stratechery
stratechery

Sponsor: Vimeo PRO

The beautiful, high-quality way to showcase and share videos with your audience

They’re there, lurking on your camera and on your phone, just waiting for their chance to break free. It’s time to unleash your videos.

Whether you’re a business or creative professional, your videos are worth uploading to Vimeo, the high-quality hosting platform trusted by more than 26 million people around the world.

Vimeo PRO is perfect for uploading all kinds of videos, from festival submissions by the world’s most talented filmmakers to beautiful product walkthroughs. Behold its best-in-class, clutter-free glory:

Get up to 20GB/week, and unlimited plays

With Vimeo PRO, you can upload up to 20GB of HD video each week for just $199/year. We don’t charge per play — instead, you get unlimited plays on your videos no matter where they appear on the Internet.

Showcase videos in our best-in-class player

Your videos will always look their best in our ad-free, HD embeddable player. It’s HTML5 compatible and fully customizable, which means you can add your own colors, logo, and more.

Protect videos with powerful privacy controls

Privately share rough cuts with clients before blasting them out to the world, and choose which sites the final videos can appear on. Add password protection, or customize embed settings.

Join now and save 15% on an annual Vimeo PRO membership when you enter the code STRATECHERY15NOV at checkout before 11/15/2014.1

Note: This offer is only available for first-time Vimeo PRO subscribers.

  1. To redeem this offer, you must purchase a PRO subscription before 11/15/2014 at 11:59 p.m. Eastern Time and provide a valid promotional code on the checkout page. You may not apply this offer to more than one purchase or combine it with other offers.

Publishers and the Smiling Curve

One would not normally draw a connection from a company like Largan Precision (TPE:3008), a small Taiwanese component supplier, to the publishing industry. But it was a very insightful observation from another Taiwanese company’s CEO – Acer founder Stan Stih – about what he called the “Smiling Curve” that created the analogy in my mind. From Wikipedia:

A smiling curve is an illustration of value-adding potentials of different components of the value chain in an IT-related manufacturing industry…According to Shih’s observation, in the personal computer industry, both ends of the value chain command higher values added to the product than the middle part of the value chain. If this phenomenon is presented in a graph with a Y-axis for value-added and an X-axis for value chain (stage of production), the resulting curve appears like a “smile”.

Created by Rico Shen for Wikipedia

Created by Rico Shen for Wikipedia

What makes this observation particularly ironic is that Acer is the epitomical company at the bottom of the curve. They put PCs together, but it was the critical component makers like Intel and Windows that captured most of the value on the left, and systems integrators and value-added resellers like IBM or Accenture that captured the rest of the value on the right. Acer and its merry band of 8 OEMs1 competed themselves to single digit margins and ultimately stagnant growth; there simply isn’t any money in the undifferentiated middle.

Fortunately for Acer, their smartphone efforts have largely failed, so they are being spared the same cycle in mobile: Nokia is gone, Sony is bleeding money, and even mighty Samsung is getting hammered (and is in fact retreating to their component business (members-only)). We all know about how Apple and Google are benefitting, as well as other services like Facebook or WeChat, but life is also good on the left side of the curve, and that is where Largan Precision comes in.

While the iPhone got less attention than usual at its launch event (due to the Apple Watch), by far the greatest amount of time was spent on its camera. And for good reason: review after review has lauded the iPhone 6 camera as possibly the best phone camera ever. It turns out, though, that there are only a couple of companies in the world that are capable of producing such a camera, and Largan Precision is one of them.2 That is why they provide the camera for the iPhone 6 (as they have for several models now) and that is why their stock performance looks like this:

Largan Precision Co. all-time stock performance

Largan Precision Co. all-time stock performance

True, their $9.6 billion market cap barely registers when compared to Apple’s $623.6 billion number,3 but when you consider that Largan Precision is a relatively tiny company that’s pretty darn impressive, and I can assure you the founders are living much more comfortably than all but the most senior Apple managers. Moreover, it’s not that far off from Foxconn, who actually builds the iPhone; their market cap is only 5x greater than the maker of a single component.

There simply isn’t that much money in the middle.


I was reminded of the smiling curve while reading this excellent piece by David Carr in the New York Times about Facebook and publishers:

For traditional publishers, the home page may soon become akin to the print edition — nice to have, but not the primary attraction. In the last few months, more than half the visitors to The New York Times have come via mobile — the figure increases with each passing month — and that percentage is higher for many other publishers.

Enter Facebook’s popular mobile app, which has captured greater amounts of time and, more remarkably, managed to fit a business model onto the small screen by providing extremely relevant advertising…the company has become the No. 1 source of traffic for many digital publishers. Yes, search from Google still creates inbound interest, and Twitter can spark attention, especially among media types, but when it comes to sheer tonnage of eyeballs, nothing rivals Facebook.

“The traffic they send is astounding and it’s been great that they have made an effort to reach out and boost quality content,” said one digital publishing executive, who declined to be identified so as not to ruffle the feathers of the golden goose. “But all any of us are talking about is when the other shoe might drop.”

Here’s the thing: the shoe has in many respects already dropped. When people follow a link on Facebook (or Google or Twitter or even in an email), the page view that results is not generated because the viewer has any particular affinity for the publication that is hosting the link, and it is uncertain at best whether or not their affinity will increase once they’ve read the article. If anything, the reader is likely to ascribe any positive feelings to the author, perhaps taking a peek at their archives or Twitter feed.

Over time, as this cycle repeats itself and as people grow increasingly accustomed to getting most of their “news” from Facebook (or Google or Twitter), value moves to the ends, just like it did in the IT manufacturing industry or smartphone industry:

The Smiling Curve for publishing

The Smiling Curve for publishing

On the right you have the content aggregators, names everyone is familiar with: Google ($369.7 billion), Facebook ($209.0 billion), Twitter ($26.4 billion), Pinterest (private). They are worth by far the most of anyone in this discussion.

Traditional publishers, meanwhile, are stuck in the middle. The New York Times, the most august publisher of all, is worth a mere $2.03 billion.4 Gannett Company, the largest publisher in the United States, is worth $7.14 billion, but the vast majority of that value lies in their broadcast and digital advertising holdings; most of the newspapers are worthless. I recounted the problem for newspapers in Economic Power in the Age of Abundance:

One of the great paradoxes for newspapers today is that their financial prospects are inversely correlated to their addressable market. Even as advertising revenues have fallen off a cliff – adjusted for inflation, ad revenues are at the same level as the 1950s – newspapers are able to reach audiences not just in their hometowns but literally all over the world.

The problem for publishers, though, is that the free distribution provided by the Internet is not an exclusive. It’s available to every other newspaper as well. Moreover, it’s also available to publishers of any type, even bloggers like myself.

In short, publishers (all of them, not just newspapers) don’t really have an exclusive on anything anymore. They are Acer, offering the same PC as the next guy, and watching as the lion’s share of the value goes to the folks who are actually putting the content in front of readers.

That Stratechery article, by the way, was about how German publishers were taking Google to court to demand compensation for article snippets that appeared on Google News. Instead Google simply removed the snippets, which resulted in such a drop in traffic that the publishers this week came crawling back asking Google to re-add the snippets, no compensation required. The general takeaway is that Google proved it was adding value to the publishers, but I have a different angle: the publisher’s demonstrated that they provide no value to their writers.

See, Largan Precision doesn’t really care if their camera phone modules end up in iPhones or Galaxys or Lumias, or if they’re physically integrated by Foxconn or Quanta or Compal. They survive – and survive quite profitably – based solely on their ability to manufacture the best miniature cameras in the world. I remain convinced that the most successful writers and publications will pursue a similar strategy: do what they do best and accrue outsized value relative to publishers that are rapidly shifting from platform to obstacle.

This trend isn’t limited to publishing, either. Last week HBO announced that it was finally going direct to customers; while I think declarations that this decision will lead to cord-cutting are massively overstated, it is certainly a devaluing of the cable middle person. You can also view AT&T’s decision to lock the Apple SIM to their network in a similar light: they are trying to stave off their inevitable future as a dumb pipe between valuable content and valuable devices. Apple Pay will, in the long run, have a similar effect on banks (which is one reason it’s so fascinating to see banks embrace it while some merchants – who will benefit from more and faster transaction – be opposed).

All of this is because of the Internet: by removing friction it removes the need for folks in the middle, and the result is that value will flow to the edges. In the case of publishing that is aggregators on one side, and focused, responsive, and differentiated5 writers and publications on the other.

  1. HP, Dell, Acer, Asus, Sony, Toshiba, Lenovo and Samsung are the Big 8 Windows OEMs. Well, were. Sony has left, and Samsung has a foot out the door
  2. For what it’s worth, Largan Precision is yet another company suing Samsung, as well as fellow Apple supplier Genius Electronic Optical Co., for patent infringement
  3. All numbers as of October 28, 2014
  4. Which, to the Times’ credit, is more than double their nadir in 2012
  5. My canonical examples: focused – Daring Fireball, responsive – BuzzFeed, differentiated – Vox

Podcast: Exponent Episode 022 – Peak Google, Monologue Edition

On the newest episode of Exponent, the podcast I co-host with James Allworth:

In this week’s episode Ben and James discuss Ben’s article “Peak Google” and the future of advertising.

Links

  • Ben Thompson: Peak Google – Stratechery
  • Benedict Evans: The Irrelevance of Microsoft – Ben-Evans.com
  • Peter Kriss: The Value of Customer Experience, Quantified – Harvard Business Review
  • Ben Thompson: Mobile Makes Facebook Just an App; That’s Great News – Stratechery
  • Ben Thompson: I Love the Blackberry Passport (on Generic Strategies) – Stratechery (members-only)
  • Ben Thompson: The Cord-Cutting Fantasy – Stratechery

Listen to the episode here

Podcast Information: Feed | iTunes | SoundCloud | Twitter | Feedback

Sponsor: Mandrill

Integrate, deliver, track, and analyze with email infrastructure from Mandrill.

Mandrill is a scalable, reliable, and secure email infrastructure service trusted by more than 300,000 customers. It’s easy to set up and integrate with existing apps. And it’s really fast, too. With servers all over the world, Mandrill can deliver your email in milliseconds. Detailed delivery reports, advanced analytics, and a friendly interface mean your entire team—from developers to marketers—can easily monitor and evaluate email performance.

Get started with Mandrill today.

This post is sponsored via Syndicate Ads.

Peak Google

Despite the hype about disruption, the truth is most tech giants, particularly platform providers, are not so much displaced as they are eclipsed. IBM, for example, has been successfully selling and servicing mainframes for going on 50 years (although they are now in serious trouble (members-only)). During the PC era, though, they were eclipsed by Microsoft.

Mainframes didn't stop being a viable business; it was just a much smaller business than PCs

Mainframes didn’t stop being a viable business; it was just a much smaller business than PCs

The same happened to Microsoft: Windows still dominates PCs,1 and in all likelihood will for the foreseeable future (although there are certainly cracks in the foundation, a la IBM). The company isn’t going anywhere. PCs, however, have been eclipsed by smartphones, to the benefit of Apple (in terms of revenue and profit) and Google (in terms of market share).

PCs have in the past few years been eclipsed by smartphones. To see a similar graph with exact data, see this post by Benedict Evans

PCs have in the past few years been eclipsed by smartphones. To see a similar graph with exact data, see this post by Benedict Evans

These eclipses are obvious in retrospect, but the truth is few if any could have predicted them before they occurred. PCs were thought to be a tremendous boon for IBM, and they did profit greatly until Compaq copied their BIOS leaving Microsoft all the leverage; similarly, Microsoft looked set to conquer mobile (which was why Google bought Android in the first place) before a resurgent Apple introduced the iPhone. In both cases it turned out that the incumbents’ prior success resulted in misdirected incentives: IBM focused on selling and servicing PCs, instead of building a platform, while Microsoft focused on extending Windows to mobile instead of the user experience. If you’ll forgive a war analogy, both companies won the battle but lost the war.

And so, if one wishes to predict who might follow in this illustrious but ultimately tarnished path, it might be useful to look for similar characteristics: the company should be dominant in its field, and the company should seem to have an advantage in a far larger adjacent field, but that advantage, on closer inspection, should prove to be just as much a hindrance as a help.

The clear candidate is Google.


Google posted its quarterly results last Friday, and they were ok, not great. Earnings and revenue may have missed analysts’ expectations ($6.53 per share and $16.52 billion), but the company was still hugely profitable. More importantly, they still dominate the most effective and lucrative type of Internet advertising: search. In July Dan Frommer at Quartz wrote an article titled Google has run away with the web search market and almost no one is chasing:

Search represents the largest digital advertising market — almost $50 billion last year globally, according to PwC, compared to just $34 billion for display ads — and is growing roughly 10% a year. But Google so thoroughly dominates the search industry that few are even bothering to challenge it anymore.

Frommer goes on to list potential challengers to Google’s dominance, but the outcome is clear: Google will continue to dominate, just as IBM has continued to dominate mainframes and Microsoft has continued to dominate the PC. They will be a very profitable company for many years to come. That is why this is not an article about disruption. Rather, the question is if Google might be eclipsed.

$50 billion for worldwide search advertising (of which Google captures a huge majority) sounds like a lot, but it’s only a small percentage of total ad spend, projected to be $545 billion in 2014. The vast majority of that spend is not about direct response – i.e. ads that spur you to make a purchase on the spot; rather most of the money is spent on brand advertising.

The idea behind brand advertising is to build “affinity” among potential customers. For example, a company like Unilever will spend a lot of money to promote Axe or Dove, but the intent is not to make you order deodorant via e-commerce. Rather, when you’re rushing through the supermarket and just need to grab something, the idea is that you’ll gravitate to the brand you have developed an affinity for. And once a customer has picked a brand, they’re loyal for years. That adds up to a lot of lifetime value, which is why consumer-packaged goods companies, telecom companies, car companies, etc. are among the biggest brand advertisers (I’ve written about CPG companies and brand advertising previously here).

To date this type of brand advertising has strongly favored television; targeting is certainly nice, but channels like Lifetime (Dove) or ESPN (Axe) are specific enough, and the actual process of implementing a campaign at scale is far more efficient and cost effective on TV. This is especially true given that the primary digital offering for brand advertisers has been the banner ad, an idea that was bad to begin with and that now is all but invisible, particularly to younger customers that have by far the most value to brand advertisers (more years in the actuary table equals more lifetime value!).

However, over the last few years a new type of advertising has emerged: native advertising. I’ve already made my defense of native advertising here, but just to be clear, I classify any sort of “in-stream” advertising as native advertising. Thus, for a news site, native advertising is advertising in article format; for Twitter, native advertising is a promoted tweet; for Facebook, native advertising is ads in your news feed; for Pinterest (a future giant) a promoted pin. These sorts of ads are proving to be massively more effective and engaging than banner advertisements – as they should be! In every medium (except, arguably, newspapers, which had geographic monopolies) native advertising is the norm simply because it’s more effective for advertisers and a better experience for users: TV commercials are 30 or 60 second fully produced dramas, magazine ads are highly refined visual experiences, radio ads are jingles, etc. And so it will inevitably go with digital advertising, at least when it comes to brand advertising.

The problem for Google is that there is no obvious reason why they should win this category. Yes, they’re an ad company, but the key to native advertising on the Internet is the capability of producing immersive content within which to place the ad, such as Facebook’s newsfeed, Twitter’s stream, a Pinterest board, or even your typical news site’s home page. Sites like Buzzfeed have taken this idea to its logical conclusion: their content is basically a marketing tool meant to show advertisers how skilled they are at going viral. Google has nothing in this regard (with the notable exception of YouTube). Moreover, all of the things that make Google great at search and search advertising – the algorithm, the auction system, and machine learning – are skills that don’t really translate to the more touchy-feely qualities that make a social service or content site compelling.

And so we have our parallel to IBM and Microsoft. IBM didn’t capitalize on PCs because their skills lay on the hardware side, not software. Microsoft didn’t capitalize on mobile because they emphasized compatibility, not the user experience. And now Google is dominant when it comes to the algorithm, but lacks the human touch needed for social or viral content. And so, when all of that brand advertising finally begins to move from TV to the Internet – and that migration is a lot closer than it was even a year ago – I suspect that Google is not going to capture nearly as much of it as many observers might expect.

The result, then, is a chart that looks a lot like the ones I drew for IBM and Microsoft:

Brand advertising is worth a lot more than search advertising; if it moves to the Internet, .Google's share of digital advertising would be dwarfed

Brand advertising is worth a lot more than search advertising; if it moves to the Internet, .Google’s share of digital advertising would be dwarfed

This is the primary basis of my thesis that Google may very well be in a similar situation to early-eighties IBM or early-oughts Microsoft: a hugely profitable company bestride the tech industry that at the moment seems infallible, but that history will show to have peaked in dominance and relevancy.

It’s worth noting that there are other potential parallels as well:

  • Both IBM and Microsoft competed fiercely – and ultimately, illegally – to win the platform that they thought represented both a huge threat and an opportunity. In the case of IBM it was software for the System/360; Microsoft fought for the browser. It wasn’t an application maker that eclipsed IBM though, but rather an OS maker; for Microsoft, their undoing was not a competing browser, but rather mobile. For Google, the parallel is the massive amount of effort they have put behind Android. True, they own massive market share and have ensured that mobile is safe for Google services,2 but might that prove to be a pyrrhic victory not unlike Internet Explorer if most of the digital advertising value increase is in native advertising? (Relevant: Mobile Makes Facebook Just an App; That’s Great News)

  • Relatedly, and as hinted above, both IBM and Microsoft were found to have abused their monopolies in an attempt to dominate application software and browsers respectively; it’s increasingly plausible to argue, as The Information has reported, that Google is doing the same with Android and its increasingly onerous requirements around the inclusion of Google’s services

  • It’s hard to read about Google X – the Google division responsible for Google Glass, self-driving cars, life sciences research, etc. – and not draw a parallel to Microsoft Research. That division has produced some amazing technology that makes for amazing demos and promo videos, but it has ultimately made very little difference to the bottom line (Kinect is arguably an exception, but the damage its forced inclusion did to the Xbox One negates the value it created as a standalone product). Both divisions reek of a company that has too much money and not a clear idea about what will actually drive the market moving forward

I do write this article with some trepidation; it’s a lot easier to be a cheerleader, and from a business perspective I’m a big fan of Google’s. They have earned every point of share they have in search, and Android was a brilliant strategic gambit to protect the money makers. Moreover, these sorts of predictions are almost always losers: you’re always wrong until the moment when you’re right, with all the attendant loss of credibility that entails.

Still, I hope the subtle point I’m trying to make is clear: I think Google is quite safe when it comes to search, and that they will be a very profitable company for the foreseeable future. I just suspect we will all think differently about that dominance when it’s a small percentage of total digital advertising, just as we thought differently about IBM’s dominance of mainframes in the age of the PC, or Microsoft’s dominance of PCs in the age of the smartphone.


Update – I wanted to make three clarifications based on feedback:

  • Technically speaking, yes, search ads are native. Native is great! However, they’re not vehicles for brand advertising (in fact, what makes them so powerful is that they are much further down the funnel)
  • To reiterate, by native advertising I mean all forms of advertising that appear in stream. This is much broader than just advertorials
  • I should have made a bigger deal about YouTube. It’s a massive opportunity for Google and will go down (if it has not already) as one of the all-time great acquisitions

Finally, as I noted at the beginning, this is not about the decline of Google. It’s about there being a much broader opportunity than just search advertising.

Update 2: James Allworth and I discuss this post extensively on the next episode of Exponent, so please subscribe. The episode will be posted Friday morning

  1. For all the (deserved) hype about the Mac’s growth, Microsoft still controls well over 90% of the market
  2. Outside of China, anyways

Podcast: Exponent Episode 021 – Gamergate of Thrones

On the newest episode of Exponent, the podcast I co-host with James Allworth:

In this week’s episode Ben and James discuss why Ben thinks the Internet is totally overreacting to HBO’s announcement that they will sell subscriptions directly to customers, and then delve into what might be the underlying motivations behind Gamergate.

Links

  • Ben Thompson: The Cord-Cutting Fantasy – Stratechery
  • Ben Thompson: Why TV Has Resisted Disruption – Stratechery
  • Ben Thompson: The Jobs TV Does – Stratechery
  • Kyle Wagner: The Future of the Culture Wars is Here, and It’s Gamergate – Deadspin
  • Paul Graham: Before the Startup – PaulGraham.com

Listen to the episode here

Podcast Information: Feed | iTunes | SoundCloud | Twitter | Feedback