds of millions of people must be clicking on them, but you've never met anyone who does it. But they don't. I don't know. So I would just say this that you have, if you just look at it through the lens of product development, you've got on the one hand at a great product, you know, the economy, not the economists. They don't do it. Well, they have banner ads, I think. They have whatever. You have the journal, the F.T, the economists, the New York Times, all of these first rate journalistic institutions with top rate journalistic products bundled with very third rate monetization products. And then people say, oh my gosh.

digital monetization doesn't work. We're trading analog dollars for digital pennies. Now, there's two ways to look at it. One is there's something magical about a computer screen that makes it less monetizable. The other is perhaps you've aligned yourself with a business model that is just a very low quality product. And that would be, by the way, the BuzzFeed perspective. And like, and people have this, I think this very, they misunderstand what Native advertising. Native advertising are ads that people actually like, right? This is the goal of Native advertising. This is Native advertising done right. It's ads. ads, like, it's sort of like Super Bowl ads or something. Well, the TV advertising industry has always known this. Of course it is. You make ads people like. You make ads people like, and in the social web, people will share them as opposed to, you know, thinking of what the publishing industry has been, I think, kind of misled or down the wrong path, of thinking of it is like you have the hamburger and you have the spinach and you have to take the spinach with the hamburger or whatever, I don't know. I think there's an interesting thing implicit all this is what happened with paywalls. It was the newspapers that went to paywalls, and particularly like hard paywalls, like the Times, as opposed to the New York Times, or the Times you have to pay, that's it, you can't read anything.

Do you mean that a lot of London Times? Yeah, the Times that the New York Times are named after. The London, okay, that's the, that's actually the Times. That's the country in the European country. So the point is that when those newspapers did that, the page, the site experience got way, way better. Because all the crap advertising disappeared. Yeah. All the link bait headlines disappeared.

all the tabula and the click on 500 other stuff disappears you get white space on the site because all of a sudden they don't have to do that anymore and it feels like you could kind of do like a two by two like a kind of a gardener two by two matrix of you know traffic versus value or whatever the answers would be and like in one corner you would have the Guardian which is trying for massive global scale

with no monetization worth speaking of and in the other corner you would have the Daily Mail which is got the same traffic a tenth of the cost base and the tense of the content quality and the rail of shame and everything else. And in another corner you would have like the Times, the Financial Times, the Economist where it's like pay or go away

in some sense. And the New York Times to some extent as well as you've kind of got to pay them if you want to read the New York Times every day. And then in the other corner maybe you have BuzzFeed, which is, no, no, no, let's just actually take instead of having a vast audience and just throwing, we don't know what at it

and hoping that we'll make it up, let's actually think natively about what money, revenue on the free internet looks like. You see what I mean? You've got these kind of these different axes of quality versus traffic. I mean, for me at least, the big, the great monetization epiphany on the internet was Google, right? Like the first time you saw, just the assumption had always been that you had to, you know, you had the carrot and the stick. The carrot was the product and the stick was a monetization. And Google said no.

I mean, the ads are actually quite useful. Like, it turns out that in many cases, those are as relevant or more relevant than the organic listings. Well, the best story is, you know, I can't remember who it was that they were trying to license their product tube in the very early days. And he said, well, I don't want to use the search engine to be too good because people will leave. This is a site. They were trying to sell the company. Yeah. And they tried to sell it for a million.

Your results are too good because people will leave the site. So we won't make any money. Well, remember, at the time, it was all. around stickiness is the thing. So you had to keep them... Search was well known to be a bad business and Portals was a good business. So you had to search was a way

to get them into your portal where you then show like celebrity gossip and then banner ads. And that's why Yahoo actually outsourced their search to Ink Tomey and others. So that's a good cautionary tale. Well, so it struck me when you talk about finding new models, it's like in a sense it's not that it's easy for BuzzFeed,

but you know, BuzzFeed can do that. And if you're a top 10 site, you can think about doing that. If you're the next 10,000 sites, once upon a time, you'd say, well, we're going to have to sell our banner ads, and that was a nightmare. And then you have ad networks, which kind of act as a natural intermediary. So is there an ad network for a native advertising in some sense? You know, how do you reach a point where everyone can be doing good advertising as opposed to only the people who've got a big team of geniuses to work it out? It's a good question. I think it's a, it's TBD, we don't know the answer.

I think, you know, it's one way to look at BuzzFeed is every media company has a point at which the advertising and the content interact. The way that it worked historically was they interacted in the news world, let's say, is they interacted through physical adjacency, right? In other words, you put the article on the page and you put the ad next to it and that happened on paper and it happened on and it happened on the, on the web. And TV, it's temporal adjacency, right? It's like, you know, you have this slice and that slice. The idea with BuzzFeed is you have that the adjacency actually comes in the layer of the creation and the data. So you have lots of data and learning, and that is the sort of the center of the system. And that informs both the publishing side and the advertising side. And that's where the quote bundling happens. It doesn't happen in the, the article is appearing next to ads. And you can't. Because, because, you can't. Because, the assumption from the start was that the internet will unbundle those things. They will unbundle the ads from the content. Yeah, you can't understand BuzzFeed if you go to BuzzFeed.com. No, that's a, that's a very small portion of the experience and not really how it works.

You understand it when you go to it through a social network and you see, because basically ads have now become unbundled from, like the only place that ads are being bundled with content is in the platforms, right? It's in Facebook, it's in Twitter, and it's in native ads, and they will be the new ad networks in many ways, right? There are ad networks, like this ad tech industry, unfortunately, I, you know, I think will mostly go away, banner ads, et cetera. It will be Google.

It will be things in streams. They will, Facebook will, Facebook knows who the person is. So is that the new search, or the search industry before Google? You're saying, you know, people are mistakenly outsourcing it, and in fact, it will come back and be a good thing? Well, in a kind of like a more general sense, that there were all these people doing not very good search, and then Google came along with a completely different way of doing search.

And there will be like a similar kind of a nuclear bomb that hits the ad tech industry. I think it's happening now, isn't it? I believe. I mean, also, if you just look at the public ad tech company stock prices. No, that 50% of traffic is bots and Ford. And so I think it's happening now. You know, for me at least, that said, I think the publishing industry, once it's going through this kind of turmoil now, will end up being stronger than ever. because you've got, what is the number now,

three billion people with smartphone internet access going to... Two, two and a half with smartphones going to probably four, maybe four and a half. I mean, like the scale, so, you know, even if you assume the worst case that you reduce monetization by, what, a factor of 10 or even 100, the scale of reach here will go up by at least that much. You know, if you consider in the past a regional newspaper or something, can now reach soon what the entire, probably, what, six billion people by 2020?

I don't know what you're projecting. Well, there's 5 billion adults on Earth. There's probably two, two and a half billion smartphones now that will go up to 4 billion. But, you know, a lot of those are farmers in rural Africa. And it's a multiplier effect, right? It's not only is it number of people, it's the amount of time spent. It used to be at best, right? Like someone who's a very engaged news reader might spend 45 minutes in the morning reading the news, and that was it.

Now it's a constant thing throughout the day. It's deeply integrated. If you look at what's happening with Facebook, I mean, you know, they, it's now news not only is something you consume, it's the thing you talk about with your friend. You know, it's part of your social experience on the web, right? It's like that's a lot of what BuzzFeed's insights are as well, is that they're not just things to read passively, there are things to then share and discuss. So the amount of time spent on news and on media and the number of people with access to it is, you know, I think like if you add up sort of, if you multiply those two

times each other, it's like a thousand X. It's very, very promising. And I think just this, we just need to figure out in this transition period what the best models are and there will be some shakeout, but the good journalists and writers and content media creators will do very well in the new world. Yep. Okay. Thanks. Thank you.