Why Advertising Shapes the Tech Economy
Paris Marx is joined by Daniel Joseph to discuss why advertising is central not just to the tech economy, but modern capitalism itself, and how the business models of companies are increasing shaped by serving ads and collecting data to inform them.
Daniel Joseph is a Senior Lecturer of Digital Sociology at Manchester Metropolitan University. He’s also written for a number of publications, including Briarpatch Magazine, Motherboard, and Real Life Magazine. Follow Daniel on Twitter at @DanjoKaz00ie.
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Paris Marx: Daniel, welcome back to Tech Won’t Save Us.
Daniel Joseph: Thanks for having me back. It’s really nice to be here.
PM: It’s great to speak with you again. Last time you were on, we had a really in depth discussion on the history of the video games industry, the political economy of the video games industry that I found really fascinating. And certainly, I think I’ve built on it with some other conversations with people like Rob Zacny, who I’ve had on the show earlier this year. But in this conversation, I want to talk about a piece that you wrote recently for Real Life that digs into the political economy of the tech industry, and how we have seen that evolve, and what is actually driving many of these companies and their business models when we really get down to it. And so I want to start with this kind of broader question. And then we can dig into more of the specifics of the piece. I think when we think about the Internet and the history of the Internet, there’s an argument that the advertising business model was something that was adopted, because you had this communications network that was developed without a clear business model. And so this was a way for companies to find some means of commercialization, when there wasn’t a clear way to charge customers for things. Do you think that that’s an accurate representation or explanation for why advertising became such an important business model for the web? Or is advertising itself just much more central to capitalism, in a way that this discourse maybe doesn’t fully get to?
DJ: I think it is a bit a both. We do have that original Internet, or the Internet that came out of ARPANET and stuff that was unmonetized or an alternative space. There were, obviously, companies and websites selling things and taking certain cuts of transactions and stuff. But I think it’s important to know that advertising is a huge industry, has a really big lobbyist wing and has played a big role in the shaping of ,at least in North America, broadcasting and telecommunications companies. And so those have shaped how understand those kinds of legacy media formats. When the Internet was privatized in the 1990s by the Clinton administration and rolled out as a worldwide thing that everyone can get access to, marketing and advertising companies were right there to play a big role in shaping how it was going to be regulated, and insure certain things and certain privileges for themselves. I think the trend towards advertising as the big underwriting of the whole thing, both at a website level, but also at platform level. It’s kind of central to it, because advertising is a big part of the whole way of our society is built.
PM: It’s fascinating to hear you say that advertising was really important to the broadcasting business model, especially in North America or the United States. And then, of course, when we think about the Internet, this very much is a product of the United States that really gets shaped by domestic political and economic factors in the United States, and then pushed out to the rest of the world, and taking a lot of that with it. And so then, if you have a really strong lobbying push by advertisers, or an expectation that advertising is going to be really key to what the digital expansion looks like in the United States, then naturally, that is going to also shape what the Internet looks like in other parts of the world, because of how important the United States and US companies are in that process.
DJ: Big time. And that’s the thing — looking at the origin of this technology, I was just teaching a couple weeks ago on the history of the Internet, and I emphasize military funding, but I think we can’t underemphasize the fact that all of those other industries came into it, and at those formative moments and 1980s and 1990s. And so much of the shaping around these communication technologies was to make sure that they were economically beneficial to GDP growth and stuff. So fitting them in to the whole system was, I think, from the start, a big part of this. You can look at documents even before other kinds of computer networking in this era. It wasn’t just ARPANET — there was many different formats of computer networking designs going around at the time. They were all focused on this commercializing aspect; it was like access to databases, access to information, and these things will help business. And so, the idea that advertising would never have been in the room and really have been a big part of that, was, I think, silly.
And in a sense, it also explains why there’s a certain thing about the affordances of computers, of digital technology made it possible for them to change the whole game in ways that I think the marketing industry has not liked. And certain intermediaries and rating agencies and stuff have lost certain amounts of power. They might not have liked, necessarily, the way that the Internet played out for turning Google and Facebook into big advertising clearing houses and things like that. But at the same time, those technologies that those platforms had, they were a really seductive component of making advertising more scientific, more accurate, more focused on tracking and all these kind of things.
PM: Super important. And I had Tim Hwang on the show, and he talked a lot about those aspects of the ad industry as well, and how even though it’s not actually clear the data around the number of people who see ads and whether it’s as accurate as they lead you to believe. But people want to believe it, so it doesn’t get challenged, at least to this degree. And this expansion into the Internet has allowed a lot of additional advertising to be done, really grown, the industry as well, as it has moved online, offered a lot of new kinds of spaces for advertising to be displayed. And certainly we continue to see that expand, as we’ll be talking about in this conversation. So in the piece that you wrote for Real Life, you drew on the work of Dallas Smythe, in analyzing the tech companies and their relationship to advertising. What does Smythe argue? And how is it relevant to what we’re observing, and happenings serving for a couple of decades in the tech industry?
DJ: So what’s interesting about Smythe, and why he comes into theorizing advertising at a time when broadly speaking in communication studies, and political economy, those who were really focused on the effects of communication systems, broadcasting, telecommunications systems, and radio and all this kind of stuff, it’s coming into a conversation that wasn’t huge. Cultural studies hadn’t been fully established as a discipline in the UK yet, really. And it was growing. And there was the cultural study side of things, which was associated mostly with the analysis of content, and in some ways, a lot drawing along a tradition that we can kind of identify with Marxist theory, so Gramsci, and the Frankfurt School, so Horkheimer, and Adorno, and their analysis of the culture industry. And that was mostly focused on communications as a propaganda tool, as an ideological tool, as something that’s important for shaping culture because of the messages inside the media. And Smythe came along, and his original target was theorizing communication around the message. And he says: Well, what we need to understand is that communication and specifically advertising has shaped communication systems in the West as around the production of audiences. And so he theorizes this thing called the “audience commodity.”
There’s a bigger bone to pick with a certain strand of Marxist political economy and Marxist theorizing around the labor theory of value and all these kinds of things. And I think he’s kind of mostly remembered for that. I think he’s more kind of considered a bit of a outlier in some ways, because he was theorizing that audiences were actually engaging in value producing labor. My opinion on this is a bit complicated, and I feel like some people read it and get hung up on that if they come from a strong Marxist background. They might not agree with it; they might think it’s wrong or whatever. But I think, generally speaking, why I wrote this piece was that Smythe’s focus on the audience commodity on this thing that, at the end of the day, that no one really disputes — that the construction of audiences is what these companies are about. If you talk to the people in telecommunications broadcasting companies, they were like: Yeah, we produce audiences; we go to Nielsen; we negotiate based on ratings and how they’ve collected the numbers around who watches what, when, and how, and all this kind of stuff. And then we sell our spots to marketing companies to run their ads.
And there’s never any dispute about that. And I think that particular, important truth around what is broadcast media is, for me, continues to play a huge role in how we understand tech platforms, and specifically platforms oriented around cultural production. And my argument is to almost go a little bit further and say: This is structured and dynamic, even at other levels in the tech ecosystem. So I do some comparisons on gig work and stuff. And I’m not necessarily saying gig workers are audiences. But I’m saying there’s similar dynamics going on here that are influenced by what comes from the advertising industry,
PM: I found the piece really fascinating and the argument itself, which is obviously why we’re having this conversation. But before we dig in more specifically to the tech industry angle of this, I’m wondering, because you talked a bit in the piece more broadly about the advertising industry. Can you explain why advertising is so essential to modern capitalism? Why it plays such an important role in the economic system that we’ve built up?
DJ: Smythe in his piece really is coming at this from — in Marxist political economy — the monopoly capitalism school of thought, which finds its origins in the late 19th century Marxist theorists, both in Europe. Vladimir Lenin’s writings, heavily theorized this, but this goes back to another writer called Rudolf Hilferding. And there’s this argument that there was a competitive capitalism that existed in the pre-1870s era, which is the capitalism that we see that Marx theorized in “Capital: Volume One.” The system that he’s constructing and criticizing is one where competition rules the day and what theorists later on start to argue is that monopolies are the dominant force in capitalism. They control their prices. They’re not necessarily engaged in competition in it’s most basic level, and so they’ve kind of shored themselves up, constructed a castle that protects themselves, and then control and dominate markets at a world scale. So, a handful of large companies own and engage in the production and distribution and sale of commodities — that is the most of what is bought and sold in any commodities market. And an example often used, especially in the 20th century, is consumer packaged goods. Think about companies like Unilever, and Nestle — they own tons of brands. They produce tons of things, and broadly speaking, they sell almost nearly identical products.
And that means that in a marketplace where things are basically the same, you need to create brands. And so this brand awareness becomes a really important thing — like, why do you buy one piece of toilet paper rather than another? Well, there might be some quality differences. But broadly speaking, there’s that need to differentiate and use that with packaging, design and advertising and making sure the brand is known to consumers. And so theorized in the 1940s and 1950s, we get a book by Paul Sweezy and Paul Baran called “Monopoly Capital.” And that book starts to begin to theorize this thing called the “sales effort,” and they start to try and identify the advertising industry as a big part of this. But really, Smythe is one of the first people to really take this further and elaborate a little bit more on how important it is for brands to basically protect themselves and as monopolies in consumer marketplaces through advertising. And broadly speaking, the general trends of monopoly ownership in all of these consumer products is generally the same, if not actually more acute now than it was when this was theorized in the mid 20th century.
PM: The brands are everywhere — they’re tweeting at us to make themselves feel familiar to us! It’s always been interesting to me to also think about the distinction between urban commerce, urban living versus suburbanism, where I feel like in the suburbs, you need those brands even more, because you’re driving at these high speeds. It’s not a culture where you’re on foot. And so if you’re going to go shop at a store, or go to a restaurant or something like that, you’re looking for the identifiable brand in a way that you might not need as much if you’re moving a little bit slower in a city itself. I guess this is a bit maybe off of your point, but it is what came to mind. But I still feel like there’s a piece of that. And you need that kind of recognition — you need people to know your brand, know what you’re selling. And thus, of course, that also contributes, as you’re talking about monopoly to this increased consolidation that we have in the economy, where there’s fewer distinct, different places to go. And it’s all kind of homogenized around these brands, as you’re saying.
DJ: I think the creation of big box stores, where they stock many kinds of brands — for me, the suburban lifestyle is all about the car; go to the big box store; shop at a giant wall of identical things. And then you really are making snap decisions based off of lifestyle advertising and general product and brand awareness. Like, why do you pick one kind of toilet paper rather than the other? Maybe for comfort. Maybe some is softer that you like. But for the most part, the big box stores have their own brands and things, and they make a big deal about that. But it’s a world where you’re buying in large quantities, you’re looking at a wall of identical things, and you need to make a choice. And it’s different in different places. I think in North America is still where it’s most pronounced. You see Europeans come over to Canada or the US and shop, are surprised at how many brands of toothpaste or or something like that. But I think the most level of competition in terms of branding happens in the US, which I think is interesting. And because it’s a land of exurban, suburban lifestyles, where it was created at its most extreme.
PM: Daniel, I think you mean that is freedom, actually! [sarcastically].
DJ: [laughs]. I grew up in Southeast Texas in a town two hours from anything good. And you really were tied to your car. And now that I don’t have to have car, that’s more freedom than having one. But that was what they told us, right? Cars were romantic items — that go part and parcel of this whole way of life.
PM: Absolutely — I completely agree! You’re preaching to the choir here. Not controversial statements on this podcast, certainly for listeners who are familiar with my work, as well. I also think it’s really interesting and we’ll get to kind of the audience commodity piece of it, how these companies are really focused on advertising in this business model. But it’s also really clear when you look at the tech companies themselves that they recognize the importance of advertising, of PR, of having a really good PR department to sell, not just their product, but a vision of themselves and the world that they’re creating to the public so that they buy into the idea of the brand and feel themselves become associated with it in a way that’s not just: I’m buying this product, but I’m buying into this idea of myself as someone who is associated with Apple or Uber or whatever company.
DJ: It’s the cornerstone of branding. You need to make tangible goods and tangible feelings. And so it’s hard to say how much of this is manipulation or just if there is something that we recognize in brands. They come so easily to us is because so much of our life is emotionally oriented, and clothes and consumer goods, we imagine ourselves in the eyes of others constantly. And these companies have more than 100 years now of really expertly understanding this and understanding the social nature of consumption, which is so much of what it’s about. It’s about thinking about ourselves in relation to others in relation to brands that and when people talk about brands. It’s not just the product; it’s something else. And yet, when you think about what that something else is, it’s purely the product of images and surface and vague ideas. That’s why I think “Mad Men” is such an interesting show, because they pull back the veil a bit on that dynamic of it.
PM: I think it’s a really good point. And unfortunately, I’ve never watched “Mad Men,” I always meant to, and then it felt like it was too late. Maybe I’ll have to go back and check it out. So I want to move on to this discussion, because you’re talking about this way of seeing it through this advertising lens. But you also discuss how we’ve seen, or we have a tendency to look at the political economy of the Internet or tech companies through a number of different approaches that aren’t so much associated with this up to this point, at least. And the dominant ones that you talk about are an approach of digital labor, where we’re looking at people on social media platforms as performing free labor for these companies, surveillance capitalism, of course, Shoshana Zuboff — the deep surveillance of the data capture that is going on here — and of course, techno feudalism — this idea that we’re all serfs on the platforms of our techno lords. Now, we don’t need to get into too exhaustive of a discussion on these. But can you briefly outline what they suggest? And why their explanations don’t fully capture what is going on here with these tech companies?
DJ: It’s interesting, because there’s a zeitgeist within this area of tech criticism, both academic and journalistic. And so all of these authors, the people affiliated with them, have pretty decent platforms. And I guess for me, I was like: Well, I come from a unique tradition, not one that is unknown, but being trained in Canada, partially in political economy, which, distinctly political economy communications, has a very strong presence in Canada. And I always felt a bit like we’re missing a big chunk of what’s going on. And the digital labor thesis, I agree with a lot of big chunks of it, in a lot of ways. I’m sympathetic to it; I’ve written about it; I teach it. The whole autonomous criticism of the Internet was certainly interesting, even if I don’t fully buy everything about it. I think that surveillance capitalism, again, I have issues with Zuboff’s work, at least that book’s basic argument, but I think there’s something interesting about positioning surveillance in that way. And then obviously, she’s not wrong about the actual day-to-day workings of how data is extracted and processed, and then used by especially big companies like Google. And the techno feudalism argument, I think, is also compelling in some ways. For me, it’s kind of almost vibes based. It’s kind of like: Yeah, you’re right, we do feel like we are working on someone else’s land, and I’m tithing them for the privilege of using it.
But I thought that even though surveillance capitalism is about the production of data, it doesn’t talk about for whom and to what purpose. Digital labor will often talk about the production of content. But again, how do they, at the end of the day, social media platforms actually turn the production of that content into their business? Facebook is an advertising company — they make most of their money from advertising. Yes, I’ve posted a lot. I interact with my friends and added value into the network. But it only makes sense if we talk about advertising. And I think techno feudalism focuses too much on that. And I’m very sympathetic to the argument that it’s because they control the market; they take cuts of every single sale that goes through them; they make a lot of money; they work as that kind of landlord, as that rentier. Agreed. But at the same time, so much of that is undergirded, so much of the transactions taking place are ads, and so much of the network data collection itself is around advertising. And Google is making most of its money from advertising. They rent out services. They do all these other kinds of things. But at the end of the day, they’re producing data for ad sales. Obviously, none of these companies only do ads, but it’s at the end of the day, they’re mostly making money that way. So we should be talking about advertising more. The people at these companies are talking about advertising a lot. So I was just like: No, put this in, put it into the mix a little bit more.
PM: And just because the companies are talking about something doesn’t mean it’s always something that we should be paying attention to. But I think in this case, you’ve hit on something that’s important, especially as we see more and more of these companies move into advertising or find ways to kind of profit from the scale of advertising online. And so if the digital labor thing, the surveillance capitalism, the techno feudalism doesn’t fully explain what is going on here, what do you see the tech companies actually doing then? How do they produce this audience commodity that you’re talking about?
DJ: It’s in a lot of different ways. We know that they benefit from the network effect thing. Why is Facebook powerful? It’s because they really benefited from economies of scale based on their network effects. And then they started to monetize and wrap the content that people are socially creating, into hyper targeted ad markets that basically gobbled up the extremely lucrative business of classifieds. So classifieds — you want to sell something on Facebook marketplace. You want to do all these kinds of things like local advertising for small businesses. I was briefly a student journalist, when I did my undergraduate and that student newspaper at Laurier made a ton of money by just selling local ads to local companies in Waterloo. All of that market has been eaten by by Facebook now. And so that’s what they did. They took massive markets that were all over the world, but highly localized in specific regions that were dominated mostly by local newspaper companies selling again, audiences to people, and obviously film and television and radio as part of that as well.
But they’ve gobbled up those ad markets, and then obviously, use the data to better target them and tell people that it’s worth more money, that you get better targeting for less cash, and then all those kinds of stuff. So there we go, they’ve collected the audience. They have all the people on that network. And that’s how they still make all their money. And that’s why they can continue to expand and all this kind of stuff. For Google, it was the AdSense program and all the other ways that they integrated cookies and stuff, and to be able to track people’s whole experiences across the Internet. So, again, Google is just a search engine at the end of the day, but their spiders are everywhere. And so it’s just by tracking that they can then go to, again, marketing companies and say: Hey, we’ve got the audiences that you want inhyper specific ways, and you’re going to buy from us because our network is the biggest — I think it is. It’s that kind of thing that, again, you can just keep continuing to sell those people that have interfaced in some way with the network. The construction of it is basicakly through these economies of scale, and gobbling up older markets and pre existed them.
PM: They had these users, they’re able to segment them in a very effective way, so that they can present them to all of these advertisers and say: Give us your money so that you can reach these people that we can uniquely give you access to in this way, where we promise you that it’s going to be more effective than previous ways that maybe you’ve advertised before, because of all of this techno magic that we’re doing. Whether or not that is actually the truth of the matter, the technology can lead you to believe that that’s the case. What role does data play in this then, because data is really key to the whole surveillance capitalism argument — that these companies are really spying on us so that they can collect this data that’s valuable for their business models. If it’s not at its core about surveillance, what is the role of data in this process?
DJ: This is really interesting. So I’m working on some project right now that’s around this, in thinking about what is data? What does it represent? And at the end of the day, they can claim data is valuable, because they can say, within a certain percentage accuracy, that it is accurate. Because that’s what you’re promising to people who are buying those ads. You’re saying: We’re going to be able to serve content to these people who we believe are real and are really there. The flip side of that is how can a marketer trust a company to be selling what they say they’re selling? And so the data is all about, and the way they sell that data is to sell that data as authentically representing what they say it’s representing to be. If the 18-35 demographic is the most valuable, male, all this kind of things, you actually need to be able to say to the people: Oh, it’s authentic, and it’s not fraud. Because a big part of this industry, and I’m not an expert in it, but everyone I talked to on the fraud issue says it’s all fraud. There’s tons and tons and tons of examples of people trying to fake information. This is why there’s obviously worries about bots on networks; they’re worried about bots on Facebook and bots on Twitter, fake reviews for things.
So much of this industry is caught up and in a world of fraud and fakery, and so they have to really constantly be selling the data and verifying that data and making the case that that data is authentically what it is. And so it’s not just that they have collected the data, and it’s a one to one representation. But it’s also how they frame it, and sell it. And so I think actually, the accuracy of the data almost doesn’t matter. What matters is the fact that that company was able to produce the receipts, and the authentication metrics and all these other things that say it’s real. And this goes back again to earlier forms of audience measurement, which had to be done by survey. They had to be done by those Nielsen boxes. If you were a Nielsen family, you had to sign a thing and say exactly what you’re watching every day, and the box attracts all of that, then you’d have to say, who was watching it at that time. And most companies don’t have to say: Oh, yeah, we verified it and we make sure they’re not lying to you. So the data has to sell itself.
PM: It’s fascinating, though, to think about it. And to think about, we’ve essentially built this infrastructure that at its core, or at least one of its key aspects is about collecting all of this data on us when we’re online, increasingly, as we’re out in the world. Everything that we do has to be quantified and turned into data, and just how much this feeds into advertising systems and an advertising business model that is essential to these companies. And that even a lot of the companies that tell us they’re about something else, whether it’s Amazon, and its e-commerce and cloud, but has a huge and growing advertising segment as well, they lead us to believe that in many cases, their whole business is something different entirely. But they either have a massive advertising business alongside it, or advertising is key in a way that maybe a lot of people don’t recognize.
DJ: I think that’s the thing — it’s just ads are kind of the data collection aspect of it, the plugging it into broader networks thing is where all kind of websites and tech companies have found themselves even if it’s like, not exactly everything they want to do or the thing they talk about the most as the thing that they’re most innovative, but then disrupting the most. At the end of the day, I think, just the fact that they are doing these things, it’s something good to sell. And it does plug in, and there’s a huge market for it. And that’s, again, going back to that gobbling up older markets, the way this industry is organized is kind of ridiculous. It’s so big and messy.
PM: It also makes you think about how there’s all this talk about innovation that comes along with technology, and that these tech companies are facilitating, that they’re moving us forward in all these important ways, supposedly. And then when you kind of look at what they’re doing and where so much of this focus and money and investment is going, is to find new ways to collect data on us, to serve us ads in new and innovative ways. Even as many people I think are getting pissed off with the degree to which they see so many ads. Tthat’s why people adopt ad blockers and all this sort of thing. And it’s there’s this constant fight as to how much data you collect. How many ads can you serve people? How supposedly accurate can you make them, even if there’s a whole load of fraud within it? And then how can we escape ads as much as possible cecause everything is just ads now?
DJ: And what’s funny, I think there’s two kinds of Internet now where there’s the ad free spaces are the ones that are ad blockers guarantee us a little bit of freedom from and then there’s the fully enclosed platforms where you go on Instagram, you can’t get away from them, you can’t add block the ads on your app. And so in a sense, that’s why when they rolled out the Reels feature, which is very much about pushing users towards specific content that increases engagement, that you can also, importantly, wrap ads around. I think one of the arguments against TikTok’s monetization, they’re not profitable right now. They’re not making money from advertising. TikTok is going to change a lot when they switch to their ad model, because they need to create ad-friendly content. Lots of companies don’t want to surround extremely risque content, or gross out content or violent content with their ads. And so when Instagram did this change, everyone revolted against it. They hated the Reels thing. They created a feature that you could snooze all the suggested content. And they understood that there’s a certain limit to that, because they don’t want to play. It is still very profitable platform for them, because most Instagram content is kind of like a store. You’re shopping. And then you’re also getting ads fed to you. And I find this is very much in my case — you look at a pair of shoes on there from a from a retailer and then suddenly you’re surrounded by shoes.
And then in journalism, here for instance in Manchester, the only local newspaper of any size, their website is a nightmare of ads. I cannot overemphasize how bad local newspapers have become, because they’re just chasing viral stories. Or they’ll do like: What time is “Game of Thrones” on tonight in the UK content. And then that page is surrounded by three or four little boxes that you have to click away just so you can see it. And even with an ad blocker on, there’s still a million little boxes that seem to have escaped it. So the kind of end goal, the end state of this kind of like advertising centric system is just a nightmare to navigate. And it’s so hard to understand all of the kind of easy access to information that you expect from something like Wikipedia, or whatever, which is very easy to navigate kind of disappears in the ads. That deep end of what advertising sponsored content looks like.
PM: It’s so frustrating then to see the experience that we’re then saddled with because of all these ads. And then, in particular, the people who don’t have the tech savvy to try to use an ad blocker or can’t pay to get the ad free subscriptions or anything like that. But of course, many of us just have to put up with these things. I want to talk about this in a few different areas, a few different companies. You were talking about social media there. I feel like Netflix is a really key example here of how this progresses. Because for a long time, Netflix’s whole pitch was you can come here; you can watch your content; there’s going to be no ads; we do not believe in this; our whole thing is just to increase subscribers. And as long as they are paying us their direct monthly fee, we have no need for advertising. We’re following this HBO model where ads are not coming next to our great, amazing content. Of course, the content has also become not so amazing, I think it’s fair to say. So what do you see when you look at Netflix, both in the kind of broader model that it created? And then also how it’s now making this shift toward ads and bringing ads into the platform?
DJ: It’s interesting. So this is the main area of my study, and my research is on cultural production. And so obviously, social media platforms, lots of ads, all that kind of stuff, like you said, cultural production has a different relationship, at least platform as cultural production has had a different relationship with that. So obviously, YouTube monetized through ads, other kinds of creater platforms, generally speaking, if it’s a streaming site like that, it’s going to be ad supported. While the HBO subscription based models of a lot services seems to eschew that, but Netflix’s model was premised on user growth. I don’t think they’re making money. Last time I checked, I think they were still in the red or barely in the black. And so much of their stock valuation, because again, the tech economy all were underwritten by this, what once was very cheap, VC cash that you could just get from banks and to underwrite these huge valuations and then grow globally. Netflix’s growth has stalled immensely, because they basically hit the top end, because their service isn’t very cheap by global standards. Does it cost as much as certain premium cable packages? No, but it is still quite expensive in a global sense. And they can’t keep growing at that rate.
And they’ve also decided, I think, importantly, there’s a great book called “Netflix Nations” by Ramon Lobato. And he talks about how they basically have decided to stop — they don’t want to sell cheap subscriptions to lower-income people around the world. So in India, their subscription is extremely expensive, and most people won’t use it. They’re going to use local alternatives that have more local content, and have licensed films that are cheaper than what Netflix is making. So to keep their growth model intact, they have to offer this subsidized subscription that is subsidized by advertising. And it’s the only way they’re going to really I think, climb out of the rut that they’re in, which is that there’s a limit to the growth that they’ve promised to their investors. You can pretend that the subscription model is enough. But the subscription model that makes enough money to underwrite that kind of content, that kind of global expansion is not there — a subscription based model. Well, if you really want to be the streaming platform for the whole planet that everyone has, you’re going to have to subsidize in some other way. And that will be ads. And we see this in I think other tech companies too.
PM: It’s fascinating as well, because you’re talking about needing this subscription revenue in order to subsidize or in order to make possible this kind of global expansion. But then at the same time, there’s a lot of people in Hollywood in the TV and film industry, who would say the Netflix model that they’re promoting is actually one that’s less lucrative than what existed before, because you’re taking out all of these additional revenue streams that existed. You’d go to theatrical, or the first release on television, and then there’d be a second release, or the movie would go to TV and there’d be paid TV. You’d go to DVD and do the home video sales, and there’d be a ton of different ways to resell the movie, to make more sales, to make more money off of it. But then in the Netflix model, it just goes into the streaming platforms library, and then it sits there. And it never makes additional revenue beyond just having those subscriber fees.
And so eventually, you need to look somewhere else for for cash, for financing. And of course, Netflix now, finally, and many of these other streaming services, if they hadn’t already, are moving into advertising as a new form of revenue as they continue to raise their subscription fees as well, in order to bring in more money that way. And so, I think it’s a real example of these companies and Netflix in particular, making a promise as to what they could deliver with this kind of technological solution to content distribution or creation in this case, and then, as we so often find, with these tech companies and their business models, finding that it doesn’t actually play out the way that they initially imagined it the way that they initially sold the public, and then they need to reimagine that business model later.
DJ: And I think for me, so much of the kind of broad conclusions I draw out from this is by bringing this discussion back to pre-Internet monopolies and the structure of industries. And then I compare that with the rhetoric of decentralization, democratization, the disruption of established business models. Okay, well, those things were disrupted. But what does the general trend lead towards? And that general trend, after all this, the technical solution to the problem was we give everyone the Internet and then everyone can stream any movie they want. And that’ll work and the whole industry is actually shifting back to what we saw. And I think that’s the thing — that older business model of mass media production was actually more lucrative. But because it was so heavily disrupted, it did throw everything through a loop. But I think we’re actually seeing a different version of that, but not dissimilar in structure locking back into place, and so the return of advertising.
But also it wouldn’t surprise me if Netflix one day sells its production half and says we’re actually just a distribution platforml we’ll integrate with the theater system and all these other things, but being on the production side, distribution, and consumption — doing all that doesn’t make sense for us. And that’s where most of their money is getting burned; it is in production, to build that subscriber base. They might give up on that one day, that wouldn’t be surprising to me. So the older model is, I think, actually a good idea of what we’re going to get with time and over time, moving forwards. It’s funny. It doesn’t work because it was underwritten by the cheap cash in the economy, which again, is another discussion entirely, but low-interest rates allowed for the ballooning of these big companies. So we’re in a new position now, where things I think might change quite rapidly.
PM: It’s absolutely fascinating. And I want to ask you about the video games industry as well, because it’s the topic of our last conversation on the podcast. But I find it really fascinating because the way that I remember video games, as I was growing up is, you’d have your console or your PC, you’d go by your game, you’d play it, and then you’d go buy another game, and you’d play it that way. But increasingly, the video games industry itself seems to be, certainly we’ve seen this for the past decade or so with free-to-play games since the advent of mobile, the explosion of mobile. And now that kind of business model, that idea that you get the game for free or cheap, and you’re served ads and have a bunch of microtransactions in order to fund the business model, seems to be extending from this free-to-play mobile space into the broader industry, as more and more games need to be always on, need to have this kind of constant playability, where you need to be constantly making these purchases in order to do well in the game itself. And I think that this is to some degree linked to the metaverse push as well, that Facebook, Epic Games, Microsoft are making too, and just extending this further. So what do you see going on there? How do you understand this shift in the video games industry? And is it related to what you’re talking about here with this kind of constant need to go for advertising and to create audiences for that?
DJ: I think it’s interesting. So the video game industry has always been a little bit different. It’s been console-based, but it’s also been reliant on the PC. The production pipeline for most video games never really conformed to an advertising business model. And so it’s always been a little bit outside of that. But at the same time, mobile, especially mobile free-to-play, like you said, it is built around the industry. It uses a lot of the same systems that the ad industry developed to keep track of its players. And importantly, it relied on the network effects that social media allowed. What is mobile if not what we were originally seeing with Farmville and Facebook games, which is this system of play that exploited simplistic gambling mechanics and gates that stop you from playing as much as you wanted to and have exploited your social networks to get more people into it. Social casino games make a lot of money. In in terms of income, mobile is where it’s at. Free-to-play is where it’s at. They make the most money. And they’re very much plugged into these ad networks. So all those games are very much a part of that ad ecosystem as they’re buying ad space in it.
But they also feed back into it by selling player information and player profiles and all this kind of stuff into the ad networks to keep track of. And then they rely on that kind of advertising to ensure that you can buy more of the in-game commodities. And so the free-to-play model is all about buying energy, gold crystals, whatever it is you need to keep playing, to buy in-game cosmetics and stuff like that. So they themselves are selling a lot of the things that need ads to ensure there’s demand for them, to a certain extent. I’d be curious to know, because we’re also seeing the switch gaming to with Xbox Live game paths and other things with subscription models, so we’re starting to see that. But I’m interested to see if games and ads have more overlap, or if they become more integrated beyond what we’ve discussed in terms of the social game and mobile game aspect of it. I don’t know — it could be.
PM: If I’m right, Unity, I think recently made an acquisition that was about bringing more ads into its engine, which is one of the major kind of engines for creating video games, right?
DJ: Exactly. I forgot I talked about that in my piece. What was the company called? It was Iron Source, in-app advertising and monetization. So those games again, one of the ways they stop you is they say: Oh, you’re out of energy, would you watch this ad and you can keep playing? So that is the kind of mobile things — you suffer through to keep playing your kind of repetitive game by being forced to watch advertising. And I think that’ll probably continue to be very much a key component of that particular market, which again, is the most lucrative market. And so then Unity is a production platform. They’re integrating every aspect of a game’s business model into themselves. And so buying that was a big part of it. And they’ve been buying up ad network connectivity stuff for a long time, this is just the most recent acquisition of something like that.
PM: It’s fascinating and concerning, or annoying, maybe it’s just because I’m someone who tends to prefer single player games, just have my experience and kind of move on. And it feels like the whole industry is increasingly moving toward these games that are never ending, that are huge, that require a huge time commitment. So you’re spending a lot of money potentially viewing ads in the future, or, with free-to-play seeing ads to some degree. And it just, I don’t know, it’s very much against the way that I’m interested in playing games. And, I guess I play fewer than I used to anyway. But yeah, I don’t love the direction things are going. Yeah, like,
DJ: It’s funny, because I’m not really big into mobile games. Despite that, I do a lot of research on mobile app stores and stuff. The game I played the most is Apex Legends, which is like a free-to-play game with loot boxes, a battle pass. And those two things make them a ton of money, right. And I see ads for that game all the time on Instagram, for instance. They know I play that game based on probably the way I tweet, or the certain kinds of accounts that I follow and stuff. And so despite the fact that it’s not as necessarily plugged into those ad networks as it could be, but it’s still like, they tell me about oh, these new skins are coming out. So get ready to buy your end game gold thing to buy new stuff for it. So I’m like you, I mostly play single player big games. I don’t like a freemium game, and yet here I am finding myself doing that all the time. I’ve been playing my game for like three-and-a-half years now. I started a new account. I was like: Yeah, I’m going to spend 70 pounds on the cosmetic items to get a special super rare one. I’m like, why am I? Here, I am.
PM: This is why this is what Zuckerberg and the metaverse are hoping we all do. To broaden out the scope of the discussion, to start to wrap things up, I think that we’ve seen in in recent years, and this is pulling from Shoshana Wodinsky’s reporting on the ad industry and all this data collection, is we have more and more companies that we wouldn’t even traditionally consider to be tech companies finding ways to create audiences to collect data on the people who use their services — whether it’s hotel companies ensuring that they have data on the people who stay at their hotels that they can then sell to advertisers or data collection firms or whatever. Car companies are trying to collect more and more data from drivers and from the cars and how people drive so that can also be sold to these companies to work for advertising.
And then, as I was saying, we also have these larger tech companies that we often don’t associate with advertising to be increasingly moving into that space as well as at least another revenue stream. Amazon is, I think, the third largest advertiser, digital advertiser right now behind Google and Facebook. Apple seems to be moving into ads after doing it’s kind of restrictions on Facebook and things like that, that hit the revenues of a lot of other advertisers, Uber is moving into ads, is creating a new kind of ad platform or whatever it’s doing. So a lot of these major tech companies are moving into it. But then a lot of companies that are beyond tech are also feeding into this ecosystem as well. What does that tell you about advertising, the advertising business model? How key it is to so much of what goes on here? And how it also incentivizes this infrastructure of data collection more broadly?
DJ: Again, it kind of goes back to that issue of everyone wants to collect this data, because it’s almost self-justifying, because it’s market research. You find out more about your customers. You feel like you can better serve them, and that is a big argument for this kind of data collection. And I think it’s also about authenticating itself. The more information you collect, the more you can confirm or argue that it’s authentic, the more again, you can self justify what you do and shape your products and services towards what supposedly these audiences want. But what is not answered if not a marketplace — a bunch of possible consumers. Every company needs to be thinking about who’s buying their stuff. There’s no reason not to collect information, applied research. That’s the basics of social science, where people are creating surveys and trying to find information about who their audiences are, it goes back a long time, right. And when capitalism really ratcheted itself up to the next level, as monopolies began to form, a colleague of mine at the University of Toronto, Dan Guadagnolo, he’s a historian of advertising. And what I love about his research is so much of what we just said about psychology, and everything like that was influenced in large part by companies trying to collect information about their customers to better understand them, so they can better sell stuff to them. And so every single digital company, if you can find a way to collect extra information about your customers, it’s on the table for them.
And then again, it becomes a special commodity that you can sell to other people. Why wouldn’t you plug that into an existing network that wants another space to corroborate that information? And we shouldn’t forget about the fact credit rating agencies and insurance companies and all this kind of stuff, keep shadow profiles on everybody and they pay good money to collect and collate this information. Banking, the your ability to get a mortgage, or get health insurance and all these other kinds of things is a whole shadow economy and data collection that we don’t really see because it’s opaque except when there’s a data breach — basically what happened with Equifax. I think the fact that so many companies want more information, and they want to sell it and they want to know more about it just is a function of how capitalism works, in a certain sense about social reproduction. If the economy is to continue operating smoothly, it has to have this information, so there isn’t a crisis of overproduction or whatever. You make too much stuff. You can’t sell it all and you’re going to go bankrupt. So, it’s just its core. And I think that’s why I tried to talk about in the piece of that is just advertising is at the beating heart of capitalism. It’s not just an appendix or whatever. It is very much close to how it functions, and I don’t think it can exist without it.
PM: I think that’s absolutely fascinating. And I think it gives us such a good insight into how these business models work, how integral advertising is the capitalism and how they’re naturally we see that kind of replicated and reproduced within the tech economy, and what all of these tech companies are doing. And I think it will be interesting to watch what comes — as we’ve had this tightening, as there’s less access to cheap capital, as these companies have to find new ways to bring in revenue as we were talking about with Netflix — if there’s going to be an increased move toward advertising even further. And of course, if the contradictions, if the fraud in the ad industry finally explode in its face, but I guess we’ll have to see what what happens there. Daniel, it’s been great to have you back on the show. It’s been great to discuss this. Thanks so much!
DJ: Well, thank you so much for having me, Paris. This was a lot of fun — always fun to talk about this stuff. That’s why I write it, that’s why I do it. So, thank you.