Tech Brew Ride Home - A16Z's Connie Chan On Outgrowing Advertising As A Business Model

Episode Date: March 3, 2019

So, I hope you read the piece I mentioned in the long reads, Called Outgrowing Advertising, by Andreessen Horowitz's general partner Connie Chan. Link in the show notes. Again, I think this points a way forward for the one trick pony-ism that I've bemoaned on this podcast. A model for new startups now that the low hanging fruit of "let's just get to a billion users and throw some ads up" is kinda, sorta, done. Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the TechMeme Ride Home. I'm Brian McCullough. So I hope you read the piece I mentioned in the long reads on Friday called Outgrowing Advertising by Andrewson Horowitz's general partner, Connie Chan.

Link in the show notes, of course. Well, today we're going to talk to Connie about that piece. Again, I think this points a way forward for the one-trick ponyism that I've bemoaned on this podcast many times. A model for new startups now that the love. low-hanging fruit of, let's just get to a billion users and throw some ads up is kind of sort of done. My thanks to Connie Chan for taking the time to have this great conversation. So forgive me for a sort of long preamble up front here, but it's always kind of jarring to be reminded how much even the biggest internet-based consumer tech companies are essentially

one-trick ponies. Like in your piece, you have the stats. Facebook, Twitter, Snap, that between 84 and 99% of their revenue is ad-based, right? You know, you can even add Google into that mix. But we're generally talking about entertainment apps today. Then the other popular model is subscriptions, but that's still a one-trick pony. Like Netflix, 100% of its revenue is subscription. Spotify plays both sides of the fence a bit.

I bet Hulu is even a little more balanced between the two. But the chart in this piece that gobsmacked me and made me want to talk to you is the one that shows that Tencent's revenue district, Its biggest, Tense's biggest source of revenue is gaming at 36%, then subscriptions at 23%, then payments. I know I'm going on and on. I'm getting to avoid. The smallest piece of the pie is advertising, but that's a balanced pie.

And so in this piece, you're suggesting A, that that sort of a balanced pie is how consumer internet business works today in China. And then sort of implicitly, B, that this is a possible. way of the future everywhere, or at least maybe this is a model that if you're someone entering the space, you might want to start thinking about as opposed to just the old playbook of get a billion users throw up some ads or get 500, 50 million subscribers. Like that's not a diversified enough business plan for the future, I think is what the point of this piece is.

So preamble... It's not just that it's not diversified. I'd say, you know, it's hard to go up against a Facebook or Google for someone's ad because their ad machines are so robust. Oh, there's also that point, which I hadn't even thought of. All right, preamble is over. So let's start then, let's start with why is the Chinese market different? Why didn't Chinese companies just throw up ads as their first default strategy?

Well, to be fair, some of them did use a lot of advertising to start with, but many of them have experimented well beyond ads. And I think the crux of it is China is much more, more, mobile first, and I'd argue almost mobile only. And a lot of the advertising, typical display ads or even search click ads, they just don't work as well on mobile in terms of how the user feels, right? When it takes up the entire screen, it's very different than a display ad that's taking up, say, a quarter of your screen. And so I think that Chinese companies have become a lot more thoughtful on all these other experiments on how to monetize. So that's definitely one. The second pieces, quite honestly, they have a whole different payment ecosystem that allows for these

microtransactions, which are really taking off. Well, and you make the point in the piece, because I think we're going to have to talk about this idea of what consumers are accustomed to. You make the point that others have made in other markets that Chinese consumers skipped the PC and the credit card. And so it's almost like this is the internet that they know that payments and, you know, that payments and, you know, and all of this universe of other things, it's a different internet than what we were a culture to in North America. Yes, and I would argue that a lot of the companies in China

will be very experimental in monetization, and they'll try it see if it works, and if not, they'll take it down, but because they're willing to go out there and explore and try new revenue models versus taking that same kind of one-trick pony and pushing harder on it, It just basically allows for more experimentation. Right. So it's like necessity being the mother of invention essentially.

And then one more thing to lay the groundwork, like you point out that like this might also like that sort of experimentation, like not having a default thing, like just throw up ads as a fallback model. It probably leads to a better product for the consumer as well. Yes. Go ahead. Yes, for sure. I think in many cases it leads to a better user experience.

Because one, rather than pay for a subscription, you know, imagine just going to a restaurant and having to buy a buffet every single time, rather than being able to order off menu a la carte. And I think that's the difference between a lot of the products in China versus a lot of the subscription models, as you pointed out in the state. And also, if you think about the user experience, not just of having that choice of what to pay for around content, but I also have other. examples I can talk to around how payments can actually facilitate better interaction with creators and also be used as a mechanism for self-expression. So if I have to think about like what new monetization models look like, rather than just point at the tactics, I would say it's really actually exploring more ideas on self-expression, giving people better ways to access exclusive content, and three, finding them the right interaction mechanism with content creators.

Well, let's go ahead and go into some of those examples. So if you have a top of mind, like some of the more creative and interesting ways to do that, let's start there. I mean, self-expression as a very simple example, a lot of the apps in China, you can pay to skin the app with your favorite artist, favorite celebrity, your favorite theme. And that means all the buttons look different. It's like you're downloading a theme onto your app. or you can pay money and change the avatar. Or there's even options where, I mean, imagine using YouTube or Twitter, but you pay money so that all your comments show up in red, bold font.

So they stand out. So that sounds like what we're used to in gaming, almost like having skins and avatars and things like that. But you see it applied to all kinds of social networks. This whole idea of being able to self-express and make my profile stand out. whether it's through an image or having my content looks differently, that's very common across a lot of these things. I think a good model to look at this,

and this is the one that you started with in the piece, is books. And I want to poke at the idea that it's not just the straight transactional model. So there could be a third model. Amazon is 80% transactions, right? but even when there are transactions and I'm using the books as a lens, like there's all sorts of more creative sort of teasers and different ways to make that transaction happen in China. Yes, I think that the book's example, when we started selling digital books online in the West, we kind of took the same model, which is you buy the entire book at once,

and we just slapped it on the Internet. But in Asia, it's almost as if this product was built for the internet. And therefore, you can read portions and preview the book well before you have to pay for the rest of it. You can't do that in real life in a physical book, right? Or you can charge by the chapter or by X,000 characters. And it just allows different ways for that creator to get their content out there and also to monetize. It's built for the internet, as opposed to taking a model that used to work in the offline. world and just putting the distribution piece online.

I think what we've done in many cases, whether it's news, music, movies, books, is we've taken out of the offline models and we made the distribution piece online, but we haven't pushed ourselves to be more creative on the monetization, the ways that we charge. Or even on the product level, because what you're describing is, again, this is a product that is designed for mobile first. Yes, exactly. obviously as a podcaster. I had heard this stat before that in China, podcasting is really a much more massive business than it is in the West,

or at least in the United States. But I didn't realize that it's essentially, a lot of it is sort of like that massive open online courses model. Yeah, a lot of it is knowledge-based learning, not just entertainment. That's correct. But mostly subscription-based with ads mixed into a lesser degree. Not necessarily subscription. You're able to buy packages of content. So maybe you might have a series on how to buy your house or how to improve your voice. And you're able to buy a package of, say, 5, 10, 15 podcasts at once.

And it allows the creator to have more incentive to create really advanced deep dyes into various pieces. as opposed to having to focus on general mass appeal content, which is typically what you have to do when you're advertising based. You're now able to cater to smaller niche audiences that are very willing to pay for that content. Well, and that's also sort of, I loved all the details. I knew nothing about this, about the music, like Tencent Music, and how its model differs from Spotify,

And it is all about like almost gamification and offering ways to prove you're a bigger fan than other fans. But then also it's a lot of, I think you said, what is it, 70% of Tencent Music's revenue comes from live streaming services. So describe to me how that model is different than the Spotify model. Yeah, so that goes back to that third kind of bucket, I would say, of monetization, which is interaction and facilitating interaction with creators. So what those tips are is for 10 cent music, there's various ways that you can tip creators. One, if you use their karaoke apps and say you're a singer and someone listens to you and they love your voice, they can send you these digital stickers, which you then redeem for cash, and then 10 cent music takes a portion of that. Or say you love listening to music and you have lots of thoughts on lyrics or you just have a great voice for radio.

You can actually create your own online radio show. and people who listen to your show and listen to the music that you curate and your commentary on it also send you tips. And you as that online radio broadcaster can cash out a portion of that for real money. So what it does is it gives us an incentive for everyday people to become content creators to also encourage viewers or listeners to pay, and the platform takes a portion of that. Right. This whole idea of interaction, tips and stickers, I mean, we're starting to see that in the U.S.

And that's what excites me, right? You see that already happening on Twitch. It was announced just a few weeks ago that Himalaya, the podcast app, is going to start incorporating more tipping as well. I think other big companies, such as YouTube and now even Reddit, they're experimenting with this idea of tipping. Right. I wonder it's almost, that's one of the key things that's been holding. back this sort of adoption of this sort of thing is that, you know, we've heard this for years that microtransactions have been a problem here in the West. And so maybe it's almost a

technical barrier coming down that maybe will make this more viable? Not so much, though. I mean, I hear that many times because, oh, the credit card fee is too high. But in reality, for a lot of the Chinese platforms, you'll buy for, say, $10 or $20, a bucket of tokens that you can then use to buy these stickers or buy these gifts to send to people. It's not necessarily an individual transaction every single time. But to me, it's not just a tech barrier. It's a function of the platforms needing to be bold enough to test it. And also, it's a function of having consumers feel like they want to contribute and give

to these creators. I believe that is the case. So when you look at the success of these third-party platforms that allow creators to monetize their fans. through monthly payments, you can see that that desire to pay creators is there. We just have to as platforms facilitate that in a more seamless way. Like almost integrate as a part of your subscription to whatever platform, the understanding that you can give a portion of that to the creators as a part of your overall subscription, maybe?

Yeah. I mean, I think something like that definitely should be tried. I mean, if you look at, you know, and I didn't put this in my blog post, but if you look at another company, Sino Weibo, which is often called the Twitter equivalent of China, you know, people say that paid content on their product will likely be 10% of the revenue. And that's going to be mostly just users wanting to pay to get access to exclusive chats or live streams or Q&A. All right. Forgive me, but I'm going to push back just a little bit. All right. You know, Facebook has been trying to diversify. Everyone should probably get to this more balanced pie revenue model, right? Facebook's been trying to make payments happen for forever. Even subscriptions for things like Facebook groups, I think they've been rolling that out recently.

You know, Snapchat is trying to do, you know, click from a video to be able to buy the piece of clothing or whatever. as of now, none of that at least again, in North America or the West, has gotten very much traction. And I wonder almost, again, it's like we talked about at the beginning, is it sort of like this is what consumers have been used to so that if the Chinese consumer was a blank slate coming to the internet for the first time, I'm not saying that consumer behavior can't change and expectations can't change, but I wonder if the problem is that North American consumers have been led to expect a certain kind of experience and maybe it's going to take some time to change that. I do agree with you that it will take time, but I also think it can work. And if you look at the success of Twitch, you can already see that people value tipping the people that they're watching. And I think what the platforms have to do is give greater tools for the creators to create exclusive premium content or reasons for that person to pay.

The issue right now is a lot of the folks who are creating this premium content, you can find something close enough or similar that's already free that's out there. And so until there's a platform that really allows for that kind of packaging of maybe not just Q&A, maybe it has to be Q&A plus exclusive chat, plus live stream, plus maybe a PDF book or plus something else that will give users enough to say, yes, I'm willing to pay for this. Final two questions sort of around that. to the extent that you're willing to speculate, which of the big players is maybe best positioned to diversify in this way,

to this sort of balanced pie? Like at the top of my head, I'm thinking Amazon, who's obviously moving into advertising and things like that? But who would you say is best positioned of the big players to kind of achieve this? You took the words right out of my mouth. I actually do think Amazon is one of the best options to go into advertising. I mean, if you think about how advertising, has worked today, it's always been around targeting a person that looks like X, Y, and Z.

But Amazon actually knows what you purchase. So imagine if you're a Coke and you want to purchase ads against people who bought Pepsi, Amazon can facilitate that very easily. And so you read the news this week that Walmart is trying to get into advertising more. I think a lot of the transaction companies are well situated to diversify away from just-straight transactions. And if you look at Amazon, all the things they've done with video, I think they are probably the furthest ahead. The other one that I would say has the content and the community to do it. I don't know if they're really going to go after this route, but I'd say Twitter actually has many options to monetize.

If you think about how many influencers already are using it to manage their followers, right? And this is again where for Twitter, I look a lot at the their China equivalent. And I see the things that they charge for. And it's not just the exclusive chats and such. They also have VIP membership options where you can decorate your avatar. But get this. You can pay for a VIP membership to follow people anonymously.

And that's something that if you think about for Twitter, Twitter doesn't allow that, right? But would you pay a small amount each month if you could follow people anonymously, also decorate your avatar, also X, Y, and B. Oftentimes, these VIP memberships for China, it's not just one thing you get. It's a package of things. And so Western platforms have to figure out

what's the right combination to make that package compelling. Yeah, that's really interesting. I would never have even thought of Twitter in this context. But, okay, so the final question would be, aside from the big players, what if I'm an entrepreneur looking to go into this space, if you were some companies starting out here in the U.S.

to try to achieve that sort of balanced pie, do we think that there are enough tools available to achieve that right now, or is that still something that people would have to scrabble together from bits and bobs and scotch tape and stuff? I think there are enough tools to get it started. I mean, say you are a video platform, you can lead to all kinds of e-gene. commerce, but also social, all kinds of services.

So for example, like if you're watching a video on how to fix the door, there should be a link right underneath where I can book a handyman to come to my house. And there should be a link right under that to buy the part at Home Depot. Right. So there's a lot of ways that you can facilitate this by creating partnerships with third parties. But I think the biggest takeaway for startups is don't focus on an ad-based model because it's really, really hard. If you're expecting that to be 100% of your revenue,

I would really encourage startups to think about alternative methods. Yeah, it's almost like there are avenues closed at this point. So it's almost, like we were saying at the beginning, necessity being the mother of invention, you've got to go in this direction if you're going to have a hope of success in the new era. Right, right. I mean, you know how many page views and unique it takes to generate ad dollars. And again, the biggest thing is you look at the amazing advertising engine that Facebook and Google have built.

And you have to realize it's not just having the traffic. You also have to have the engine that allows advertisers to target people very specifically. Right. And that's why I feel like if you are a platform that's just banking on traffic, think about how else you can use that distribution to monetize. And try to make it as natural as possible. You know, another thing I study is TikTok as an example, which is the big new kid on the block that's really taken consumer mobile by storm in 2018. And if you look at the advertising that they have in their China version, which is called doying, a lot of the ads look like other TikTok videos. You can't even tell it's an ad.

It actually flows very naturally and it's native to that platform. And so when I think about the future of monetization or even what advertising can look like in the U.S., I think it's going to become more native to specific platforms, as opposed to things that are jarring and usually unrelated to the context of the content.