Sharp Tech with Ben Thompson - Meta Comes Roaring Back, What the Market Missed Last Fall, The Compromises that Define the Modern Internet

Episode Date: February 6, 2023

Meta’s earnings and the market’s resounding endorsement, revisiting the misconceptions that colored the Meta story toward the end of 2022, an essay about the degrading internet and what the causes might be, plus emails on lost AirPods and a healthier alternative to cigar night.

Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing? I'm doing well. I'm doing well. I'm grateful that we have a product in this trajectory plus portfolio to discuss this crazy kaira retrain. That's greatest of all talk.

It is not sharp basketball. Maybe someday in the future there will be a sharp basketball, but not today. Not today. Well, Ben and I talked for about 45 minutes as if. if it was a certainty that Kyrie Irving would end up on the Lakers. Now he's a Dallas Maverick. It's been a very active day across several different group chats. And so we're pausing the group chats for about an hour here to talk about technology.

And we've actually got a lot to get through. So I'll just get right to it. First and foremost, Sam says, Ben, you've always said that you are not a stock picker due to timing, parentheses, and to not have the liability of other finances, I'm sure. but I have bought stocks twice based on what you say. Cloudflare before it went bananas and meta last quarter. Thanks for paying back my subscription fee. And meta shares, just in case anybody missed it,

they jumped 23% in one day last week on the heels of the earnings announcements. And the stock price has more than doubled since the fall when you wrote Meta myths. And we had a long conversation about meta. and I came away thinking, should I just buy meta stock? Is Wall Street just missing the mark on this one? And I didn't because I thought that might have been like an ethical gray area for me. But I'm curious, like what actually changed from where meta was last fall?

Because on paper, a lot of the numbers look fairly similar. They're still going to lose a lot of money on the reality labs bet. They're still making over $30 billion per quarter in revenue. So what do you think? am I missing something or was this more of like a market shift than a meta shift? Yeah, nothing has changed. That's why writing meta myths was very easy. I mean, I think the most important thing that has not changed about meta.

And this goes back to the very beginning of meta. It goes back to their IPO. It goes back to the huge stock price plunge they had like the year after their IPO, you know, when mobile came along and they're like going through this shift. It goes back to the stories collapse in the stock price in 2018, which price. which prior to the current collapse was the largest collapse ever, meta has from day one faced this consistent undercurrent of skepticism that this is a real company.

Right? Everyone sort of like assumes it's like, like Myspace 2.0, you see that again and again. You saw the exact same articles come up over the last year. And it's just wrong. And because it's wrong, I get to write very easy articles. I mean, the funny about the Metamist thing is, you know, from some respect, it was difficult to write because it was, you know, very contrarying at the time.

But from a sort of analysis perspective, it was very easy. Like it was very much in line, frankly, with an article I wrote five years ago called Facebook lenses or something like that, that was making a similar point that all the, like, this underlying assumption that Facebook is a fundamentally flawed business that is on the precipice of falling apart. press a piece yeah whatever first mispronunciation of the show yeah we're off to a great start leads to you know I'm glad you're

evangelical about pronunciations but leads leads to this like people back into this analysis to justify this sort of underlying assumption about the company and then you marry that to general like the stock markets down in general people were panicking about inflation

like the tech industry in general was in trouble there's this ATT bit, which by the way, is a very real thing. Caused a structural change in the long-term outcome of meta's business. For that, meta did deserve a valuation decrease because we're talking about their long-term ability to make money, but it wasn't to the extent that the valuation should have been cut to the degree that it was. And so I think the only thing that's changed in the last three months is Wall Street

investors waking up saying, oh, actually, no, this is still a. very stable business. It's a business that still has engagement. That engagement is still growing. TikTok was certainly a threat, but is a threat that was arrested. And by the way, this is, I wrote this last summer. I wrote last summer that it looks like Facebook has contained the TikTok threat. That was a pretty early call that has turned out to be correct. Like TikTok's installs have completely flatlined over the last nine months. The word on the street is their monetization efforts are not going great that advertisers were. disappointed, have been disappointing the performance, particularly over the holiday quarter.

Interesting. And again, but it's not just that this happened. It's that we've seen this happen again. We saw this happen relative to Snapchat. We saw this happen with stories. We saw this happen back in the shift to mobile. The fact of the matter is that Facebook, and Facebook specifically, is the digital representation of our relationship with our friends and families.

And one of my sort of longstanding, I might have made this point in the podcast before, but one of my longstanding contentions is the reason why people in tech and people in the media and arguably people in finance consistently get Facebook wrong is because these are all a bunch of high achieving individuals that are trying to get away from their friends and families city dwellers that's right exactly and the strength of the strength of facebook has always been the like it's the opposite of Twitter Twitter appeals to this very information dense textually oriented like, you know, sort of population that's, but the problem with Twitter, what's the problem? It's a very small market that's like that. Like Twitter's core issue above and beyond anything else. This is the core issue for Twitter from day one. Well before Elon Musk entered the scene, well before they were a poorly run company, is that the total addressable market of people who are interested in a product like Twitter is fundamentally

limited. People like seeing pictures of their nephew and niece. They like sharing pictures of their ski trip, right? They like, you know, sharing silly quizzes from BuzzFeed. Like that's just a much larger market. That audience does very much like short form video, which is why TikTok is one of the biggest threats that meta has faced. But all those fundamental strengths of the business were there,

continue to be there. And then when you layer on all the monetization stuff, Yes, ATT fundamentally was a shift in their business, and they deserve to have a lower valuation going forward because of that, but they were given their strength, given the capabilities that they have, given their demonstrated ability to adapt to new advertising environments, we're always going to handle ATT in the long run better than anyone around them.

And the reality of regulation generally, where that regulation is public regulation from governments or private regulation from platforms like Apple is they tend to strengthen and give a bigger relative advantage to the largest companies. And that's been my prediction for ATT, and I assume that's going to end up playing out in the long run. Yeah. Well, and the cyclical nature of all of it is funny because we've gotten several notes

from people complimenting you on the MetaMitts call and saying that they made money in the stock market. Yeah, by the way, just for the record, unfortunately for me, I don't direct. invest directly in stocks. My money is managed by investment manager and mostly like index funds or whatever. I mean, it's, it's funny because there's a weird sort of like, some people are like, look, I actually would prefer if you had money on the line because like, like, what's the phrase? Skin in the game.

Skin in the game, sure. My reputation is skin in the game. That's literally all that I have. And there is an interesting tradeoff as far as like, you know, should you have money involved? I think it's benefited me broadly that kind of. of everyone knows I don't have money involved, whether it be in startups or these big companies. And because the reality, I think this is a Silicon Valley specific thing where everyone's talking their book all the time because everyone has money and everything.

And so it does afford me a sort of like neutral player. I recognize and acknowledge the skin of the game argument. But for the record, I did not get rich off MetaMus either beyond the extent that hopefully people stay subscribed for a long time to come. That's right. You're going to get rich off the greatest. of all talk podcast. That's right.

That's right. Kyrie Irby is paying my bills, not Mark Zuckerberg. Well, and people keep sending that article and saying, oh, my God, Ben really nailed it. And it leads with that Grand Theft Auto meme, like, oh, shit, here we go again. And a nod to the cyclical nature. So it cracks me up that one of your most famous pieces from the last year leads with a grand theft auto meme. But it's perfectly appropriate because everything about this,

almost followed to a T what happened with stories five or six years ago. Snapchat comes along, right? They're getting a ton of traction, particularly with young people. And by the way, that's going to continue to happen. There's going to be another service past TikTok, right? That is going to capture young people, is going to capture attention. And it's going to be perceived as a threat to meta. Like, that's just the nature.

Like, people want young people, particularly, they want their own thing. I mean, that's what Facebook did to MySpace. Yeah. We're just at a much, much earlier stage. And, you know, I think Facebook was just a much better. product than MySpace and MySpace never, ever adjusted or shifted. And most importantly, MySpace's user base was very, very small, relatively speaking, like in the tens of millions, I think.

Facebook has three billion daily active users or meta as sort of a company, right? Like we're not dealing with a few tens of millions. It's just a different sort of scale at this point. And, you know, and so what happened with stories is so Facebook incorporates stories in their apps, you know, particularly Instagram. and it turns out that stories are pretty great. Like, stories actually becomes the dominant form of interaction sort of in Instagram. But the problem is Facebook's advertising products are all tuned to the feed.

And the advertisers are familiar with that. And feed advertising is relatively easy. You just need image and a text. When it comes to stories, it's a little more complicated. It's more engaging. It's maybe it has to be a different format. Like you have to figure out how it works. And Facebook has to figure out how to target it better and how to insert it.

And all this means there's a gap between. usage. So task number one is get customers using this new thing, which happened with stories pretty quickly. Task number two is figuring out how to monetize it effectively. And in between step one and step two, your growth is actually going to slow down because the time people are spending in stories is time they're not spending in the feed, which means they're seeing fewer ads, which means your monetization is going down. But the way this manifests in their earnings is their ad impressions go up a ton because they have all these new places to, put ads and their money per ad goes down because this is the other thing.

Facebook doesn't put a price on ads and sell. Everything is an auction. And so it's completely governed by supply and demand. So if there's a dramatic increase in supply of advertising, the price per ads going to go down to sort of meet that. And so that happens and everyone panics. And it's funny, this goes back to Google's IPO. Google's IPO was a massive success.

But the big critique in the early days around the S-1 and in the years after it was like, And we're like, oh, look, the price per ad keeps falling. And that is a bad thing in a world of scarcity. If you're a TV network and your price per ad keeps going down, that's a massive problem because you only have 24 hours a day and seven days a week. You only have a limited number of ads to sell. And so if your price per ads are going down, that's a very negative indicator for your business.

In digital, the inventory is effectively infinite. The gating factor in how many ads Facebook can show. is a function of how many people are using it, how long they're using it, and how many ads they want to cram into a session, right? And Facebook itself will limit that last one because if they put too many ads, you're going to bail, right? It's like, this is annoying. I'll see it as an ad every other one.

And arguably, that has happened at times and people feel very frustrated about it. They push it to the limit, certainly. But yes, I see your point in terms of the scale with cheaper ads. Right. So in the case of these companies, right before the story. stuff happened. Facebook was warning. And the other thing is Facebook is infamous for this. They always issue these scary warnings on their earnings call. The stock plummets. And then it ends up not being that bad. It ended up being like the next eight earnings call. This happens again and again. I've documented this

years ago because it was so predictable. So they said, oh, we can no longer increase our ad load. Growth is really slowed. And so the only growth going forward is going to be by the price per ad going up. And again, the price price price is going to go up because we're going to make it better at targeting. so people will pay more to use them in our auctions, but they can't unilaterally raise the price. And so everyone sort of paddocks. And then the thing with stories coming along is that was a massive bullish indicator

because when they have way more inventory, the prices per ad go way down. And so now it's more accessible to more advertisers. The more advertisers can sort of get in on the ground floor and start experimenting with these new formats. And by the way, a thing that performance advertisers know is if you get in on a new format, your prices are super low.

And the reason they're low is because it's hard to, it's not measurable yet, right? But they work. And so if you can figure out a way to sort of how to measure that effectively or just go on faith, you can almost get a better deal going with these new formats because you're like, it's like getting it on the ground floor. But it takes advertisers a long time to sort of adjust to that, right? They have to adjust their workflow.

They have to convince management that, oh, we don't have very good signal, but we're pretty sure it's working. But the big thing is, is that if you were an advertising, you're like, well, maybe I should do Snap because Facebook ads are getting really expensive and XYZ. Suddenly, Facebook ads are way cheaper because they have way more inventory. A bunch of new inventory, yeah. Yeah. And so it's, it's, you sort of, it's a big problem for your competitors because now your ads, which have a much better infrastructure behind that, have a much better measurement, you're already doing Facebook ads. So why not just tack on stories and, and even, why even bother the Snapchat thing?

Another aspect of that success story is my continued amazement that Facebook could just clone someone else's really successful product and incorporate it into their own product. And that is like perfectly legal. I guess shame is the only penalty there. And there was no shame on Facebook's part. And I use stories. I never had to download Snapchat because stories was so convenient. And I had my whole Instagram network already set up. So it's like, yeah, okay, I guess, you know, 15-year-olds seem to like Snapchat, but I'm all good with Instagram stories.

Yeah. I mean, so you made a couple of really good points there that are super important. The key thing that stories, Instagram stories accomplished, it didn't peel people away from Snapchat. Snapchat didn't lose users, right? People who grew up on Snapchat are still using Snapchat. And it's remarkable. Yeah, there are some real Snapchat adherence out there. Right.

Well, this is why network effects are super powerful. You have your people. You have your network on there. You have your habits. You do sort of stick with that. What stories in Instagram did was stop people from even trying Snapchat, right? It's sort of like cut them off. Why even bother going over there?

And especially since my network and all the people are here. And oh, by the way, Facebook also did it better, right? The performance, the responsive stories was from almost day one, much better than Snapchat. I have to take your word for it because I've never used Snapchat because Instagram stories was so convenient and, you know, efficient. Well, so the same thing happened with is happen. happening with TikTok, where meta did screw up with TikTok in that they didn't perceive the threat nearly quickly enough. And the reason is that TikTok was fundamentally different because, well, Snapchat was an alternative

social network and stories were mostly about seeing people in your network. Yes, there were public sort of things, but it was still all about your network. That was right in Facebook's wheelhouse. Well, we have a better network. All we have to do is stick it into our network and will dominate. They did. TikTok was unique because it's not a social network. TikTok is user-generated content, but you're seeing videos from all over the web.

It's a recommendation engine. And, you know, it's almost in some senses a little closer to a Twitter sort of thing in that regard. And that's about your interest, what you want to see as opposed to who you know. And Facebook failed to, I think, had a blind spot about this because they couldn't imagine being threatened by something that wasn't a social network. They were, you know, super alerting that was a social network, but this was not a social network. And I think that's part of why they were slow to respond. TikTok did take a much bigger chunk out of Facebook than Snapchat did. But that chunk, this is the other thing I made a point I made a meta-miss.

That chunk was foregone growth. That was foregone increased in engagement on Facebook. That was foregone advertising opportunities. It never actually cut Facebook. It never actually like, and people had it in their head that Facebook's like plummeting to its death. It's like, well, no. That was the most remarkable thing. back in the fall, they were pointing to the metaverse losses and ignoring a continued stream

of like really solid revenue alongside the metaverse bet, which obviously wasn't working out. I think we should all remember the most recent crash as like a collective reaction to how lame the Meta connects keynote was. That's up for debate. You can decide whether you want to partake in that. I actually think meta accentuated the always present meta-scepticism. in that, well, if Meda is throwing billions of dollars at this

metaverse, they must be truly panace about their business is broken. And I think the reality, the actual answer is, no, Mark Zuckerberg actually believes in this. He does want to own his platform. That's always been a clear thing. He wants to, you know, not be intermediated by

an Apple or something like that. But that is, it's similar from the, to like sort of their pamper of their business, but it's different, right? It's not a desperate Hail Mary to rescue their business like people were framing it. It's like, no, he actually believes in it and wants to do this. And that's sort of an important distinction.

I think I put it in that article. Like, this is the most successful rebranding of all time. That's part of the problem, right? Like, Facebook is still a social network company, right? And the, you know, the other thing that really impacted those earnings was they said we're spending all this money on CapEx. So there's two types of money, right? There's CapEx and OPEX.

CapEx is the actual buying of like hardware and servers and stuff like that. And you're buying it up front. It shows up in your income statement as depreciation, right? OPEX is what you're paying on an ongoing basis to like just operate the company. Now, there's kind of a third category, which is R&D. That's technically in OPEX for tech companies. That's most of their costs. But for for meta, you can almost put it as a third thing, which is all this money they're

putting towards the Metaverse. The Metaverse has basically zero CapEx because there's no service. They're just trying to figure stuff out and build stuff. So there was this big increase, forecasted increase in Cap X. And people were conflating that in their mind with all this spending on the metaverse. And the reality is that big investment in CapEx was about this AI stuff that we've been talking about.

And AI isn't just about better recommendation of Reels to compete with TikTok. it's about building better advertising for a post-ATT world, where you're doing advertising based on probabilistic measurements. Is this probably an ad this person wants to see? And also, did this person probably convert? It used to be you could know those things for sure, particularly the conversion point. You could know for a fact, did this ad result in a conversion

because you add that direct connection. That direct connection Apple was severed. You know, Apple severed. But that, who's going to, number one, who's likely to have the most data, the most computing resources, the most technological capability to solve this, and the most advertiser base who's desperate for you to figure it out, it's meta. They're the best place to figure, even though they were hurt the worst, they were also the best place to sort of figure this out. And one of my points in meta myths was this CAPEX increase should be celebrated by investors because it's doubling down on what is actually their sustainable advantage relative to their competition. and that was the real point that Wall Street got totally wrong last fall in particular,

was freaking out about this CapEx investment, when CapEx investment is exactly what you should want to see. Now, there is a question this applies to Google too. Is this a long-run concern that it's getting more expensive to run these businesses because AI is expensive? That's true, but that's always been the case. I've been writing about this in the context of Google for years, like how their cost of goods is creeping up and hasn't been creeping up

ever since they've been incorporating AI and machine warning into their products because it's more expensive to build. But that's that that wasn't something that suddenly happened. That's sort of an ongoing question. And I think to your point, it just got conflated with all the metaverse spending when the reality is the metaverse spending is like 15 billion or or no, no, it's more of that. It's like tens of billions. But the cap X is like 5x or 10x that I don't know. Exactly. No, but the numbers gave me whiplash coming out of our conversation in the fall because I was like, look, this is definitely not going to work, the metaverse.

That's at least where I sit on the issue. Yeah, but that's what I mean, Metameth's the last point in Metamiths was maybe not a myth. The metaverse is a total disaster and a waste of money. And all there's still a lot of positives that were weirdly ignored. It was instructive for me, like coming to this space with relatively fresh eyes. it was really interesting to see how divorce the narrative became from like the meta reality on the ground. Yeah. And just in general, I think the whole Facebook thing is and always will be very complicated because there's so many undercurrent and surrounding Facebook, right?

I mean, I think Facebook was blamed by a certain contingent for the election of Trump, which I don't think is really supported by the evidence. but it was convenient for a lot of people involved who maybe should deserve blame to blame Trump, right? Like, you know, if you're like, you want to blame the, his presidential candidate opponent or you want to blame the New York Times for talking about emails, like that's a civil war waiting to happen. And we wait, let's all shake hands here and blame Facebook, right? It's a very common enemy. Yeah. And I think that's, it's just in the ether. It's something people don't think about, but it's sort of like underneath the.

surface where there's this inherent skepticism and dislike of Facebook, which is wild because Facebook was the golden child in like the Obama years, right? And there were so many articles, Joseph 12 Obama master social media and all these sorts of things. And it was just a wild. I think Facebook was not at all prepared for this either. And the reality is, is, I mean, I think I don't know if I've dropped this take on the podcast.

I've dropped the chat. I think Facebook is arguably the best social network. Like, oh, man, what a terrible. take. I can't wait to get to the next question. It's mostly your friends and family posting crap about they did over the weekend, right? And it is a good way to stay in touch with people that you normally would not stay in touch with without sort of act of participation. And like it's Twitter where there's like culture war waged like 24-7, right, day and night, right? It's, you know, TikTok where you're just devouring your time and getting sucked into stuff that is probably not the best

for you to watch for hours on end. Of course, Facebook is now completely going in that direction because of the competitive threats, so maybe that's not so good. But again, I think it's hard to divorce this. A lot of the people in positions of influence don't use Facebook. And so if you're going to hate on social networks, it's always easy to hate on the one you don't use and ignore the problems with the one you do. Because no one wants to say, oh, yeah, the social network I love is terrible. I do have Twitter for the record. I love Twitter and it's terrible.

I'll say that with my chest. But then also, I think there is this weird, these weird political, undercurrents. And again, I'm not at all excusing bad things that Facebook has done. And, you know, and all social networks have fundamental issues. I think we're going to get to some of these, you know, questions sort of in a moment. But, you know, this, I do, I just, the whole point is there's a combination of long-term skepticism of Facebook as a business, these weird political undercurrents that undergird it. The fact that the people that are making decisions and casting narratives are, I think, are not heavy Facebook users that just in general lead to these whiplash cycles where when people

actually look at the fundamentals, it's like, yeah, this is a pretty good business. And when they sort of get hung up on there it is, it's like, oh, my God, this business is for sure doomed tomorrow. And it's a little bit more of the former than the latter. Absolutely. Yeah. And what you're describing as far as the political stuff, there was certainly wishcasting with talk of Facebook's imminent downfall because there were people who convinced themselves

that Facebook was responsible for the Trump election. And then downstream from that, they say, okay, well, it's all going to catch up to them. And it's going to be a big problem. And it's just not reflected in the numbers. Like you see it in the earnings report this time. You saw it in the fall also. So it'll be interesting to see. But there is, do you have another thought there?

Yeah, well, just the other thing about the earnings. The other thing to remember is these earnings were not good. You mentioned this before, right? Their revenue was down 4%. It would have been up 2% in constant currency, but even a 2% growth rate for Facebook historically is not very good. So this stock reaction that sort of speaks to the point that if Facebook had come out with this earnings report, you know, five years ago, the stock would have plummeted and already will be rightly so because it's like,

whoa, what happened to their growth? It's completely gone, XYZ. So it speaks to the point that this was really this. this drastically misplaced expectations issue. And we kind of talked about with Netflix a couple weeks ago where Netflix's last earnings were not very good either, right? And they're like, yeah, our international shows don't scale very well. And yeah, people don't care about our own shows.

Like, they came out and validated all these bare thesis about Netflix. And the stock was up also because the, the narrative had been so dark that suddenly the bar gets lowered. Yeah, I mean, it does seem like that's why it's hard to be an investor, right? Like, like, because it's not just the fundamentals. Like, you know, in the long run, yes, theoretically, things are priced correctly. But in the short run, there's market sentiment. There's all these sorts of things.

And measuring and fighting against that is difficult. So to the extent I got, I got this one right, it was just because the sentiment was so clearly out of touch with reality that, frankly, it was an easy article. It was an easy article to write. And I don't think I deserve too many plots for that, to be totally honest. I mean, I mean, like I said, I've written the article before. And so, yeah, Facebook is just, when you're aware of all these weird currents that are around it, it's just a more extreme example of stuff that does happen to other companies also. I mean, when I first got a lot of, you know, when I first started, I was writing about Apple. And that was the Apple is doomed narrative where Apple had a similar thing to Facebook where it's like, it's just going to be Mac versus Windows all over again.

And that happened with the iPod. Well, the iPods are going to get swept out by all these cheap competitors. And then it happened with the sort of the Mac comeback. Well, that's going to be nice for a little bit. And the iPhone comes along. Oh, Android's going to take over like Windows and Mac. And I start up being like, no, this is, it's a completely different situation. You don't actually understand what happened there.

There's fundamental strengths here. This market is so large. There's going to be two winners, not just one. And in retrospect, it's like the most obvious, you know, things in the world you could say. But at the time, because of the prevailing narratives, it felt. sort of like edgy and contrary in it and is you know writing that's turned out very very well and but that's that's not really that that's just the way the world works and right and and and there's plenty of stuff i've gotten wrong for sure so i mean there you know it well and talk about

history being written by the victors i was not even aware that there were people 10 years ago predicting apples imminent demise i think that's insane to even consider um yeah well i mean And Apple is obviously much better at PR than Facebook. They have a less objectionable business model, although the services stuff is pretty nasty. But, you know, the, and so. Well, and no, I mean, Apple has been coded as friendly, lefty company for like 30 years, whereas Facebook took on this like sociopathic brand during the Trump years. And some of it was stuff that Facebook was actually doing.

And some of it was just sort of getting caught up in the political machine. Nobody wants to blame Hillary. Nobody wants to blame the New York Times. And so to your point, like a lot of it was out of their control. But, yes, Apple has helped to this day by its sort of cuddly brand, you know, just a couple of dreamers. Steve Jobs just trying to change the world. And they also have a phenomenal business model. So that that helps a lot.

That helps a lot as well. Okay. So we've been very glass half full. Greg says, can you guys discuss? this article, the inshittification of TikTok, a recent piece from Corey Doctoro at Wired. And specifically this question, is there any way for ad-based platforms to escape the cycle described in that essay? Do you guys have any good examples of companies who've managed to avoid these pitfalls? And for anyone who hasn't read it, we'll put the article in the show notes.

It's a very long essay that highlights the slow degradation of, of user experience on Facebook, Amazon, and Google, and predicts that we're about to see the same pattern play out at TikTok. I don't like the word in shittification because it sounds ridiculous. And I think this is a real thing that happens across the internet. So there should be a clean way for everyone to identify it. But his basic thesis was that most successful advertising-based companies offer revolutionary services initially and then they start compromising those experiences with customers when it's time to

capitalize on all their users and actually make money. And then eventually they start to screw third party sellers and advertisers when it's time to appease their shareholders. And at that point, it just becomes terrible for both users and advertisers or in Amazon's case like third party sellers. What do you think of all this? And do you think there's any way to sort of avoid? going down that path if you're relying on ads.

It synthesizes a couple different conversations we've had about like Amazon's ads, Google, and how I personally find Facebook's user experience to be like amazingly crappy, but maybe that's just me as an urban elite. I don't know. I mean, so my issue with, and I've had these sort of disagreements with, with Corey Dr. O for many, many years. I don't deny that stuff becomes crappy. I wrote a, there's an article I wrote,

this is the Rupter Aggation Theory, I think like why webpages suck, you know, just talking about a lot of these sort of dynamics. And this bit about, you know, getting a lot of customers, that gives you power over suppliers, and then you can extract terms from your suppliers. That's aggregation theory.

Like I appreciate him sort of articulating that to a certain extent. Where I disagree, is the question of cause, right? Like, sure, we see this effect happen. What's the cause? And Corey sort of attributes it to the malice of, like, executives being evil and bad investors and all this sort of thing. If we could only have more enlightened leadership or whatever, you know, that the internet

would be such a better place. And this is aligned in general with a lot of the, like, like, Corey Doctro is very big on like, like, there should be no copyright or there should only be copyright if we're trying to sell something in general anything should be available just just like a very sort of 90s era arguably even earlier sort of idealistic view of the internet and the free sharing of information all these sorts of things and the disagreement I have is that I think it is that philosophy that's actually the problem and what I mean is when you have the zero marginal cost of the production of content you're going to end up deluded with deluzed delused deal yeah deluge

You nailed it. You're getting it to lose with shit. That's what is going to happen because it costs nothing to produce content. The only cost, like it doesn't cost me to bring content, but for the time and effort I put in to hopefully make sure that content is high quality and reliable. And that takes a long time to write, you know, to write a weekly article can take hours and hours and hours, right? To generate BS, to generate stuff that is like just going to show up high in a Google result, even though, you know, to generate a bunch of boilerplate before my recipe shows up at the bottom. them and have 47 gazillion ads in the middle of it doesn't take much effort. It's just dumping stuff out there.

And with AI, the issue is going to get even worse, right? You just sort of just generating sort of stuff. And as the amount of crap becomes overwhelming, which is a function of the economics of producing content and the zero distribution cost, you're going to end up with crap everywhere and the platforms have to figure out a way to manage to that. The overall experience is going to get worse. They're going to try to have to figure out what to rank and what not to. rank. And yes, there is an alignment incentive issue where that does open the door for

advertising because the only way to sort of break through the noise, but the noise is not a function of the platforms inserting noise. They would rather have, they want an average amount to be sure, but they don't want crap that you're seeing when you open up, when you do a search or you're on Facebook, whatever. They want it to all be good content. But the economic driver of free means you're going to get a bunch of crap. And it's going to degrade over time. Because when a platform is new or relatively small, the people that are motivated to share or to produce stuff are, they want to get a following. And there's a real opportunity to build stature, right? This is the other reason why new social networks are going to always come along.

Eugene Way wrote, wrote, wrote, has written a couple of brilliant essays about this where in an established social network, the people who won, they out like they win forever, right? If you have millions of followers on Twitter, you have millions of followers on Twitter, it's very hard to sort of build up to that level. When a TikTok comes along, suddenly it's Greenfield. It's a completely new opportunity to build a new following. You don't necessarily have a leg up because you're big on Twitter. You have to actually figure out. And it's one of the reasons I've been reluctant to get on TikTok because it's like I don't have the energy to try to build up a new following and make it useful for my promotional purposes or anything like that. Yeah. Yeah. We all have that same problem. And that's also why it makes it really easy for the olds on the other social network

to insult and dump on the new platforms. Because not only could they come up with ideas, but also there's a self-preservation. Complete and utter ignorance is not going to stop me from making fun of TikTok until the day it's officially banned in this country. And I'm going to continue having fun with it. My question. But let me finish walking through this. So you have, so the core, issue is the free spread and distribution of content is just inevitably going to lead to, you know, so moving forward, as a platform is bigger and bigger and more popular, then the more motivation and monetary incentive there is for the people producing crap to come in. And so the amount of

crap is going to come in and overwhelm the good stuff. And then the platforms is to figure out how to manage that. And part of manage that is having an advertising product. So again, there is a monetary incentive here for their business model to be clear. But this is like the way around this as a creator is you have to get out of the advertising business model. This is the whole strategic point. And I have a real problem with a lot of these early 90s idealists who are super opposed to copyright. They're super opposed to selling stuff online.

These were the people who were dumping on me when I started strategically saying that's bullshit that will never work. Why would you charge for stuff on the internet? Like there's still people that are huge skeptics and get annoyed at me for charging as if I'm violating the principle of the internet because of where information ought to be free. And it's this utopian idea of the way the world works that is just wrong. And if you actually want to build a sustainable business, like the fault for the insidification of YouTube or TikTok is to build a connect with your audience independent of that. Now, that's not to say it's easy. But guess what?

It's never been easy. The fact that you can reach the whole world is a marvel. The fact that it's hard to build a new business has always been the case for all of human history and will always be the case. When you're talking about actually capturing dollars, there is scarcity. I mean, the zero interest rate environment, maybe there wasn't much scarcity there should have been. But today in particular, there is scarcity. And there's this weird blaming that you ought to be able to convert attention to money. Because you deserve it as a creator.

And also these companies are very mean for taking money. It's just there's a, there's a willing, there's a, this eagerness to skip over fundamental economic realities, both in terms of the cost of production and also like the reality of capturing an audience and monetizing that. And maybe I'm a bit biased against this mindset in general, in part because these are the people that still get angry about the fact that I charge for content. And it's like, yeah, guess what? I make a living.

And I'm very happy about that. And I was thinking about this this afternoon, you know, you think back to the Halcyon days of the free and open internet and like the blogs and everything else, like 2008, 2009. And maybe I just have warm feelings for that era because that's when I was coming of age on the internet. I'm sure lots of people think back and I like 1996, 1997. But like even back then, the best days of the blogosphere, most of the people in digital media, we're not getting rich off of what they were creating. And now it's a lot more viable

in part because the free ad-supported internet is just full of trash. You know, I subscribe to like five different substacks because I really value being able to read like clean writing that's not polluted with ads and, you know, diverse perspectives. All of that has more value as, you know, the rest of the internet sort of goes to shit, as Corey would say. Right, which does happen. I'm not denying this. It's the cause and effect thing that I have the issue here. Like, the effect is real.

I just disagree with the cause. I think you make a really good point, which is the value of breaking out of these systems is higher than ever precisely because of this point. Now, everyone's like, well, I can't subscribe like 47 substacts. It's like, well, there's a sense of entitlement around this. this sort of view. Like, I ought to get access to all good content and also there should not be advertising all this sort of thing.

It's like, why? Like, like, well, there can be advertising. It could just be within reason. And I think one of the things that this article identifies effectively, at least for me, is there's not really the incentive to worry about the user experience. Like, once you lock people in and have like a huge base of people, you know, Amazon, you're locked in if you're subscribed. to Prime because it's so good that you're never going to choose anything else. Facebook,

like you said, if all of your aunts and uncles and friends are on Facebook, you can't really like go anywhere else. And so there's not a fear in those companies of like what actually happens if we let the customer experience degrade to a point where like it's just not enjoyable at all. They can't go anywhere. There's not other alternatives out there. I'm sure. I know. you're going to say there are like plenty of alternatives. I do have some responses. I'm finding my time here. Number one, just notice that you just said because prime is so good, no one will go anywhere.

So just to make sure I understand, and it does not like the FTC is going to go down this road. The problem is that prime is too good and that that's now the crime? No, the problem is that Amazon has this sort of lock-in mechanism because their shipping is so good and because everybody's gotten used to shopping. It's so good because they've invested billions and billions and billions of dollars and tremendous risks to do it. And from my part, I'm glad they took those risks. I'm glad that they have this thing. And by the way, they have like 10% of total retail. Right. Like, like these and they're getting hammered the stock market right now because their costs

have gotten out of out of control relative to the revenue growth. And again, I gave the example a couple episodes ago of a high-end brand that in part differentiate itself by not being on Amazon, right? Like that's that that is a that is a hard goods example of what strategy is, right? Right. I'm not dependent on Facebook algorithm. I'm not dependent on the Twitter algorithm. I'm dependent on building a direct connection to my customers and leveraging it that way and

then charging appropriately for it. And the reality is you can't have everything, right? You like this is a real thing that I. I grapple with. And we talk about this in the context of the stuff we do. It's a bummer to feel like you wrote something great or you're recording a great podcast and not that many people are listening to it, relatively speaking. It is frustrating.

Yeah. But that's that's that's that's that's, that's, that's, that's, that's, that's, that's, that's, that's, that's, that's, that's, that's, that's just a tradeoff. That I have made. Wimiting my reach in exchange for making a good living. And right. Right. And people don't want to accept that they have to make tradeoffs. And you see this all over life.

There's just a refusal to admit to. or accept that there are tradeoffs. And this is a good example. That's number one. Number two, you go from Amazon, like, there are. Well, let me just clarify. The Amazon point specifically, Prime is great. Their shipping and fulfillment is phenomenal.

What I'm talking about is actually shopping on Amazon has gotten much worse because there are so many ads in every product search you make. And there's not really incentive on Amazon's part to worry about that because, you know, Shopify, nobody's going to start shopping on Shopify for the rest of their lives. And the absence of competition allows some of this to fester in ways that I'm just curious whether we'll ever be able to regulate something like that. Yeah, exactly what we need is the government dictating the means of commerce. Like the reality is, is that the way to compete is to build up a better alternative

to Amazon. Like I think Best Buy, like for several, like completely rehauled its business to be a much more compelling e-commerce operation. If you're building large appliances, I think it's a better option. It's one I've used personally. And that's a way to compete with Amazon by what? We're going to offer a better experience. We have a better home installation experience.

There's going to be fewer ads in our results. The market takes care of this. And there's a, this is just a philosophical distinction. Like, there's a distrust that the market will figure this out. This assumption that consumers are more. and we'll never figure out that it's bad and it's going to be figured out. Like, we just spent the first part of this episode talking about how meta really had to desperately respond to and change the way they approach their approach to content.

They couldn't just stick with the feed in ads forever. They couldn't just stick with stories and ever. And people, in one breath, you're upset that meta ripped off stories or ripped off reels. in the next breath, you're like upset that. Yes, but in one breath, you're saying the market will figure this out. But in the next breath, you're admitting like, yeah, of course it's all gotten shittier. Like, that's the way it works. And I'm wondering whether there's a third door that can avoid the mass degradation of free internet.

And maybe there isn't. Maybe the answer is subscription. Yeah. Like, no, the emergence of, I would like to think, I shouldechery, and this is, I'm, yeah, I'm very, proud of it. Chatechre is on the cutting edge of a reaction to Facebook, of a reaction to the crapification of free media. There is a different model.

You can actually focus on delivering a quality product, not a quantity product. You can ask people to pay for it and they can feel I have this great piece of content in my inbox every day and I contributed to it by paying for it. And there's, it's not. That's how I feel. Yeah. It's easier to read. That's a market response.

Refreshing relative to Twitter or everything else. And all of substack and all this is a reaction to it. The New York Times focus on being, look, we're a subscription product. We're going to deliver this suite of content that has been very successful. And just because it's relatively small, they only have millions of subscribers as opposed to hundreds of billions, that's the reality of life. Free stuff is always going to have way more people. And it's going to be crappy.

That's just the reality of things, right? And people want to fight against economic gravity in this case. The problem with being free is that you're like the, you're just going to have all these fundamental limitations. The cost of production in a world, the cost of production is zero, right? It used to be when you had to actually make something, right? You had to actually print a book. You actually had to print a newspaper. There was a fundamental gate on making stuff up because it wouldn't sell.

And then you had to pay for the costs of the books you printed, right? So there was a motivation to get it right. And if anything, if you want to have a sophisticated response, it's being mad at the internet in general saying like, look, back in a world when you actually had to pay a price to print something, that was better because there was a fundamental gate on people sort of doing, doing sort of crazy stuff. Right. And that's actually a legitimate criticism. That's a fair thing to say. What I reject and I don't think is legitimate is to think that a world of free production of. content and free distribution will ever not end up this way. And this isn't because Mark Zuckerberg's

an evil person. It's because the fundamental economic nature of free production of content. Yeah. No, and I think that part of the value of the piece is identifying that pattern because it was edifying for me to sort of step back and think, all right, so a lot of the conversations we've had about whether it's Google search or Facebook or whatever, they all sort of track on this same wavelength of reasoning. And I, it's interesting because I also may just be biased. Like, I think Facebook sucks and I'm mystified at their continued success. But clearly there are lots of people who really enjoy using Facebook and keep going back to

that well. So I might, I might be the outlier. Right. And the flip side to the MySpace angle is that still is always a possibility. Like, like Facebook's fundamental weakness, if you're looking at it, sort of an investor is absolutely at some point people just get sick of it and stop using it, right? Like that's that's legitimate. And it is possible.

But they also have this fundamental, like massive built in advantage where they have three billion users. And when there are upstarts, they can look around and say, all right, let's take, you know, the Snapchat stories and incorporated into our business. And let's come up with our version of TikTok to serve this market with our user base. And it's difficult to compete under those conditions. But maybe someone's going to do it one day. Yeah.

Well, I mean, TikTok got quite large and they still are quite large. Snapchat is somewhat of a functioning company. You know, like, yeah, network effects are real. I'm not denying it. Facebook has this built-in thing. And that is a core, like I can't deny it because that's a core precept of my defense of VETA and underlying. Founding pieces.

Yeah. Yeah. The network effect is real and it's very, very powerful. at the end of the day, though, what we're talking about is that the cost of going to a new network and rebuilding, and that cost is massive, to your point, right?

You have to, if you have a lot of followers of Twitter, like, potential to rebuild a following, if you have all your friends and family on Facebook, do I have to, like, go convince them one by one to switch? Like, yeah, you do. Like, that's, and that's a huge moat. No one is saying it's not a moat. It's also, in my estimation, not a crime.

And you have this thing where, you know, Facebook, we go back to the story of Facebook, and they're going to limit the ad load. And that was a, you know, people were, you know, want to respond to that. They, they know it. They, they can't overload it with ads. And that's why Facebook did respond, whatever you want to say about driving the, the criticism after 2016, they did overhaul their content moderation and build up this huge contractor army and try to sort of really limit stuff and things on those lines.

Because that is a forcing function on them. And, you know, I think there is this people want to have hold two ideas on their head. They, number one, want to criticize Facebook or these other companies. And also, two, really hope that the companies don't listen to and respond to those criticism because they want them to fail, right? And so when they actually respond, they get upset. And this goes back to the Google, like Google in the early years. And, you know, again, Google was the company that had the hardest time analyzing made the most mistakes for, I think very well established at that point. But there was a big critique around them that, look, they're going to be in trouble from vertical search.

People are going to just go to an app to search. And Google responded by making their, changing their search results based on what you were searching for. Basically incorporating vertical search into the core search app made it a better experience. And this makes people very, very upset. They're like, no, Google, you can't respond. You can't change. And these big companies responding and incorporating these things into their products is also a market. response. There's a sense that a market response can only be when the incumbent loses. No,

the incumbent making their product better and more attractive to people because the company was challenging them is a market response and it's a good one. And by the way, you can make the case that by Facebook rolling this out or Google rolling this out, suddenly billions of people benefit instead of the few tens of millions or hundreds of millions that would have had to switch to a new app. Now, I get the point that that's not very fun to think about that. Oh, you know, where's where's, you know, We want competition. Like, there's just a stay. Well, and I get the point that, look, we shouldn't penalize a company like Amazon for succeeding

and having the foresight to, you know, build out the fulfillment services and create this invaluable service that everyone relies on and makes Amazon, like, so valuable that it almost doesn't matter that the searches now suck and that they're, you know, half ad products and payola because, you know, they made a really smart business decision like 15 years ago. So it's a really tricky balance. I don't want to penalize these companies for being smart, but it's just kind of an interesting phenomenon to step back and look at from a bird's eye view. Honestly, I think to the degree that Amazon's search continues to degrade,

in the long run, it will cost them money. And I do think it's a concern. Like there's this, you know, they make so much money from ads, that amount of money is increasing. ATT supercharged it because a lot of these merchants that could no longer advertise effectively on Facebook, have no choice but to sort of advertise on Amazon. And that does play back into higher prices. And if you want the lowest prices, then it's not always best to be on Amazon.

And if you want sort of a guarantee of who it's coming from or who it's buying from, like if you want to buy some electronics, she's probably go to like BH photo video instead of going to Amazon. You'd be at least be sure who it's coming from, right? These are real concerns and they will accumulate over time. I mean, this goes back. I just think in general people want to see fundamental,

like they want an a like a causes B and they want that to play out in a matter of weeks when this does take years right five six years ago everyone was convinced that social networking was over facebook and one forever and ever amen then suddenly ticot shows up right and you end up five years later the fdc files a lawsuit against uh against facebook for the instagram acquisition the first version of that lawsuit did not even mention ticot he wasn't even in the lawsuit it's like hello and and like if the reality is, is there ended up, even in that case where it felt Facebook was so down in this space, it ended up there was still a market response. And I think that should give people pause.

Like, yes, it takes time. But the problem with regulation coming in is, number one, even if it works, it also takes time. And number two, it becomes rigid and ossified because it doesn't get redone or reworked over time. And you're stuck with sort of the way these things sort of work. There's real risks in that approach as well. And there's just a, like, and it does bother me. And I disagree with a lot of these utopians that are just fundamentally flawed in my estimation in their analysis of the problem.

Why would I want someone who can't understand the problem regulating the issue? And I don't know that regulation is the issue just for the record. I'm not even sure that that was raised in the wired piece. It was just sort of me spitballing this afternoon thinking like, well, why does it? this exists. Maybe it's a lack of competition. How do you solve that? Maybe regulation. I don't really know. But it is when you step back, like, it's also pretty compelling to me the idea that, look, if you want something of value throughout the last 10,000 years, you've had to pay for something. And if you're expecting to get a really great valuable experience free on the internet, then there's a good chance you're going to be disappointed. And that's just sort of like the inevitable outcomes of, again, like market theory for 10,000 years. And so maybe it's just sort of an awakening to reality that we're all experiencing here as these markets mature.

I agree with that. I think that's right. Okay. Two emails here. First from Ian, he says, I was on a flight to Disneyland for a family vacation listening to the latest Sharp Tech episode through my beloved AirPod Pro 2s. I leaned over to help my four-year-old with a Lego Star Wars-related problem and his shoulder bumped my ear. The AirPods slipped out and fell into the crack between our seats. Andrew can't be right, I mumbled over and over, desperately feeling around for the headphone. What are you doing? Who's Andrew? My wife asked.

I probably looked like William Shatner in that Twilight Zone episode. An hour later, after the plane landed, I got up, moved the seat, and found my precious AirPods. Congrats to Ian. I'm glad that I could be part of his vacation. I'm glad he found his AirPods. It's bad enough to get shaken down the entire time you're at Disneyland. You shouldn't have to be shaken down by Tim Cook as well. Do you have any thoughts, Ben?

I mean, it is a problem. It is a real issue. The AirPods on the airplane. That's probably why there's just AirPods like literally vending machines in the airport. great, great gig if you can get it. And you know what? What I willingly pay because they're that good. Well, Ian, if you do lose your AirPods Pro 2s at any point in the future, just email Sharp Tech.

I will send you some wired Apple earbuds for 1999. And you'll be set. I'm telling you, the earbuds work great. Always have. Final note here from Andrew. He says, hey, guys, I really enjoyed your discussion in recent episodes about getting together with friends in person. Way back in February 2011, a group of local friends and I started up a monthly album club. Since then, we haven't missed a month. It's become known as

the best night of the month among our friends, and it's been brilliant to get together with friends around a common interest. We take a round-robin approach to hosting. If you're the host, you have to organize drinks and snacks, but also get to share an album that you love with the group. It can't be a compilation, and you have to genuinely love it, ready. If you're hosting, you can't be hearing it for the first time. We listen to the album in silence. Ooh, that's intense. That was the most surprising part of the email to me for sure. A monastic experience together. And the evening usually ends with people lining up tracks on the high five that are related to or inspired by what we just heard. It's a lot of fun. I see the iPod,

iTunes years as a bit of a loss period where I was listening to Playlists on Shuffle. Our album Club has brought me back to admiring the album format and has introduced me to so much brilliant music. You can see our entire history here. I'll put a link to the Album Club website in the show notes. Really cool tradition. And I appreciate him sharing it with us because I think there are all sorts of different ways to solve the problem that Ben and I are solving with Cigar Nights. Right. It's always good to have a solution that doesn't involve cancer. So thumbs up to Andrew. The other brilliant part about this solution is that it ultimately involves the drive and impetus to buy more gear, which is, which is like that, that is the, you know, so you have this, this isolated experience

on your own where now you can spend time, my, my speakers are not as good as XYZ. I mean, and believe the audio, you can spend just a ridiculous amount of money. So this really has everything that a guy needs. So I applaud this sort of approach. I was blown away at the, sitting for a half hour sort of bit. But this is the key point. It doesn't matter what you do. Like the, we don't want to get together and just talk, right?

I was going to say, it's really sad that this is a guy specific problem. You need to have some sort of activity that you're all bonding over because everybody feels weird just getting together and like catching up like normal humans or women might do. So I agree that like having the album

to gathers. round is productive for everybody. Yep. So thumbs up to Andrew. We are, as always, endorsing the concept of the activity as opposed to pushing our audience to smoke, which I do always feel a bit cheapest about.

But yes, no, it's awesome. And if the, you know, I've always very, to take this full circle, I always talk about strategically. I obviously am proud of strategic, but I'm super proud of the business model, right? And I sort of articulated that pride on this episode. In this case,

I'm proud of Sharp Tech. I think we put out great content. But if we start a broad movement, a touchgrass movement, that that is going to be the true win. That's right. Great stuff. Foster community, any way you can. A good goal for all of us.

On that note, Ben, we will come back later in the week. We had a number of good mailbag questions that I wasn't able to hit tonight. You had a good collection here. I actually did research on Sparkling, water to answer the question on here. But alas, I was too busy

ranting and raving about free stuff on the internet. Well, we'll have fun with Thursday's episode. And until then, you can email us at email at sharptech.fm. And Ben, I will talk to you soon. Talk to you later.