The GiD Report #116 — Identity is tech’s next big wave

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GlobaliD

14 min readJun 30, 2020

Welcome to The GiD Report, a weekly newsletter that covers GlobaliD team and partner news, market perspectives, and industry analysis. You can check out last week’s report here.

For reference, Taku shared two great links for our “book club” this week—which we talk about in today’s post:

What we have for you today:

Ayo — Why spotting and catching waves is the most important thing for a startup
Facebook backlash builds momentum
Apple’s privacy changes from WWDC (and what it means for FB)
Don’t believe the hype, Facebook is better positioned than ever
This week in antitrust
BitLicense turns 5 (and it didn’t work out the way it was intended)
Stuff happens

1. The concept of Peter Thiel’s ZERO TO ONE is essentially about creating something truly innovative and new that takes us/society from 0=>1. Compared to taking us from 1=>n, which is more derivative, less about real innovation and more about optimization.

0=>1 is adjacent to the theme of Ayo’s latest blog post (via Greg), which focuses on “wave hunting.” In other words, a successful startup isn’t just about good execution, it’s about solving the right problems, which in turn, amplifies good execution.

Ayo’s recent time at Square working on the Cash App (2014–2019) reinforces this experience:

I also think Square/Cash App rode (and are still riding) a few massive waves that cut across rapid technology adoption, new technologies becoming widespread that weren’t before, and discontinuous changes in the economic structure of financial services. A large domain with lots of growth and macro change is a force multiplier for strong execution. Example waves (from my time on Cash) are below, but they’re meant to be illustrative.

Ayo’s example waves regarding Square Cash:

Time to money (moving money in the US is slow, which taxes financially vulnerable Americans living paycheck to paycheck)
Next Day ACH (Square+Stripe productized this for merchants, who typically wait up to a week before getting funds from credit card payments)
Instant Push to Debit (a Square innovation that Greg referenced during last week’s open mic)
Mobile & impact on distribution (self explanatory)
Dodd Frank and the impact of the Durbin amendment (as expected, regulations plays a role — impacting incumbent business models and providing opportunity for challenger banks particularly when it comes to the underserved)

Ayo also provides a framework for pinpointing the chillest waves:

best case: find a large market with lots of growth and change.
Failing that, find a small niche with lots of growth
Failing that, find a large market with lots of change
Failing that, find a large market
Don’t fail that.

It’s not hard to think about GlobaliD within that framework. At the very least, the market for identity is huge because identity touches everything and includes everyone, everywhere. Think of a larger market — I dare you.

And there’s plenty of arguments for why the market is experiencing heaps of growth and certainly change, accelerated by the global pandemic, underlied by a general convergence of our physical and digital worlds.

Even if, from a practical perspective, it makes sense to target a smaller niche — those avenues are instinctively available. And with all the incredible progress around the product and the platform, the challenge now is to pinpoint exactly what those waves are.

Taku and the rest of the team are already on it. And it’s where his second link comes into play — re: a16z’s famous Product-Market Fit blog post.

It’s also the type of challenge that requires leadership across the entire team — re: Ronald Heifetz — On Leadership (via Greg)

BONUS: At the end of his piece, having shared past waves from experience, Ayo ponders potential future waves worth catchin’:

A friend who’s been in Silicon Valley for a long time recently commented that a lot of the biggest opportunities left for technology are these truly large domains in the world, that software has only started to touch. He mentioned financial services and healthcare as two where software has only scratched the surface. Extending this, the others I think (all for different reasons) are logistics, freight, construction, natural resources, energy, industrials, and mining. There are probably others I’m not considering, but these are the obvious ones. When hunting waves, you’re more likely to find large, valuable ones, outside the domain of pure, traditional software.

Is that a Greg Kidd reference?? (Disclaimer: pure speculation. But I do know that Greg and Ayo have been chatting it up. Maybe Greg can confirm if he sees this.)

Anyway, check out Ayo’s piece — Wave Hunting (or the importance of problem selection

Also relevant:

Paul: It’s a matter of time before people have to prove they got tested and don’t have the virus within the last x days / months

2. The big news this past week is the growing Facebook backlash, which, according to various reports, is building steam.

Axios (last week):

Calls for advertisers to boycott Facebook grew this week, amid increased scrutiny around the tech giant for the way it moderates content.
Why it matters: Tension between advertisers and the tech giant have existed for years, but now — as the country faces a reckoning over longstanding systemic racism — marketers feel more compelled to take a public stand against companies that waffle on filtering hate speech.
Driving the news: The North Face, the outdoor apparel brand, became the first major marketer on Friday to announce that it is boycotting the use of Facebook advertising.

Also Axios (this week):

The Madison Avenue boycott against Facebook has quickly grown into a worldwide movement against the content moderation policies of social media giants, Axios’ Sara Fischer reports.
Why it matters: The initial Facebook boycott among advertisers, prompted by Facebook’s refusal to fact-check a post by President Trump, has hit a nerve among people outside of the marketing community, who think boycotting social media advertising altogether could help to create a healthier internet.
Driving the news: Jim Steyer, the CEO and founder of Common Sense Media, an advocacy organization that’s part of the campaign organizing the boycott, tells Axios that the #StopHateForProfit campaign is moving its focus to marketers overseas, where many big brands spend a large portion of their marketing dollars.

Andrew Ross Sorkin:

This is getting serious
A boycott of advertisers on social media is gaining momentum, and Facebook is the primary target. Marketers are expressing unease with how it handles misinformation and hate speech, including its permissive approach to problematic posts by President Trump.
Who’s doing what. The boycotts have followed a call by the advocacy group Stop Hate for Profit, which is keeping a running list of participating companies. Over the weekend, Starbucks and Diageo said they would pause advertising on all social media platforms. They’re among the biggest spenders on Facebook ads: Starbucks spent $95 million and Diageo $23 spent million on the platform last year. Other companies have boycotted Facebook specifically, including Honda America, Levi Strauss and Patagonia.
Who’s next? Procter & Gamble, the world’s largest advertiser, said it wouldn’t rule out a pause on Facebook ads. (Its big rival, Unilever, is stopping ads on Facebook, Instagram and Twitter through the end of the year.) Big ad agencies generally take their orders from clients, but they also have leeway to steer spending to certain platforms over others.

And let’s not forget, this is a war on multiple fronts:

Claiming censorship by major social media platforms, many right-leaning pundits, lawmakers and others have decamped to the upstart network Parler. That may cost Facebook some high-profile users — and an outsized source of engagement on its platform.

One of Parler’s selling points (aside from free speech)?

3. Because privacy matters, perhaps now more than ever (and for Facebook, as we mentioned previous, as it once did). Here’s Ben Thompson on Apple’s recent announcement at WWDC on privacy.

First a primer from AdAge:

Apple announced new privacy changes to its upcoming iOS 14 software that will significantly hinder how media buyers and brands target, measure and find consumers. One change will make it harder for apps to track iOS users across different apps and websites. Another will make attribution — determining which tactics contribute to sales or conversions — harder for marketers.
The changes, announced Monday at Apple’s Worldwide Developers Conference, apply to the company’s Identifier for Advertisers (IDFA), which assigns a unique number to a user’s mobile device. Advertisers have access to the feature and use it in areas including ad targeting, building lookalike audiences, attribution and encouraging consumers to download apps.
IDFA is shared with app makers and advertisers by default, but that will change once iOS 14 rolls out this fall. Then, users must give explicit permission through a popup for app publishers to track them across different apps and websites, or to share that information with third parties.

Ben’s take:

Facebook was the king of the IDFA (and the Google Advertising ID equivalent on Android): it was the linchpin around which its app install business in particular was built. The company could understand when a user spent a certain amount in a game, for example, look for users that were similar, and then display an app install ad for that game, and measure how effective it was. In fact, over the last few years, Facebook has simply asked advertisers to specify what return on ad spend they are hoping to achieve, and Facebook does all of the work of figuring out how many ads to display to which users — the entire process is automated.
This part of the business is going to change a lot. Apple was quite clever in their approach: instead of killing the IDFA, which could be construed as anti-competitive, particularly given Apple’s expanding app install ad business (which is expanding beyond App Store search ads), Apple is simply asking users if they would like to be tracked, and letting them render the IDFA useless. Notably, Facebook has declined to even show app install advertisements to the 30% of U.S. iPhone users that turned off their IDFA of their own accord — and now it is opt-in, instead of opt-out.

I have an iPhone. Everyone in my immediate family has an iPhone. Do you have an iPhone? These changes will clearly have a big impact on Facebook’s strategy and business model.

And more generally, it sort of shows where the wind is blowing.

Facebook is fighting a war on multiple fronts. And we haven’t even talked about antitrust yet this week.

4. BUT. Don’t make the mistake of counting Facebook out. Facebook will evolve and it will adapt. And in fact, according to Ben, Facebook continues to be very well positioned.

First off, the boycott. It’s an eye-catching headline. And it certainly has the potential to move the needle. But perhaps not in the way that you might think. Let’s also not forget — we’re in the midst of a pandemic and big companies will be looking to conserve cash and get lean. As my astute (and sometimes pessimistic) friend Alan pointed out, a lot of these big companies are taking the opportunity to cut advertising while framing it as “the right thing to do.”

You certainly wouldn’t put it past them at the very least.

But also consider this: The top 100 big brand advertisers on Facebook make up only 20% of their ad revenue. The other 80% is made up of 8 million smaller advertisers.

What happens when those big advertisers drop out? The 8 million smaller guys actually UP their ad spend. It’s a market after all. Ads are cheaper and so their cost of user acquisition actually goes down. Ben explains (in a previous analysis of FB’s Q1 earnings):

That first bit gets at the other thing the Wall Street Journal article got wrong: it is not simply that direct response stayed strong while brand advertising declined, but rather that Facebook actually received more direct response advertising because brand advertising declined…
Notice, though, what happens in a situation like the coronavirus crisis, where a segment of advertisers competing for limited inventory stop buying ads: the mobile gaming company doesn’t reduce their budget — to do so would be to kill the company! — but in fact ends up getting more efficient spend. Suddenly the clearing price for the auction to show those app install ads is $0.75 per app install; now the mobile gaming company is getting 26,667 app installs for its $20,000 spend, which results in an expected profit of $6,667.

In other words, Facebook is very well positioned. Here’s Ben today:

This explains why the news about large CPG companies boycotting Facebook is, from a financial perspective, simply not a big deal. Unilever’s $11.8 million in U.S. ad spend, to take one example, is replaced with the same automated efficiency that Facebook’s timeline ensures you never run out of content. Moreover, while Facebook loses some top-line revenue — in an auction-based system, less demand corresponds to lower prices — the companies that are the most likely to take advantage of those lower prices are those that would not exist without Facebook, like the direct-to-consumer companies trying to steal customers from massive conglomerates like Unilever.
In this way Facebook has a degree of anti-fragility that even Google lacks: so much of its business comes from the long tail of Internet-native companies that are built around Facebook from first principles, that any disruption to traditional advertisers — like the coronavirus crisis or the current boycotts — actually serves to strengthen the Facebook ecosystem at the expense of the TV-centric ecosystem of which these CPG companies are a part.

What about Apple’s fundamental privacy changes? Ben compares it to GDPR (i.e. Facebook will be just fine):

This part of the business is going to change a lot. Apple was quite clever in their approach: instead of killing the IDFA, which could be construed as anti-competitive, particularly given Apple’s expanding app install ad business (which is expanding beyond App Store search ads), Apple is simply asking users if they would like to be tracked, and letting them render the IDFA useless. Notably, Facebook has declined to even show app install advertisements to the 30% of U.S. iPhone users that turned off their IDFA of their own accord — and now it is opt-in, instead of opt-out.
Still, I wouldn’t count Facebook out: to the extent the company is hurt, it seems likely that the universe of 3rd-party ad tech companies that lack Facebook’s direct connection with users, both in terms of data collection and ad display, will be in far worse shape, and it is not as if the digital ecosystem — and its associated advertising — is going to disappear. Indeed, much like GDPR, the safe bet is the company with the wherewithal to make lemons out of lemonade. Notably, Apple’s alternative for app install ad campaigns, SKAdNetwork, is so limited that there is likely to be tremendous value in whatever company can create the exact sort of automated campaign creation that Facebook is already offering.

The main point? Facebook is a goliath and will continue being one for quite some time, barring very aggressive antitrust measures — which isn’t something you can necessarily count out as we’ve discussed.

Via Anej:

Relevant:

5. Speaking of goliaths and antitrust. Here’s the NYT from their tech newsletter

Tech goliaths acting like Davids:

When Apple was founded, it mocked IBM as a bully that made terrible computers. Pipsqueak Google made Microsoft its mortal enemy. The young Uber hated … everyone, basically. It’s energizing to be the scrappy upstart fighting a rich superpower or the big, bad system.
The technology companies still like to believe that they’re Davids — except many of them are now Goliaths. And the underdog tactics and fighting spirit that once served them well now make these companies look petty and mean.

Also (Axios):

Congress’ efforts to revise the legal shield that protects online platforms from lawsuits over user posts and content moderation entered a new phase this week, with members of both parties pushing fresh remedies to address the situation, Axios’ Kyle Daly and Margaret Harding McGill report.
The state of play: For a while, this debate looked to be splintering along partisan lines, with President Trump calling for its repeal on Twitter and claiming it lets tech companies censor conservatives. But changing the law will depend on winning support from both sides of the aisle.
Driving the news: This week has seen several instances of Republicans and Democrats pushing to soften or add conditions to the legal protections online platforms have under Section 230 of the Communications Decency Act of 1996.

Relevant:

The central bank said in a statement that rolling out the service without previous analysis by the monetary authority could damage the Brazilian payments system in the areas of competition, efficiency and data privacy.
…
In a separate setback for the venture on Tuesday, Brazil’s antitrust watchdog, Cade, blocked WhatsApp’s partnership with credit and debit card operator Cielo (CIEL3.SA) to process the payments.
As Cielo is already Brazil’s largest payment processor, a partnership with the biggest messaging service could pose a market concentration risk, Cade said. Shares in Cielo soared 30% on the day WhatsApp announced payments service in Brazil.

6. BitLicense just turned 5. And it didn’t work out the way it was supposed to. (Regulations and unintended consequences — name a more iconic duo.)

BitLicense at 5: Despite Architect Lawsky’s Hopes, Few States Copied NY Rules — CoinDesk:

When the BitLicense was pitched by its creator Benjamin Lawsky, then the head of the New York State Department of Financial Services (NYDFS), it was intended to become a model for the rest of the states to rely on. Five years later, the BitLicense has gained little traction.
“New York’s BitLicense was usually brought up to illustrate how overzealous a state can be,” said William Haynie, owner of Pelicoin bitcoin ATMs. “It seemed like there was agreement from both sides of the aisle in that no one wanted something that was going to be oppressive to operators in the state of Louisiana.”