WORKWEEK

Advertising has caught investor’s attention 

It’s not big new news that advertising-driven businesses have had really crappy multiples on the public markets over the past few years. Did you know you can buy Buzzfeed today for $60M? Yes, just $60M for a business that does $300M+ in revenue. 

Buzzfeed’s horrible multiple is a reflection of two common investor beliefs: 1) they can’t make a profit despite hundreds of millions in revenue and 2) advertising as a revenue source isn’t valuable because of the lack of scale. 

But this week, all of a sudden, something changed in the headlines. Advertising is being embraced. 

Retail media and the advertising tax

When I had Ben Faw on my podcast almost a year ago, we talked about the rise of retail media. He predicted that the next billion dollar media company would be a retailer. 

At the time, it made sense to look at the brick and mortar retailers with huge footprints. Brands like Albertson’s, Home Depot, and others. 

This week, we found the brand doing it better than most: Instacart.

As the food delivery app prepares to go public, they released their S-1. 

Advertising is now 30%+ of the business with more than $750M in annual revenue. 

For context, CNN did $312M in its first 4 months of 2023, or a $930M run rate. 

So Instacart, the food delivery app that is used by yuppies that live in Austin, NYC, and SF is almost as big as CNN in terms of advertising revenue. That wasn’t on my 2023 bingo card.

But I should have it seen it coming.

Marketplaces are growing their advertising revenue at an incredible clip. 

Amazon is now a $40B a year advertising business and makes more profit from advertising than they do their cloud business. 

Uber will do more than $500M in advertising in 2023. 

These marketplace businesses make perfect homes for advertising. 

Each has a high-intent demand side with large amounts of data on users. Due to the price of these marketplaces, the audiences are typically high net-worth and hard to reach. Dream places for marketers to advertise.

The advertising tax 

And what these retailers are doing is using advertising to create an even better service for the supply side of their business. 

Want to know how Amazon pays for all the perks of Prime that are clearly not covered by your $10/month? Advertising. 

Look for more and more companies that have your attention to start to monetize with advertising to supplement their investment into their core benefit. 

Will users care?

I think we all hate the dumb ads on Amazon that make us scroll halfway down the page. But you know what we don’t hate? 

We don’t hate running out of toilet paper in the morning and then arriving home from a workday to a new package sitting on the doorstep. 

These incredible services that made consumers be amazed they were possible are going to sustain because of advertising. And investors appear to love it. It strengthens the flywheel. It makes the moat bigger for these businesses. 

On top of that the US digital advertising may be one of the strongest growing sectors in the US the last 20 years. 

And US digital advertising might be the best you can make in terms of sector growth. Since 2003, there’s been 1 negative year of growth and every other year had at least 10% growth, and has a CAGR of 43% over 20 years.

Incredible market growth and a perfect opportunity for more players than Meta and Google. 

How someone screws this up 

The reality is that this playbook is going to be a shiny new slide in every marketplace startup deck. Investors will be all about it. Board members will embrace the idea.

Let me tell you, it’s much harder than it looks. 

During my time at Under Armour, we did this exact move. We tried to create a media arm within a shirts and shoes company. And on paper, it made SO much sense. 

But it failed. 

UA spent $800M on the acquisitions on 3 apps, and the reality is the company’s financials have still not recovered.

Here are the 3 suggestions to avoid companies screwing this playbook up:

• Evaluate the attention of your audience. Each moment of the user journey has a different intent and value. When you treat all moments the same and try to advertise everywhere, the advertising value goes down, and the user experience goes down. Pick your spots. Most of the time in marketplaces this will be in the search area, but you may find other spots that are valuable and won’t disrupt user experience. 
• Brand control. UA had rules around not working with Nike, Adidas, etc. That made total sense. But they also started to reject brands because “that brand competes with Tom Brady’s main sponsor and we need to keep Tom happy”. Be clear from the jump who you should and shouldn’t work with. The more clarity you have the more you can assess how important this is to your brand. Instacart has an application to advertise on the app. I assume they only accept the brands that make sense for Instacart. This boundary is how success is driven. When the lines blur too much on who can and can’t advertise, it all crumbles.

• Use the attention you’ve captured. At Under Armour, we had 100M+ users of MyFitnessPal app. The engagement was insane. Yet, advertisers started to request branded content and banner ads on the website, etc. To match that request we started to create content for advertisers. Then it was someone’s bright idea to start to create content on the website. Sooner or later we had an entire content team that was trying to build content to capture more attention. Don’t fall into this trap. Double down on capturing the value of the attention you already have. Your revenue may be lower, but your margins will be much higher. 

Attention is still the scarcest resource on the planet, and all of these companies are realizing there is a profitable and scalable business to build with the attention they’ve captured— all thanks to advertising.