The Curse of Ad Revenue
Facebook is unstoppable — yet dying. Data, privacy, foreign actors and government scrutiny are all challenges, but manageable. One thing however seals their fate: how they make money. The curse of ad revenue guarantees the death of any media platform. It’s just a matter of time.
Why do media platforms fall? Mostly, the answer is the inescapable tension advertising creates between the two customers - the consumer watching and the advertisers paying to reach the consumer.
New platforms constantly evolve but the life cycle they follow has a familiar pattern:
- New technology creates great new way to reach people. A platform emerges.
- It grows rapidly.
- When growth slows, revenue becomes the primary objective, leading to more ads, which make the platform less enjoyable and opens the gap for alternatives.
- New alternatives emerge. Sensing danger, revenue extraction gets cranked up — further diminishing the experience.
- Everyone jumps ship, in search of better experiences and better value.
Snapchat could be on its way to completing this lifecycle in record time.
As Facebook’s growth starts to slow, we see signs of people becoming disillusioned with their experience on the platform. They suffer from the same tension that all ad driven platforms do: they must trade off their user experience with their commercial interests. Or even more simply: to make more money from ads, their core product must get worse.
This “X” relationship makes all the ad driven platforms mortal. It also creates the snowball that accelerates the death of platforms. Where a declining product experience and pressure for revenue compound — just look at linear TV. They are losing eyeballs to new alternatives and at the same time the pressure for revenue forces them to inflate the price of their advertising real estate. If one looks at the long term trend of ratings (in decline) and revenue (still growing) you see the unsustainable predicament the networks find themselves in.
Essentially advertisers are paying more to reach fewer people. The value is hollowing out.
Netflix, earning subscription fees and not ad revenue, does not have to give it’s users a worse experience to make more money. Naturally it’s easier to grow platforms that are free, with ad support, but once they stop growing an inevitable course unfolds.
It begs the question, couldn’t Facebook simply offer an ad free experience for a monthly fee? They have embedded advertising so deep into their DNA, it’s hard to see this happen. Even if they wanted to, the growing stigma around the Facebook experience has probably closed the window for them to make a pivot of this scale. It would look defensive and the future still looks great for them.
Users are stingy with their money and clicks and startups need and love velocity. Launching a free (ad supported) service makes it much easier to attract users at scale and speed. Once these businesses grow though, they are stuck with the curse.
The slow and steady approach of subscriptions should become more attractive as mainstream sentiment sours to ads and exchanging data for service. The exchange of value is so much cleaner with a monthly fee, but it does require a product that presents very clear value from the outset. Facebook could never have grown this way.
Linear TV, Facebook, Snapchat, Twitter and even Google, all chose mortality when they chose advertising as their revenue and it’s why we will continue to see new platforms emerging and powerful ones fading.
