On this episode of Okay, Computer. Dan talks with Joe Marchese, Executive Chairman & Build Partner at Human Ventures, about Snap’s struggles amid an advertising downturn (2:35), unlocking Twitter’s full potential and its brewing courtroom fight with Elon Musk (6:36), Netflix’s make-or-break push into ad-supported subscriptions (9:37), challenges with evaluating the performance of digital ads (18:45), the intensifying competition between Alphabet/Google and Amazon (29:09), if TikTok is the new center of culture creation (34:54), and whether Apple will become a dominant player in the streaming wars and digital advertising (43:40).
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SHOW TRANSCRIPT:
Dan Nathan: [00:00:36] Current Ad. [00:00:36][0.0]
Dan Nathan: [00:00:38] Welcome to okay computer. I am Dan Nathan. I am joined by someone today who has been on the pod before but he’s probably the most mentioned I guess name dropped person on okay computer is Joe Marchese he is a very good friend of mine. He is the executive chairman of Human Ventures. Joe, welcome back to okay Computer. [00:00:59][20.9]
Joe Marchese: [00:00:59] thank you for having me back. [00:01:00][1.4]
Dan Nathan: [00:01:01] So here’s the deal. You just put yourself in this class of Komos. Most people who come on the pod get a bottle of Komos, as you know, on the way back. So you’re not doing this for the tequila? [00:01:09][8.6]
Joe Marchese: [00:01:10] No, I actually like your company. [00:01:11][1.4]
Dan Nathan: [00:01:12] You like my company and you like the conversation. All right, listen, we have a lot to cover today. This is our holiday shortened week episode of okay Computer. It was Labor Day. We are recording this on Labor Day, but I just thought we’d kind of chat a little bit. I know this is a huge day for you. Coming up, it’s Apple’s big iPhone launch day, which it is not. But we’re going to cover we’re going to cover some things about that. Why is it not yours? You’re the green guy. [00:01:35][23.4]
Joe Marchese: [00:01:36] Are you picking on me for having an android in being a man of the people like this is it is much more used internationally as an operating system. [00:01:43][7.3]
Dan Nathan: [00:01:44] You are the green guy, you’re WhatsApp guy and you’re the guy with the latest Samsung phone. We’re going to talk a little bit about what Apple is doing possibly on the bundling front. And that is, I think has a lot of really interesting implications for some of their other services, just kind of conditioning their user to pay kind of monthly fee for the hardware and the services. But I also want to talk about it seems like you started a digital ad tech company, sold it to Fox in 2015. You became the head of advertising revenue for Fox Networks. And it’s just interesting to me and you and I talk about this a lot. You’ve been on CNBC’s Fast Money with me talking about it. It seems like the guys who are getting away from the cable bundle are now thinking about what ads look like. Right. Good subscriptions, but supposed to save content. And then all the bundling, guys, I mean, they don’t even know what to do. They’re just starting their own streaming services because they want the recurring revenue. So just a lot to talk about as it relates to anything that’s Disney plus or anything plus or anything like that. So I want to hit all that. But first things first, let’s talk a little bit about Snap. Last week, SNAP announced that they were laying off 20% of their workers and they were restructuring the business. They were cutting a lot of problems. Give me your thoughts when you think about that, because, again, you know, this is a company that basically, what, 97% of their revenues comes from digital advertising. [00:02:59][75.3]
Joe Marchese: [00:02:59] Yeah, no. And I think this is going to be the case for a lot of companies. And I know we’ll touch on Twitter, which in some ways is is has a lot of the same problems as SNAP, but also couldn’t be more different because Twitter is a media company. But for SNAP, you know, what’s been interesting is that Evan kind of famously and I think rightfully said that Snapchat isn’t a media company. They don’t have influencers on Snapchat. It’s a place for real friends. And he underlines the word real and it’s a communication and self-expression tool and it’s private. And so all of those things that I just described don’t sound like a media company. Normally you associate advertising with media companies, not with utility companies, but what’s Snapchat is such a large, engaged audience. And when it had a device ID on mobile, they could turn that into what is called direct response advertising and performance advertising because they could get credit for lower funnel activity, meaning, you know, they know this person might be in market for X, Y, Z, movie or e-commerce, retail, whatever it might be. And so that was kind of a bit of a golden goose for them for a while, even though their platform wasn’t optimized for. They don’t have intent the way Google or Facebook has intent. Like for Google, you search for the movie you want to go see on Facebook. You’re talking to your friends about these movies, you’re posting things you’re letting it know. And so snap, it’s found upside in that advertising. But I think it has so much more potential on the brand side, and it always had more brand advertisers, but that’s just been out of vogue in the advertising industry. [00:04:23][83.4]
Dan Nathan: [00:04:23] Yeah, well, talk to me a little bit about like so this company went public in March of 2017. It’s never been profitable on a GAP basis. And when you think about this and I know that you’re not like a financial analyst or whatever, but you know, they’re going to do a little less than $5 billion in revenue this year. And net income net income is supposed to be a loss of $1.3 billion. So the question is and that’s been ballooning year over year here, so is this company on that sort of revenue base with the reliance on that revenue model, is this a going concern as a standalone? [00:04:56][33.2]
Joe Marchese: [00:04:57] It’s a very big question to say is it a going concern as a standalone? I think I think you and I have talked before about would it make sense for someone like them and Twitter to be together or other? But I would say it’s a going concern as a influential and useful company to tens of millions, hundreds of millions of teens, and that it will grow. And as utility, I do think the question you’re asking is fair, which is can it get there on a direct response advertising model, which is what mobile wants with the Internet? And I think the answer is no on that pure advertising model. But the good thing about being a utility, you know, it’s funny, all these streaming services that were subscription based are now figuring out advertising. I think all these utilities that were advertising based are going to figure out a subscription and they’re going to come the other way. And if you have utility and you provide value to your users, which SNAP does obviously like they were one of the few that was up and engage time with its monthly active users in the last earnings even though it was down and the advertising or at least versus expectations. So that is the going concern. But I actually think it’s a very fair question to say if they continue to try to change, like you don’t try to compete with Google and Facebook and now Amazon on their own turf of knowing who is going to buy a product. I do think that’s a losing battle. [00:06:12][74.4]
Dan Nathan: [00:06:12] Yeah, well, it’s interesting. And the reason I mentioned like, can they go it alone is that, you know, Twitter is obviously a profitable company, similar revenue base. I mean, net income gap basis they’re expected to lose a little bit adjusted. But again, I mean, similar revenue base is similar monthly, daily active users, whatever, like the daily monetizable, active users. I think that’s Twitter’s metric. They’re both in and around that kind of 300 million sort of level here. And so I just go back to it. Putting my kind of stock market hat on is like if Twitter didn’t have this this $43 billion bid from Elon Musk that he’s trying to get out of it. And this company has a $30 billion enterprise value right now. So it’s trading at a big discount to the agreed upon deal. This is obviously going to court. A lot of people think he could be forced to buy this company. If he has to pay $43 billion for Twitter, then SNAP is probably the most mispriced, one of the cheapest media or ad based kind of revenue models that exists on the planet at 18 billion. And I got to tell you, if he’s forced to do that, then I think we get an activist group together and we take this thing private. And I mean that sincerely, because it needs to be retooled and maybe it needs to be retooled out of the public eye, if you will, because investor updates every quarter and all this sort of stuff that goes with it, maybe it’s just not a good environment for them to do what they need to do to kind of really expand on this brand, to your point that has, you know, like this huge influence of hundreds of millions of youth. [00:07:44][91.8]
Joe Marchese: [00:07:44] This is the point that I think is fun to talk about, which is the similarity in both advertiser makeup for Snap and Twitter that they’re a little they have more brand Twitter has even more brand advertisers and less participants in some of the troubles and some of the headwinds they’re facing, competing with Facebook and Google and Amazon. But then you get to the part that’s totally different. Snap and Twitter couldn’t be any more different. Twitter is a media platform. Twitter has influencers, you know, some of them famous, some of them infamous that advertisers sometimes they want to be around, sometimes they don’t want to be like being around the news and it’s edgier. The other thing that Twitter has is advertisers, since the beginning of advertising, have wanted to be around culture creation. Right. That was the whole point with TV, right? You wanted to by being around culture creation and you paid for it in those commercials. And so Twitter has culture creation. And this is this is the funny part about the Elon bid, right, to me, which is if you’re Eon or you’re anybody and you’re looking at Twitter, and one day you’re like, this company shapes the rise and fall of governments like this company has influences, popular culture and what’s funny and what people watch and the watercooler conversation the next day. It does, but you can’t monetize it. And so media companies before Twitter have always had outsized influence in the world and undersized monetization, and it’s always been hard to kind of get people to pay for it. Snap, on the other hand, truly as a utility and not a media company. So the question is, Twitter’s looking at different monetization streams. They’ve got a subscription option now. They have a reduced ad load. I think if you get Twitter blue, you can use the edit button that people have hammering for forever. I think that these advertising based companies are going to start racing towards figuring out how to people value the product or service that we give them, because advertising as an industry isn’t properly valuing their influence because they don’t have an ad product that works like that. [00:09:31][106.7]
Dan Nathan: [00:09:31] So let’s switch gears a little bit, because part of that snap announcement last week when they’re going to be cutting all those jobs that two key executives, Jeremy Gorman and Peter Naylor, both of whom are taking jobs at Netflix, that is per the information here. So talk to me a little bit about this, because this is something you’ve been tracking fairly closely now. You know, Netflix has had a hard time with a deceleration rate post pandemic. They saw this huge pull forward and now they’ve seen this deceleration of user growth. And they’re having a lot more competition as it relates to original content. And they’ve decided that they want to capture some of these nonpaying users who are on family accounts and they want to offer an ad supported model. So they’re going around and they’re picking off some big execs from some big platforms, thoughts here about their success. And I know that they originally they were thinking that this might be an early 2020 thing. It sounds like they’re going to launch this ad supported model as soon as November. [00:10:26][55.1]
Joe Marchese: [00:10:27] Yeah, I mean, they launched the ad supported model by November. It will be a very impressive feat. And I know both Jeremy and Peter and I am very much rooting for Netflix in this space. Let’s talk about what the challenges will be, though. One, live is the cornerstone of brand advertising sports and I think like 18 of the top 20 broadcasts on television now and it’s just going up are sports and that’s the anchor and then you and then you buy a bunch of commercials to go with it. And so that is a big deal. And that’s something Netflix doesn’t have yet. So so if we move past that, the next thing is that you ask yourself the question, is Netflix at the center of culture creation? And it is. So, okay, brands want to be there, but how many impressions are they going to have? How long will commercial breaks be? Which content do they have the rights to put ads into? And then if they don’t have a broad base of advertisers, I’m not talking about the top 100 advertisers. I’m talking they need thousands and thousands of advertisers so that you, Dan, when you’re bingeing a show, don’t see an ad for the 50th time in an hour. That’s the frequency problem. That’s the user experience. All good. Any entrepreneur or founder that comes to the door of human ventures, all good challenges or opportunities. Netflix isn’t starting with a legacy ad model that it has to try to fix. It could start and do something bigger and better, something different. The problem is they have to both do something different and then they have to get a market that is billions and billions of dollars with a lot of momentum behind it. So TV still has it. And the reason TV has it is because if they do leave the television ecosystem, they just go Facebook, Google, they go from above the line to below the line. They’re not willing to do anything different in branding, pricing. And so that is both the challenge and the opportunity Netflix has. And and I think that that’s is going to take a couple of reps to get it right. [00:12:09][102.4]
Dan Nathan: [00:12:09] Well, let’s talk about that live because people have speculated for a very long time some of these big media platforms have bid in the past for sports rights. We’ve seen Twitter do it. Amazon has done it. People think that Apple is going to go big into that, too. And when you think about Netflix as a small company now, I mean, it’s got a $100 billion market cap, which I know sounds kind of big, but it’s down at its lows. A couple months ago was down 76% from its all time highs and now it’s up about 38%. I do think it’s interesting that the stock, even after having a disappointing quarter and guide the stock, kind of held its gains. It’s up now about 38% or so from those lows a couple of months ago. But here’s a company that was widely criticized. A pillar of the bear case in the stock market for Netflix for years was all of the cash that they were burning to create original content. And the whole idea was they’re going to create this huge moat, right? They’re going to have people locked in and they’re never going to cancel their subscription because of this continuous, I guess, flywheel of content. Well, the problem is with all the competitors, they have much deeper pockets when you think of the big platforms, and then the media companies, they obviously pulled their catalogs off. So I guess the question is if they go on a binge to start buying sports rights because they want to put ads in them, it seems like a tough road to hoe. [00:13:30][80.3]
Joe Marchese: [00:13:30] Yeah, it would look that would be a very, very tough road. One I don’t get how so many people think just buying sports rights is that that’s what you do. If you bought the rights to the NFL. You don’t just point a camera at the field and then have it streaming like the sports leagues know that their value is not in showing the game alone. Their value is in. You need to know who the players are. You need stories like you need you need that. You guys, when you watch an NFL game and they give you the back story on the tackle who came up through like Oklahoma State. Storytelling in sports is is so underappreciated. We just we just experience it, right. So getting giving the streaming rights like this is going to happen this year with Amazon where they’re they’re going to produce these games. They’re not just going to take someone else’s stream, and that’s expensive. And then you have to do it right. And the leagues care very much about keeping the value of their IP. I also think this is a great point to the to the snap Twitter conversation we were just having earlier. Every major media company other than Netflix makes most of its money from something besides being a media company. Apple sells phones like we talked about, maybe a bundle. Amazon sells everything. Disney used the IP for parks and cruises, merchandise, etc. So I think that what you have here is you and even the Paramount and NBC, NBC has cable paramount still has a lot of cable revenue from bundles. So you have this environment where media companies figure out how to make money and monetize in other ways, or they get bought by companies that do. Netflix of the loan player that is truly global in production. It has made the go at doing volume and this advertising tier, if they do it differently, is an opportunity. But. But that’s the challenge. [00:15:10][99.6]
Dan Nathan: [00:15:11] Yea. All right. Well, you just brought up Apple. There’s an article in the F.T. today, I think Monday that was really pretty interesting. Apple plans to double its digital advertising business workforce. Now, Gavin Baker of Atrios Management, quote, tweeted This ad I thought was really interesting. He said, The most interesting part about this story was that they have $5 billion of revenue with only 250 people on the team. So they’re talking about building that team. I thought there was a couple of other really interesting things in this article, talking about listen and they have a billion Apple iPhone users, they have 1.8 billion iOS devices out there. When you think about who owns the digital advertising space, they quoted at $400 billion in 2021. So it’s Google at about 210 and it’s Facebook at about 115, and then everyone else is the other one. We’ll talk about Amazon in a minute because they’re growing pretty fast. Also, what are your thoughts about a company like this that is actually been really careful to diverge too much away from this hardware strategy? Obviously, services is a really important part of the Apple story. It’s a much higher margin business. But here’s a company that’s defied all logic when it comes to hardware because they have gross margins now on their entire business that are about 40% or so, and they literally have like 90% of the gross margin in hardware. So if you want to get a bigger multiple, even on that really good margin on their hardware, the faster they can grow in services and then advertising is better the multiple. So your issue thoughts about Apple’s ability to kind of get in there and really grow this to I don’t know, 30 billion, 40 billion, 50 billion in the next five years or so. [00:16:50][99.3]
Joe Marchese: [00:16:50] I wouldn’t doubt that they can get there. I mean, I’d put it back to you as someone who analyzes companies like this. When you say doubling a staff of that size in a company that big, as big as Apple is, it’s still nothing in the grand scheme of Apple. Right. So I think that’s a good signal to the street saying we’re doubling this team means we’re taking this seriously. It’s a high margin business, but I think that they care a lot about privacy, or at least that’s what they’re putting into the market. That’s hey, everything we’ve done that’s defanged by unintended. They’re some of the advertising businesses for privacy. And we shouldn’t discuss that because I actually I have a pretty strong thoughts on that. [00:17:24][34.3]
Dan Nathan: [00:17:25] Well, let’s do it. I mean, so it was the app tracking transparency. And in that article, I think it was really interesting. Our mutual friend David Steinberg, CEO of Zeta Global, he was quoted as saying that this was Machiavellian and a brilliant and brilliant by adopting privacy rules that forced rivals to rebuild their ad infrastructure simultaneously, creating an opening for itself to fill the void. They could build it out their advertising business dramatically. And the air cover is they are protecting the consumer’s privacy. So thoughts on that, I’d love to get your take in general on the whole move. [00:17:57][32.6]
Joe Marchese: [00:17:58] I mean, I so I kind of agree with him, but but I have a more friendly view of of Apple doing this and that. I mean, I kind of somewhat loudly said, even when I was in the advertising business, I wish we could apply ad blockers to everybody’s computer. I wish everybody going to start from scratch because the ad industry is so polluted. [00:18:18][20.1]
Dan Nathan: [00:18:18] Right. Well, let’s take a step back. So about a year, what, a year and a half ago, Apple and they started advertising all over TV about this, about their privacy. And they created this, I guess it’s a kind of a new was an apple is if you will it was app tracking transparency. So every app that’s in the iOS app store, basically there needs to be an opt in for these companies to track your data. And so what did we see after that? It took a few quarters, but companies like SNAP, Twitter to a lesser degree, but Facebook got absolutely nailed. So just describe what happened there. Why did it hit snap and Facebook’s so hard? [00:18:54][35.3]
Joe Marchese: [00:18:54] There’s a couple of views of it. One is that if advertisers have been taught by Facebook and Google, mostly, mostly Google, then then Facebook and now Amazon, if you can’t measure it, don’t buy it. And all of these companies that were chasing below line needed to have needed to have a close loop and say, oh, look, see that that ad that you served here, the person bought it six months later, two months later, one week later to pick the time frame. But here’s where I diverge from the narrative that’s out there that like this really hurt ad effectiveness. This just hurt the ability to get credit for advertising is working or not working. Right? It didn’t hurt. The ads could still be served in a lot of different ways. Yes. You couldn’t follow someone and then serve the ad to them. But but I want us to think through something. This is the part that’s always bothered me. If billions of dollars of advertising effectiveness got wiped out, you have to believe, then, that human beings who were going to do one thing would have done something different if they could have been targeted with an ad that consumer spending had to shift. Like during that period when all that advertising went away, did consumer spending go down in aggregate? I mean, not that I saw in any meaningful charts. What we’re saying so you have to believe one of three things that the ad was just getting place and then they could get credit for it because there’s enough people on SNAP, there’s enough people on Twitter, there’s enough people on Facebook that you can figure out who’s going to buy a Ford or who’s going to buy it, who’s going to do. Or you can convince someone who wasn’t going to spend any money to then now download this app and spend 599 on the thing, which does happen some of the time but not all of the time. And then whether that’s good or bad, that people should be doing that. And so I think that there’s a difference between performance advertising went away versus people weren’t able to claim as much credit for all the same purchases consumers were making. And it’s somewhere in between. It’s not one or the other. And so I’m a fan of this happening so that ad models can get a little more honest about how they work. I mean, I don’t know about you, but I don’t like to see a McRib ad on Twitter and then zombie walk into a McDonald’s. Like that’s just not what. [00:20:51][117.1]
Dan Nathan: [00:20:52] Twitter ads don’t work. But I think one of the reasons why people actually don’t mind Instagram ads is they’re doing a really good job serving things to you that they basically the algo has trained that right to serve that ad because I actually do zombie buy things on Instagram because it’s literally feel like it’s tapped into my brain. But I will also tell you this and you probably see this as a power user of Twitter and maybe it’s Twitter blue too. I never see any ads. I see some promoted tweets, but I never see real ads. And so they dropped the ball. They had the opportunity to do micropayments and e-commerce and all that sort of thing. So, I mean, Twitter has dropped every ball imaginable on this front. [00:21:32][40.2]
Joe Marchese: [00:21:32] Yes, I’m going to go a big yes. But here, which is I mean, I still see some ads. I still think that it’s highly effective placement because you have attention. I think the problem is you’re missing two things. So let’s say Google has your intent and Facebook has your interest. Really, Instagram has your interest, but you’re like your commercial interest, whereas Twitter has this is what I find funny, right? This is what I find interesting for the news. This is what makes me you know, it makes me angry. None of those things are good indicators of, hey, time to go buy something. So just because they could have all the data in the world on you, Dan, and you’re reading a Twitter stream because there’s something happening in a country somewhere and there’s flooding in Pakistan, you’re like, Well, now’s not a time to like serve Alexa’s ad. And so their product enhancement does come from thinking about different ad formats. But there is great time to serve an ad when we’re all talking about the Oscars or we’re all talking about an NBA game, we’re all time. And that is what Twitter focuses on. It’s just the mechanism for getting advertisers to pay enough. This is, again, back to the same thing, cultural relevancy. [00:22:33][60.3]
Dan Nathan: [00:22:34] Can I ask you I never asked you this question before. So in the last I want to call it 20, 30 minutes of the Oscars. And I’m just thinking about this because you brought it up and you’re wearing a Tequila Komos T-shirt right now. You guys had an ad. It was either right before or right after the slap. What did that ad do for your brand awareness? Because you happen to be in the half an hour that everybody was focused on as they were gearing up towards the biggest awards and then the biggest unscripted or maybe scripted, I don’t know, event ever on that stage. Was that like a monumental event for you? And you’re somebody who knows how to evaluate the relevancy of an ad? [00:23:12][38.3]
Joe Marchese: [00:23:12] I’ll put it this way. My first answer is, I don’t know what it really did for the brand overall. I mean, I know it got seen and I know it’s very valuable. But like this is the same thing I think about Out of Home. Like I’m on the board of Clear Channel and I just love Billboard and out of home industry. Right. And the truth is, you don’t know how effective an ad is in a short period of time, because who are you really marketing to like? Are you marketing to consumers because you think people are just going to go buy that the next time they see Komos? Or are you marketing to the buyer at Four Seasons is like, Oh, everyone who is watching the Oscars is now going to expect that I have this at my bar, or if you go down the list of who you’re talking to with it. But then what I think is amazing about big moments like the Oscars, sports, like the NFL and out-of-home has this very similar thing. They had this bit of meta information in the ad that’s not actually in the ad. So you’ve never seen a billboard that says, we have a billboard, so we must be a serious company. So you can you can take us seriously, right? But every time you see a billboard, you’re like, oh, that must be a serious company. And you saw all those digital, all the D to C advertising companies that we worked with or that we’ve even seen in the New York ecosystem. There’s been a lot of them. Once they move to like subway advertising billboards because direct response advertising is a treadmill that you can’t get off if you don’t build a brand. Building a brand requires that you market to groups of people, not just people buying your product. And so going back to the Oscars or buying a billboard or I happen to love trucks because they’re on wheels with advertising, there’s just something to advertising like that that delivers a message that isn’t even in your creative. And that is incredibly powerful. The thing that tech companies are uncomfortable with. And it’s because they’ve been taught by Facebook, Google and Amazon. If you can’t measure it, you don’t have an immediate feedback loop, don’t buy it. Well, that means that everything that’s hard to measure is probably getting wildly undervalued. Like incredibly undervalued. [00:25:02][109.1]
Dan Nathan: [00:25:02] Well, it’s interesting what I think about that commercial in particular, though, I can only imagine how many people went and just googled tequila Komos. Yeah, I mean. Right. And so the hits that you had, whether it be on your site or your socials, was probably something that just from a brand awareness stuff, made a lot of sense. Just real quickly, on the ATT, though, the app tracking, what was the effect on YouTube, for instance? Obviously, the largest kind of property, if you will. It’s really the only social property that exists of all the Google platforms. Just curious, your thoughts like because it seems like they were kind of unscathed a little bit too. [00:25:35][32.8]
Joe Marchese: [00:25:35] I think they have so much first party data that if you’re searching on Google, you’re searching on their apps, they have so much information on their own, in their ecosystem, I would say that they would be the least affected by that. And I mean, everything seems to have that way. I don’t know internally how things moved around. They could have lost some advertisers who were trying to track a certain way and picked up others, but like they could fill it up. The most interesting thing about YouTube doesn’t get enough attention is that big insights in this world where Disney Plus and Netflix and Paramount and go down the list of giant media companies are going. The number one streaming app on the wall is actually YouTube and your TV at home. And that’s the number one ad supported streaming app. It is the most watched time. It’s weird to have an 800 pound gorilla that nobody talks about in an ad ecosystem because everyone’s thinking about how is Netflix and Amazon and Disney plus going to do. So I think that that’s very interesting. I think the the question I’ve always had is long tail advertising. It’s very hard to produce a 32nd spot that’s good. It’s very hard to produce. Making a search ad is easy. Making a banner ad is a little less easy, but still easy enough. Making a commercial that’s good enough to put in the middle of Stranger Things, good enough to interrupt Game of Thrones. That’s pretty hard to not be jarring. And so that shrinks your universe of advertisers significantly. [00:26:55][79.3]
Dan Nathan: [00:26:55] So Netflix was talking about doing a lot of product placement or that was some of the early thoughts that how they might kind of do that. Is that something that you think is interesting? [00:27:02][6.4]
Joe Marchese: [00:27:02] I do not. I love product placement from a brand perspective, from a publisher and creative perspective. You know, it’s hard enough to make a show that’s good to begin with, like to make a show that’s good and then have product placement. I mean, if you have if you’ve worked with creators and I did this at Fox, they’ll work with you to a point to bring the Prius into whatever show. ABC But there’s a limit. And then also your problem is what do you pay for that? How long is the show going to run? Do you know how it’s going to rate? You know who’s going to watch it? So product placement, it’s a nice thing. It’s like a cherry on top, but it is in no way going to be a driver of massive advertising revenue. [00:27:35][32.9]
Dan Nathan: [00:28:21] Current Ad. Masterworks Ad. Taboola Ad. So the pie is kind of growing and digital. And I don’t want to I want to kind of broaden this out a little bit. And I wanted to hit a lot of this just because we started with SNAP. But, you know, one of the things in Amazon’s quarter in Q2 that people were kind of pretty excited about as they did nearly $9 billion in ad revenue, that was up 18% year over year, a higher growth rate than any of the major competitors, though, obviously coming off a smaller base. We just said that Google is north of 200 billion in annual revenue, Facebook over 100 billion. So now you think of Amazon doing 9 billion a quarter. This is going to be a $50 billion business for them pretty soon. We just talked about Apple and you think about their installed base of iOS devices in the App Store and all the services. I mean, this is going to be a $50 billion business probably in five years. So the two next hundred dollars Billion annual ad revenue companies are going to be companies that do hundreds of billions of dollars in other revenue. So how does that change the landscape? So you have these two behemoths, then you have everyone else, you have the Snap’s and the Twitters and everything like that. Doesn’t that change the game? [00:31:08][166.8]
Joe Marchese: [00:31:08] It does. And it Amazon’s different. Amazon’s the biggest one that actually is I don’t want to call it a threat because that would be speaking it to high, but like is really meaningful to Google’s business or threatening to some portion of Google’s business because Google gets intent. I type into the Google search box, you know, these certain headphones or those certain headphones and then and then the ads can then Amazon when you go in and type in Amazon absolutely knows your shopping intent and what performance advertising becomes first from Google, second from Amazon, and then then from Facebook. Save your interest. Maybe that maybe they do some discovery. But like we all talk about how the credit card companies, you know, a lot of the fintech companies that we know out there and a lot of the talk in kind of the crypto or defi world is that, you know, that 2% or 3% or whatever the credit card fees are on is a tax on transactions. But for another debate, that tax on transactions is for safety and customer service and everything else. But advertising performance advertising is a tax on all e-commerce basically that you were searching for Nike’s and then you click through the ad to buy the thing it’s more than 2% of the price of the Nike was probably what they’re paying for those ads and so Amazon same way and more and more you see that on Amazon and Google if they’re the front door into what you’re doing, they then can decide what tax to take and someone else wants to pay more than they get that spot. Ones that are the brand side of the world that we talked about on Snap and Twitter and others, they’re going to have to figure out, one, if they can convince the ad world, hey, you still need to build the brand over time. You don’t want to be just paying for that last attribution right at the end. And if we can’t, I struggle to see how this all plays out, where brands are fully commoditized. Like there was a point for every we talked about this before, but there’s a point, I don’t know, six months ago, maybe a little further, that the richest people on planet Earth were Jeff Bezos and Bernard Arnault. Jeff Bezos says, Your margin is my opportunity. And Bernard Arnault makes the best brands in the world with the highest margin. And the middle was just gone. And I kind of think about that at a micro level for every startup I’m at. Which one are you? You’re not saying you have to make luxury goods, but like a Dior or Louis Vuitton. But you do have to decide is your brand and the quality of product? Do you stand by? And that’s the margin you’re going to make and people come to you? Or is there a risk that you’ll be commoditize? Because I think that a lot of what’s happened with this D2C and even with the app from Apple was that it just kind of showed who was just buying conversions over and over again. That was not a sustainable business model to begin with. And I ask a lot of small businesses, a lot of startups like what is your plan when you cap out on your direct response advertising? Because the largest expense for every VC backed company besides people, the most visible companies is the money they spend on Facebook, Google, Amazon, and that is growing. [00:33:52][164.1]
Dan Nathan: [00:33:53] So let’s talk about that for a second because again, you have many portfolio companies that you advise similar sort of issues. You also speak to a lot of people. You just said you’re on the board of Clear Channel, not asking you what you guys are seeing from that. But at the end of the day, I mean, it just seems like a lot of tech companies are bracing for a recession. We’re in a bit of a market downturn, downward pressure on valuation, on margins, on a whole host of sorts of things. And so one of the easiest things that you can do is obviously cut marketing spend. We’re seeing people also cut jobs. So I’m curious how you think about that, if that’s one of the biggest expenses, if you’re forecasting a bit of a recession in the future and you don’t have great visibility about your business, cutting ad spend seems like the logical course. [00:34:37][44.8]
Joe Marchese: [00:34:38] Yeah, it is. I also think cutting your brand advertising spend, the so-called above the line even goes first because you think that in order to maintain sales, you just you do the most effective stuff that’s closest to the sale. The problem is, like I said, that’s a treadmill that you can’t get off of. And so then you have to keep spending that money. It’s funny advertising as a whole market, like the billions and billions of dollars in television and the tens of billions of dollars that flowed through hundreds through the platforms is a marketplace. So if some people are pulling back, then the people who are still spending it gets cheaper for. And so the people with a successful product we call NBC World Product Market fit right. I guess just means something people actually want to spend money on or enjoy using are massively advantaged when there isn’t money sloshing around the ad because like if every week back company there’s tens of billions of dollars in the market all going against Facebook and Amazon and Google ads to try to acquire users and get app downloads. Even if your product is great, it’s hard to reach people now in a market where that money isn’t sloshing around, really good products can rise to the top. And the company we haven’t talked about, which is astonishing this late into a conversation about the ad market is TikTok and it’s really TikTok that’s eating everything like mindshare from consumers, but also mindshare from media companies. The companies think I need to have my TikTok presence and then mindshare from the advertisers. The difference a TikTok is we don’t really see their ad products in the same way. There’s a lot of influencer marketing, there’s a lot of things that are still figuring out how to price. But again, same theme. It is at the center of culture creation. So brands want to be there, but they need to figure out how to attach to it and how do they value it. [00:36:18][100.0]
Dan Nathan: [00:36:18] So a lot of those influencers, though, who are probably getting paid to be on TikTok are kind of annoyed. Kim Kardashian had that tweet, I think it was her Instagram post about Instagram copying with reels, what’s going on on TikTok. And when you think about it again, I think about what’s going on there and I think there’s a very strong likelihood that TikTok gets banned in the U.S. in the not so distant future, especially when you see some of the stuff that’s gone on. There was this export band of advanced A.I. chips for U.S. chip companies to China. I think it’s just going to be a tit for tat. I think it’s going to keep going back and forth. If you think about most of our digital companies do not have a footprint in China, well, what’s one that we can easily? I mean, the Trump administration is probably one of the only things I probably agreed with them about was that when he was trying to ban TikTok here, but the way in which they were going about it, he was trying to put it in the hands of his pal Larry Ellison at a sweetheart deal. That was never going to happen here. So I actually think and this goes back to snap in a way, I think if TikTok were banned here in the U.S., I think snap stock doubles kind of immediately. And so I look at this period, I think it’s been, you know, the sort of disconnect that we’ve seen in the tech markets, at least in the public markets so far, is reminiscent of what happened with tech stocks back in of the highs in 2000 to the lows in ’02. And just to be really clear, it took the Nasdaq more than 12 years to get back to those highs from March of 2000. And it’s also very similar, but obviously very different by industry. And what happened in the financial crisis with financial or energy companies. There has been some generational disconnects, you know what I mean? That have happened in the in the public markets. Now, that doesn’t mean the stock that goes down 75, 80% can’t get cut in half again, especially in a period where we just don’t know what the visibility looks like going forward here, how bad of an economic situation we’re going to be in. But I find some of these things that are down 80% really interesting from a brand value standpoint. And I’m curious, again, this goes back to let’s just say Elon and I suspect he gets out of buying Twitter and Twitter goes directly. [00:38:23][124.9]
Joe Marchese: [00:38:24] What’s your bet over under? [00:38:25][0.8]
Dan Nathan: [00:38:25] If this whistleblower that came out a week or two ago hadn’t come out, it really looked like the court in Delaware was moving towards making him close on the deal. He had agreed to close on it. I also think, though, that tech in general and a lot of ad supported models could be in for a massive reckoning if it is proven that, you know, Twitter has been fudging a lot of these bot numbers and stuff like that. It’s going to be. [00:38:48][22.3]
Joe Marchese: [00:38:48] Hard to stop there on this. This is what everyone’s got wrong, right? It’s not bots. This is the thing. We’ve created an image and people who don’t don’t really dig into this world too much of like bots like or that one person could run thousands of accounts. They’re more like what they’d call sock puppet accounts, right? And it’s a real person signing up for a real account. Doing real thing. Right. Or phone firms, places, right? Not not bots. Right. So. So, yes. And then that means Twitter wasn’t lying or fudging anything. They look. [00:39:13][25.3]
Dan Nathan: [00:39:14] They know. But they but they know. And so so, for instance, if you if you were looking at that business and you would basically you see that behavior, they know that it’s bullshit, they know it’s a form. And I guess bot is just it’s just an all encompassing term of not a real person, you know. [00:39:28][14.2]
Joe Marchese: [00:39:28] But I think we’ve always had this idea of like there’s a certain amount of waste built in. We’ve made the decision advertisers that the most culpable group in this whole thing is the advertisers. Advertising broke the Internet, right? Because it created perverse incentives. It said, just give me more impressions, do this. And that’s why performance advertising became all the rage in Internet advertising, going like, I have no idea what you’re selling me as real. It sounds shady. Like, I have no idea if anyone’s seeing my ad, I’ll just pay if someone ends up buying my shit. That was what happened. And that screwed up the internet because then places that were beautiful places to have. Brands where they say, oh, I can put your Lexus ad here on the New York Times, but they’re not going to buy it tomorrow. Well, I don’t really know how to value that. So I’ll just I’ll just keep buying performance advertising. And so it screws the good publishers. But I think Twitter truly does culture create. And like all of that noise is it is just noise, but who cares? I think you said if TikTok got banned, which I don’t think it will, I think it would be more likely that it gets cordoned off to the U.S. somehow not maybe not in like a sweetheart deal, but it gets it becomes a US based business with the financial incentive still going back to its parent company, but with full management here. But if it did, it wouldn’t be SNAP would go up significantly, but it would be it would be Facebook and Instagram that would breed the biggest sigh of relief, like it’d be Facebook and Instagram that has the attention back. But that Kardashian post. Far be it for me to know what’s happening inside of the head of Kim Kardashian, but was really not about you know I want to see friends only do that on Instagram. You can become a media empire. Like Sam Lessin had a great post on the information about this a couple of months ago, maybe even longer than that. The pandemic really squeezed time. But he had this post talking about how like they’re the new Disney, right? They’ve created IP. They’ve got fans that can launch products off of it. Well, TikTok. Anybody can be a star on any given day, and that’s a lot better to have like any given day, pick someone who does the most creative thing that day and then they’re not as expensive as talent to keep. And so that changes everything when you’ve democratized entertainment for people. [00:41:28][119.3]
Dan Nathan: [00:41:28] This is purely anecdotal, though, but during the pandemic and I had two teenage girls, as you know, they were creating TikToks that were following TikTok dances. This was an activity, and they never do anymore. They never, ever do. And I think it’s really interesting that two years later, now they’ve gone from being a participant in it, trying to actually do their own content to just consuming. And that’s not a great place to be because when you look at people just kind of power search through reels on Instagram or whatever, it’s not an engaged behavior, in my opinion. [00:41:59][31.4]
Joe Marchese: [00:42:00] It has switched to become I mean, I would have to see the numbers ten to know exactly. And I don’t think we’re going to be given the the numbers from TicTok, but I think it feels like it’s become slightly less participatory but is still growing at breakneck speeds in terms of the amount of consumption that lead. So YouTube has that on mobile, but then also has it on connected televisions on the TV in your living room? No, Snapchat was going to make that transition to the TV somehow with all their publisher Partnership TikTok, what wants to do it and no one else has that. Facebook wanted to do it like everyone tried to have video on TV in your home and they just have it. [00:42:36][35.8]
Dan Nathan: [00:42:36] Yeah, well, here’s the thing. So let’s kind of reset this whole conversation a little bit, because I want to hit two more things before we get out of here. It seems like as it relates to the app tracking obviously works out very well for Apple here. And I thought this was interesting because I mentioned Gavin Baker when I saw that article from the AP and I tweeted at him David Steinberg’s response, and he said, yes, but utter dereliction of duty by regulators most anti-competitive behavior I’ve witnessed from any tech company in the last 22 years. We’re saying 22 years. That means Microsoft, right? Prior to that blatant abuse of market power to the disadvantage of small, medium businesses. Whilst, I never use that to use that word whilst, wow. Whilst simultaneously breathtakingly hypocritical. So I think you would agree with that comment. I think that’s pretty interesting. [00:43:24][48.1]
Joe Marchese: [00:43:24] No, I mean, yes, I would like to see the small and medium businesses that weren’t you know, a lot of the ones that really suffered from the app tracking transparency like is like the affiliate marketers who were selling dropped good ship from China. They just kind of QVC like meets a dumpster, right? [00:43:42][17.8]
Dan Nathan: [00:43:43] Like basically basically it’s Alibaba. Yeah. [00:43:45][2.4]
Joe Marchese: [00:43:46] Yeah. I mean, like it was and then and then part two of that is like if the people that it’s really just advantaging in a totally noncompetitive behavior or sorry, anti-competitive behavior are Google and Facebook. I mean, are we really saying that that’s like we’re trying here? So if it’s Google and Facebook, let them all fight. They can fight with Apple on their own. If it’s if it really is the small business I’d really like to see. Like because like a lot of the small businesses, I think I think SMB is get taken advantage of all local gets taken advantage of. They overspend on performance advertising because it’s very hard to be a sophisticated buyer of performance advertising at that level. And then the ones who are sophisticated are gaming the consumer. So I don’t know that I’m too worried about it. [00:44:25][39.6]
Dan Nathan: [00:44:25] All right. Well, there you go. I mean, so but to me, this just is positive, if you think about it, for Apple’s stock, if you think the ability to grow a business, the way that they’ve grown services, the way they’ve grown airpods. [00:44:36][10.5]
Joe Marchese: [00:44:36] It is. But I think I think the bigger positive for Apple’s stock over the long term is if consumers like the Apple brand and if this there’s something that plays with consumers and it also advantages their ad business, well, even better. But but if they say to consumers over the long term, like, you want Apple, that’s the most valuable thing in the world to them. [00:44:53][17.1]
Dan Nathan: [00:44:53] Yeah. And so if we’re just going to kind of think about this from a stock market perspective, I think it’s neutral, the positive for Apple. I think it’s negative for the smaller players. We just named two 5 billion annually that are probably growing less than 20% a year. That’s now in Twitter. It’s probably very negative for Facebook, which is gone negative as far as growth and really putting all their eggs in this whatever this metaverse basket is. And it’s probably Google just keeps winning because that’s what they do here. All right. I wanted to hit one thing here, you know, so I made this joke to you that most people who have an iPhone in their pocket every year around this time, they kind of get geeked up and they’re hoping for something that’s not iterative. Right. Some sort of new iPhone, that’s really exciting. You don’t seem to give a shit because you’re the green guy in all of our imessages here. But, you know, one of the one of the things that people are speculating, they’ve been talking about this for a while is the idea of basically creating a bundle and putting your hardware in a monthly subscription sort of fee. And, you know, I think that’s really interesting. I’m on the iPhone upgrade program right now. You get so if they could just make it just so simple for everybody, they give you a new phone every year, you’re paying a monthly fee, you’re getting a bunch other stuff, you’re getting Apple plus the TV stuff in there. You get a few other things and you don’t even think about it. I mean, you’re there for life and most iOS users are already there for life. So I think that’ll be probably the most interesting thing that comes out of this Apple meeting this week. And I’m just curious how you think about that as somebody who’s not in this ecosystem. [00:46:22][89.5]
Joe Marchese: [00:46:23] Yeah, I mean I mean, I am I’m speaking on my MacBook right now. Like like I actually think that’s the most anti-competitive behavior from Apple is the fact that they make Android users outcasts. And I’m not in the family text message with Kristi and the family because like I don’t have an iPhone, although I think I’m okay on that one for now and then. But Krisit might she might be listening or him. But what was that? There’s a joke that like the only two ways to make money bundling and unbundling, right? Like, you know, that was an old meme about like Craigslist being unbundled and all became giant Internet businesses or like our friend Rich Greenfield, who constantly was like, good luck, bundle, good luck, bundle that bundle. And now the bundles are breaking. And like Netflix and Disney and everyone’s looking for what’s the new bundle going to be? And here’s Apple looking for the new bundle is going to be. I think it’s just hard to be a definitive bundle when you’re part of two or three like. So it was hard for AT&T to make a bundle because they had Verizon and T-Mobile and like things like content wanted to live everywhere. [00:47:18][54.8]
Dan Nathan: [00:47:19] But it’s funny, Joe, you know, Apple went iPhones went from this luxury good to now anybody can have it if you’re thinking about it as a utility and a monthly charge. And then if you’re getting a lot of other value associated with it, I think that is probably the selling point. That’s how they actually grow share in a world where Android phones are 80% globally of market share. And the last thing I’ll just say, and you and I have definitely talked about this before, I mean, a pillar of the bear case for Amazon was will all the spend or how much money they were losing in the years after they launched Amazon Prime, right. Free two day shipping and all the other stuff that went. And now they know after all of these years of data, probably 15 years, that the prime user spends like two X the non-prime or more than that. [00:48:03][44.9]
Joe Marchese: [00:48:04] But Amazon has so many other things for you to buy. Okay, I’m already a prime member, so I might as well get my toothpaste here. I might as well. I might as well orders and toilet paper. I might as well look for sneakers here first before I look anywhere else. Where’s Apple? They’re going to need that. You don’t have impulse buying happening left and right, so I wouldn’t doubt them for a second in terms of great, we’re locking into an ecosystem, but everyone’s already kind of locked into the ecosystem. Music purchases has gone away. I’ll be interested to see how music kind of comes back. Apple TV is the sleeper. I think I was shocked to see a chart of all the TV operating systems and that Apple hasn’t grown its share in the market. Like even with Roku kind of being on TVs and Android and Amazon having their own, Apple hasn’t grown at all, but they are the best TV operating system experience. I mean, I’d be it’d be hard to argue against their TV operating system. You have prime and YouTube TV, and if that is the gateway, whoever controls the TV operating system is going to have a lot to say about what the new ad model is for the world, because they become your home operating system. And that that’s that’s the most interesting battle to watch. [00:49:08][63.7]
Dan Nathan: [00:49:08] Well, it’s interesting. It seems like that was kind of Steve Jobs last wish as it related to TV. It doesn’t sound like he ever had designs about making the hardware, but he really wanted to control how brands get into. [00:49:19][11.4]
Joe Marchese: [00:49:20] Maybe that’s it. Maybe we stumbled upon it here. Maybe this is the secret. Okay, we’re to the Apple Bundle. Okay. To sign up for the Apple bundle. One part of that is your TV experience will be optimized if you also use Apple on your television. And then if they if they start to pick up share in TV operating systems significantly like that, I would say. [00:49:38][18.0]
Dan Nathan: [00:49:39] It’s also about the car. And so when you think about what they’re doing as far as automotive, it really is about an operating system and it’s about moving towards an autonomous vehicle where you’d like people sitting in that car, will use that operating system and they will consume content and they will engage with that. [00:49:55][16.0]
Joe Marchese: [00:49:55] Yeah, but a bit of a car the replacement cycles are. Longer and I. [00:50:00][5.0]
Dan Nathan: [00:50:01] No no they’re not making the hardware again. It’s just the appeal you think you have in the car. That’s what I mean. It’s so similar to the home and the car. All right, listen, let let let’s let’s do one last thing here, because this is very important to you. It’s near and dear to my liver. I mean, my heart. So tequila Komos, the company that you founded, how long ago With with Richard Betts? [00:50:21][19.9]
Joe Marchese: [00:50:21] Yeah. Richard and I shook hands four years ago, I think about. And we said I really I’d say I wanted to support him in kind of his creation. [00:50:30][8.3]
Dan Nathan: [00:50:30] Yeah. And it is a delicious tequila. Our listeners have gotten to hear a lot about it. Hopefully you guys go out and taste it yourself here. But talk to me a little bit about this announcement here, because it kind of came out of nowhere, at least for for some of us. I mean, I am just full disclosure, an investor and a huge supporter of the product and the brand here. But you guys just had a significant strategic investment in tequila Komos [00:50:53][22.9]
Joe Marchese: [00:50:54] Yeah, it was a Gallo Gallo family which are iconic. I mean, they are the largest supplier in the US on the wine side, the fastest growing spirits businesses. They did a strategic investment, a minority investment. And really it’s just a testament to what Richard’s created. I mean, Richard was a former master, Somalia, one of very few people to pass on his first test. And he’s the first person to quit the court of master sommelier, renounce it. But he just wanted to take ground it. He’d been making tequila for 20 years and mezcal and take this idea of winemaking and care and put it into tequila. So it just made it totally different than anything else. And that was something I was I was pretty excited to support. And this this announcement with Gallo is I mean, it’s a it’s a very big deal like this has become the fastest growing luxury tequila brand in the world right now. Like globally, it’s like we were just over in Europe. [00:51:41][47.8]
Dan Nathan: [00:51:42] So that’s by volume you mean, right? And then from a from a valuation standpoint, as a as an investor, I mean, you guys have also got a 0 to 100 probably faster than any spirits brand ever. [00:51:52][10.3]
Joe Marchese: [00:51:52] I don’t know about ever these I mean, some of these spirits brands that are celebrity back can go very quickly up. It’s just a question of like like our goal is to create a generational brands. Like I’m gonna be going out to a bar someplace 20 years from now and there’s the bottle in back. And, and I mean, it’s, it’s just, it’s just an iconic brand and taste that is created. So, so it really is thinking about like, how does it build the scale? And, you know, it’s with human ventures. We do a lot in future of of media and attention, a future of work, future of wellness. But like one of the big things we think a lot about our is hospitality and how people are going to connect with each other like in real life, like how do people get together? How do they laugh, cry? And so backing Richard was really just about backing a great human who is a master craftsman. And having it turn into this has been been a really special thing. [00:52:38][45.7]
Dan Nathan: [00:52:38] Well, it’s been special. I’ve gotten to enjoy your guys, company, your product, and I’m along for the ride. So it’s been a lot of fun so far. I can’t wait to see what happens next. Joe Marchese I really appreciate you stopping by having this convo. I learned a lot. And you know, one of the things I’ll just say this and I’d love to hear your thought on this, it’s just like, think about all those companies that we just talked about that are considered kind of old line tech ones. Now, if you think about it, obviously Google was built on an ad based model, but Apple certainly wasn’t Amazon certainly wasn’t, that we can go into a whole handful of other names. And, you know, some of the apps that let’s say we are our kids use most frequently are some of the like the kind of most inconsequential is as far as actual market share and market cap and all that sort of stuff. So I really appreciate you coming in here and dropping a little knowledge on us about all those things. [00:53:28][50.0]
Joe Marchese: [00:53:28] Yeah, thank you very much. I love the conversation. [00:53:30][2.0]
Dan Nathan: [00:53:31] All right, Joe, thanks for all your support. We appreciate it. I’ll talk to you soon. Thanks again to our presenting sponsor Current and our supporters Masterworks and Taboola for bringing you this episode of okay Computer. If you like what you heard, make sure you hit, follow and leave us a review. It helps people find our show and we want to hear from you. Email us at contact at risk reversal dot com follow and connect with us on Twitter at okay computer pod. We’ll see you next time. [00:53:31][0.0]
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