Good morning,
On the latest episode of Exponent we discussed Aggregators and Jobs-to-be-Done and The State of Technology at the End of 2018.
Listen to it here.
On to the update:
Tumblr’s App Store Ban
From The Verge, in mid-November:
Tumblr’s iOS app is missing from Apple’s App Store. Tumblr says that it is “working to resolve an issue with the iOS app,” but it’s not clear if the app is missing from the store because it was removed by Apple, or by Tumblr itself…It’s not immediately clear why the app isn’t available, although there was some speculation that there might have been due to a certain type of inappropriate content. We’ve reached out to Apple and Tumblr for comment, and will update this article if we hear back.
It was tempting to immediately blame Apple for being prudish and bemoan the state of affairs where centralized control of a critical platform for reaching users was resulting in censorship. Then came the follow-up, also from The Verge:
Tumblr says that child pornography was the reason for its app’s sudden disappearance from the iOS App Store. The app has been missing from the store since November 16th, but until now the reason for its absence was unclear — initially Tumblr simply said it was “working to resolve the issue with the iOS app.” However, after Download.com approached Tumblr with sources claiming that the reason was related to the discovery of child pornography on the service, the Yahoo-owned social media network issued a new statement confirming the matter.
In its updated statement, Tumblr said that while every image uploaded to the platform is “scanned against an industry database of child sexual abuse material” to filter out explicit images, a “routine audit” discovered content that was absent from the database, allowing it to slip through the filter. Although Tumblr says the content was immediately removed, its app continues to be unavailable on the App Store. It’s still available in the Google Play store for Android users, however.
It’s a little hard to be mad at Apple now! When child pornography is the issue, a centralized gatekeeper suddenly has its advantages. Indeed, this episode presents a different lens for looking at the challenges facing other user-generated content platforms like Facebook or YouTube: the price of priceless content that would absolutely not be delivered elsewhere — and make no mistake, both Facebook and YouTube are chock full of treasures — is content that would never otherwise be published. Just look at this Tumblr episode: stopping child pornography is a good thing, destroying communities around topics that aren’t necessarily in the mainstream perhaps less so. In short, everything is a trade-off, and it is never so obvious as it seems.
Tumblr’s NSFW Deadline
That was not the end of the story, though; the next shoe to drop came earlier this month; again from The Verge:
Tumblr will permanently ban adult content from its platform on December 17th in a move that will eradicate porn-related communities on the platform and fundamentally alter how the service is used. The ban includes explicit sexual content and nudity with a few exceptions, the company tells The Verge. The new policy’s announcement comes just days after Tumblr was removed from Apple’s iOS App Store over a child pornography incident, but it extends far beyond that matter alone. “Adult content will no longer be allowed here,” the company flatly stated in a blog post published on Monday.
Banned content includes photos, videos, and GIFs of human genitalia, female-presenting nipples, and any media involving sex acts, including illustrations. The exceptions include nude classical statues and political protests that feature nudity. The new guidelines exclude text, so erotica remains permitted. Illustrations and art that feature nudity are still okay — so long as sex acts aren’t depicted — and so are breastfeeding and after-birth photos.
After December 17th, any explicit posts will be flagged and deleted by algorithms. For now, Tumblr is emailing users who have posted adult content flagged by algorithms and notifying them that their content will soon be hidden from view. Posts with porn content will be set to private, which will prevent them from being reblogged or shared elsewhere in the Tumblr community.
Perhaps not coincidentally, two weeks later Tumblr was back in the App Store; then again, child pornography is a pretty good reason for an app to be booted, so perhaps it’s not related at all. It seems just as likely that Verizon, which acquired Tumblr along with the rest of Yahoo’s non-Alibaba assets a year-and-a-half ago, was looking for an excuse to act.
The reality is that Tumblr is almost certainly a big money loser: the app was earning about $13 million in revenue on expenses of about $25 million when Yahoo acquired the blogging platform/social network in 2013, and while that is not necessarily reflective of how much the service might generate today (although it probably is — more on this in a moment), it is not hard to imagine that the risks outweighed the rewards for Verizon.
Verizon Writes Down Oath
To that end, there is a broader context for Verizon’s move; from Bloomberg:
Verizon Communications Inc. is conceding defeat on its crusade to turn a patchwork of dot-com-era businesses into a thriving online operation. The wireless carrier slashed the value of its AOL and Yahoo acquisitions by $4.6 billion, an acknowledgment that tough competition for digital advertising is leading to shortfalls in revenue and profit. The move will erase almost half the value of the division it had been calling Oath, which houses AOL, Yahoo and other businesses like the Huffington Post…
The episode offered a silver lining for investors. Rather than attempt a megadeal like AT&T Inc.’s $85 billion acquisition of Time Warner Inc., Verizon only spent about $9.5 billion in the past three years buying fading web giants. Though the bet hasn’t paid off, it at least stumbled on a smaller scale. The revision of the Oath division’s accounting leaves its goodwill balance — a measure of the intangible value of an acquisition — at about $200 million, Verizon said in a filing Tuesday. The unit still has about $5 billion of assets remaining.
Credit to Bloomberg: the sly dig at AT&T earned their article an excerpt — I’ll return to the point in a moment. For now, though, this write-down has clearly been coming both in the short-term and long-term.
Start with the former: Verizon changed CEOs this summer; Lowell McAdam, who did the AOL and Yahoo deals, departed in favor of Hans Vestberg, who has been very clear that he sees the future of the company in its traditional wireless business, particularly with the imminent rollout of 5G. Unsurprisingly, McAdam was followed out the door by Oath née AOL CEO Tim Armstrong, who had been unable to either engineer a spin-out of Oath or bring Verizon’s full resources to bear.
That last point is worth exploring more fully; note this paragraph from the Wall Street Journal when Armstrong was first reported to be on the way out:
Verizon and Oath executives have disagreed over what some employees within the digital ad unit see as an overly conservative approach to using wireless subscriber data to boost Oath’s advertising revenue, people familiar with those discussions say. Senior executives within Verizon are wary of potentially alienating lucrative wireless customers in the name of adding incremental advertising revenue, these people said. Oath contributed less than $4 billion in revenue during the first half of the year, compared with the wireless business’s $44 billion…
Verizon agreed to share with Oath anonymous information on subscribers’ age, gender, phone language, and data plan size, for example. But people familiar with the matter say the carrier refused to share information on the apps customers used and their web browsing activity unless users explicitly opted in.
My guarded optimism on the Verizon-AOL deal — optimism, I should be clear, from a business analyst standpoint, not a consumer advocate standpoint — was predicated on leveraging Verizon’s data. That Verizon ultimately declined to follow-through is interesting for several different reasons:
- First, this shows that Verizon believes the consumers will make choices based on perceived privacy from wireless ISPs.
- Two, Verizon believes there is sufficient competition in the wireless ISP space that compromising user privacy in such an egregious way would result in a loss in market share.
- Three, this is a classic case of the cash cow incumbent part of a company limiting the growth potential of the growth-focused new division.
That last point is compelling for another reason: just because something is “new” or “disruptive” does not necessarily mean it is “good”, either for the company in question or, especially in this case, for consumers. And, by extension, it is a reminder that analysis as to whether a decision makes sense or or not from a business perspective is a separate question as to whether it is good from a moral sense.
Regardless, within six months I had abandoned the analysis, for reasons that get into why Oath was doomed in the long-term; I wrote in The Reality of Missing Out:
Both companies…have dominant strategic positions; they are superior to other digital platforms on every single vector: effectiveness, reach, and ROI. Small wonder that the smaller players I listed above — LinkedIn, Yelp, Yahoo, Twitter — are all struggling…Digital, though, is subject to the effects of Aggregation Theory, a key component of which is winner-take-all dynamics, and Facebook and Google are indeed taking it all.
I expect this trend to accelerate: first, in digital advertising, it is exceptionally difficult to see anyone outside of Facebook and Google achieving meaningful growth, with the possible exception of Snapchat, which just signed a deal with Viacom that is very much inline with my analysis of the company in Old-Fashioned Snapchat, and has a hold on the powerful teen demographic). Everyone else will have an uphill battle to show why they are worth advertisers’ time…
We know what happened to Snapchat after that: it would have been the height of optimism to expect Oath broadly, or Tumblr specifically, to do any better. The truth is that Facebook and Google are simply better for advertisers, and unlike TV, their inventory is not limited by the number of hours in a day, but rather by the number of Internet users on earth (ex-China) and the time they spend on their respective services. Oath never stood a chance.
That then leaves the question raised by Bloomberg: is it better to spend $9.5 billion on a doomed pair of digital media companies than $85 billion on a traditional media company? Frankly, I’d rather be Verizon than AT&T: granted, Time Warner has much stronger cash flows, then again, that’s what you would expect for an entity nearly ten times the valuation. That’s precisely the problem though: one of the problems I raised about the Time Warner acquisition is the possibility the outlay would hinder AT&T’s ability to invest in the spectrum and build-out for 5G. To that end, I think Verizon’s new CEO is quite wise to accept the sunk cost of Oath — perhaps with an oath — and press Verizon’s traditional advantage in network quality.
In short, Verizon is back to being an infrastructure company, and they look set to win the next generation thanks to the way infrastructure companies have always won: by spending more on, you know, actual infrastructure. And, by extension, why would an infrastructure company want to run the risk of being NSFW?
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