How to compete with Google and Facebook

Rohan Rajiv
Aug 28, 2017 · 10 min read

“How to compete with Google and Facebook” is a question on the minds of nearly every publisher, ad tech firm and start-up that intends to build a digital ads based revenue stream.

The word “duopoly” has certainly been trending in the advertising industry over the past year or so in reference to Google and Facebook. We’ve all seen charts similar to the one below that show Google and Facebook dominating the industry — this is from Mary Meeker’s excellent industry trends report.

So, if you are looking to build an ads business on the internet, how do you think about competing with Google and Facebook?

The simplest version of this note would be just two words long: you don’t.

That would actually be smart advice. Snapchat’s stock price, at least for now, would support this line of reasoning.

But, that would be no fun and would be devoid of any nuance. So, I’ll try the longer, more nuanced approach.

The worst time to build an ads business.
Even for the more nuanced approach, it’s hard not to start with a bearish point of view. This feels like the worst time to build a consumer facing technology product to be monetized by ads since the beginning of the internet era. The reason for that is that there’s just limited whitespace to build a consumer app that has the capability to grow user attention to meaningful scale.

Comscore just released the top 10 apps in the US. Pandora and Snapchat are the only 2 non Google and Facebook apps that made the top 10.

This isn’t a recent phenomena either. As I’ve shown in a previous note, this was the case even in 2013.

So, Snap aside, we’ve not had any other app crack the top 10 of the app store in the US.
Why?

Network effects is the easy first answer. And, both companies’ ability to innovate at scale would be a good second answer. Combining both of these explains a lot.

But, there’s an important third reason. Google and Facebook identify successful competitors faster than everyone else and are aggressive acquirers. Both of these companies rely on their existing strengths -

  • Google has a treasure trove of search data that can tell exactly what their users like. And, it also helps that Android is the most dominant mobile OS on the planet.
  • Facebook, on the other hand, has been found to use app data from “Onavo Protect” — a popular VPN based security app that it owns. Onavo users allow app download data to reach Facebook. And, it is Onavo that inspired the purchase of Whatsapp, the bids for Snapchat and, later, allowed Facebook to measure the success of its bid to attack Snap by copying its key features.

Not only do both of these companies know who the up and coming apps are, they are also willing to be really aggressive. Below is a screenshot of the acquisitions of the big 5 companies (dominated by Google in red) since 2011. Each acquisition is one block.

The difference in the length of the lists between this decade and previous ones illustrates how aggressive the biggest technology firms have gotten.

But, it isn’t just about numbers — it is about the sheer scale of these acquisitions. The largest acquisitions — LinkedIn, Whatsapp and Motorola Mobility — all happened after 2011. (Thanks, Gecko Board, for these awesome insights)

Finally, Google and Facebook have built really sophisticated ads business with an ability to serve customer needs all along the advertising funnel. This ability is unprecedented. Traditionally, companies were well versed in serving marketers at specific parts of the funnel (e.g. TV for brand advertising, newspapers for direct response). But, Google and Facebook have changed that method of operation.

Both have powerful top-of-the-funnel offerings with the strength of videos on Facebook and Instagram and YouTube. Facebook has announced its intention to double down on this strength by adding Facebook TV (Watch) to its portfolio. And, while Facebook has done a great job building formats that enable marketers to find leads and make purchases on its platform, Google search remains the most powerful direct advertising tool there is.

To recap, this is probably the worst time to start a company that monetizes via ads because -

  • There’s very little white space to build an app that will get traction.
  • Even if you do — against the odds — Google and Facebook will know and either buy you out or copy you.
  • And, even if you manage to survive that, you have to compete against an incredibly sophisticated suite of advertising products.

Good luck with that.

Competing with the 2 giants is hard for existing companies as well. And, to understand that, let’s take a deeper look at how digital advertising businesses are built before getting to how you might want to compete with Googbook.

Why digital ad businesses are different.
Our first stop will be to look at the 4 fundamental business models on the internet.

The 4 business models are -

  • Incidental/one shot purchases (retail): The internet enables everyone to be a retailer
  • Subscription: This is probably the most important business model as the internet’s payments infrastructure enables customers and vendors to have long standing subscription based relationships.
  • Tax: This is the platform approach to monetization. Take a small cut of many transactions.
  • Ads: Of course.

Now, what’s interesting here is that there has been plenty of movement between 3 of these 4 business models.

We’ve seen the likes of Adobe, Microsoft and Amazon move from pure retail to subscription models. We’ve seen Amazon and Apple create healthy tax based business models as well.

We’re also seeing a move at present — Apple is also in the process of switching dominant business models in some areas in its quest to become a services company. So, you are now discouraged from just buying 1 song on the iTunes store. Instead, Apple would like you to pay for an Apple Music subscription.

But, you almost never see such switches into becoming a digital ads company. Instead, digital ads companies come from outside this framework. That’s because the internet’s dominant digital ads companies focus on users, create an incredibly sticky product and monetize using ads.

So, the first step to trying to create a GoogBook (for simplicity) competitor is: Don’t try to create an ads business. Try, instead, to create a product that users love and want to use.

In fact, while you are at it and if you are following the Snap and Instagram playbook, make public statements dissing ads. Once you’ve reached a large enough critical mass, you can turn on ads (and, hopefully, get very rich :-)).

The second step is to pick a strategy to compete. I think there are only two ways to compete with Googbook -

  • Bet on the future
  • Focus on a niche

1. Bet on the future
This is Snap’s strategy. Ben Thompson, of Stratechery, summarizes Snap’s strategy beautifully in his analysis of Snap’s S-1.

“Most companies use their S-1 to explain how they are building a sustainable competitive advantage — a moat, if you will. Snap is declaring that moats no longer exist; all it has is the Gingerbread Man strategy:
Run, run, run as fast as you can.
You’ll never catch me, I’m the gingerbread man.”

Snap’s long term strategy is to out innovate Facebook. This image from a patent filing for a future version of its Spectacles is indicative of just that — betting heavily on a world with augmented reality and its ability to build products that its young users love to use.

This is why I think of Snap’s stock price as option value. There’s a good chance it’ll not be able to compete with Facebook. But, in the event it defies the odds, large advertising budgets create big winners.

However, this is a dangerous strategy because it requires you to out-innovate a competitor who is more than happy to copy you. This chart shows how Facebook did that.

And, as the chart below shows, the results have been good for Facebook.

While Snap did indeed report Q2 numbers of 173M DAUs, more people use Snap’s innovations on Instagram than Snapchat.

2) Focus on a niche
My thesis that the niche strategy is the only way to compete with Facebook and Google at the moment. This strategy is built off advertising first principles. The 2 most important metrics to build an advertising business are —
i) User attention — money follows attention
ii) Targeting capability — marketers will pay for the ability to target specific audiences

As I’ve demonstrated above, Googbook have conquered mass user attention. That’s not a battle worth fighting. Instead, there are still opportunities to focus on niche audiences. Here, there are 2 approaches that work off the 2 key metrics -

  • A niche audience that has high usage (attention focused)
  • A niche audience that has high value (targeting focused)

This is what competitors of Googbook do today.

I would argue that the primary reason to hold out hope in Snap is because it’s strategy to bet on the future has handed it dominance in the millenials niche. Snap reportedly has 29M daily users tuning into NBC’s news show, for example. And, on the other hand, my inability to easily articulate Twitter’s niche may point to some of the problems Twitter has been facing of late (Note: I love the Twitter product — so, my biases don’t allow me to be a doomsayer).

Each of these businesses faces challenges given Googbook are intent on capturing every aspect of the advertising market. But, it is hard to be everything to everyone. So, there’s a lot to gain by being the best service that nails your niche’s needs.

Waze is a fantastic example of just that. Waze’s high value niche is a community who likes to find the most optimized route while avoiding any speed traps and cops along the way. These users pay close attention to Waze and this, in turn, enables Waze to serve powerful native advertising experiences within the app. A Waze ad is the equivalent of an old school billboard.

Hard to capture value if you aren’t the user facing advertising business
Every time I write about the digital advertising industry, my pessimism about the rest of the ecosystem comes through. Internet businesses are hard on middle people. And, digital advertising is a textbook example of that — it is very hard to capture value if you don’t own the end user.

I’ve been bearish about ad tech, publishers and agencies. I wrote about this in detail when I started this newsletter in March and those notes continue to play out. Ad tech companies, save a tiny minority, are either being acquired for less or are going out of business. Publishers, save a tiny minority, are struggling. And, the chart below sums up what the large agency holding companies have been going through.

Somebody once said that it is a pity that some of the smartest minds in technology spend their energy trying to get folks to click ads. As humans, we are motivated by incentives. And, given money is the most powerful incentive there is in the age of capitalism, it should be no surprise that this is the case. In Google and Facebook, 2 of the 5 largest companies that exist monetize their businesses via advertising. And, given the nature of their dominance, it looks unlikely their dominance will be threatened for the next 3–5 years at least.

So, that’s why, for reasons laid out above, I don’t believe this is the time to be building a technology company that seeks to compete with Google and Facebook. As is generally the case with such dominance, it is hard to predict an end to it. It looks certain that we’re going to move toward a world with mixed reality and the existing giants seem to have a strong advantage going in.

But, then again, history reminds us that technology waves don’t play out as we expect. We are currently in an age with an incredibly centralized communications architecture and it is hard to imagine a decentralized world in the near future.

Maybe that’s why the blockchain revolution is one to keep an eye on.


Links for additional reading (longer than usual!)


This is an edition of a bi-weekly technology newsletter called Notes by Ada. If you like this and would like free weekly notes via email, please just subscribe here.

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Rohan Rajiv

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I write about product management and technology. I also share a learning every day on www.ALearningaDay.blog

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