Invest Like the Best with Patrick O'Shaughnessy
· Gokul Rajaram
[00:00:00] S1: I always say as a company, you either die or you live long enough to become an ads company. And so we are seeing now with OpenAI, it's happening. Now, how do you build an ads business? There are three fundamental ways to succeed in the ads business. Three, and only three. One, you need to own a very coveted group of users and you need to have a surface on which those users interact. Google Search is a great example. It's a surface on which a very coveted set of users interact with. Obviously, they express high intent, so Google is one of the most profitable ad businesses. Facebook, very similar. It took us a while to figure out what was coveted about these users. Turns out what was coveted was the identity. We knew who these users were and we could match them to customer and other data. And so you could precisely target these people with messages you wanted, and you could find people similar to them. ChatGPT, their combination of intent and identity data is unparalleled. I mean, Google had intent data, but not identity. Facebook identity, but not intent. These things have been both together. It's the dream of any advertising person. And these are complex, multi-phase searches. That's the other beautiful thing. You search, but each of the queries is kind of like a search. And then you search again and you're just building up searches. At Google, you typically search and then you lose the person because they go off and click and you don't hear. These are natural language queries ripe for amazing, amazing targeting. So that's one example. That's one way of making money, where you have to own a first-party product. You have to be the first party. Second, you have to drive outcomes. That's another way of making money where you don't own any inventory, but you can drive outcomes to advertisers. The best example of this is a company called AppLovin. AppLovin is a $100 plus billion company. They drive one outcome really well. Mobile app installs. And no one believed that people would need that many mobile app installs. Turns out everyone wants to get mobile app installs. It was initially only restricted to gaming, but now they sell to every mobile app that wants more app installs. So AppLovin has built a massive infrastructure.
· Gokul Rajaram, Patrick O'Shaughnessy
Now they control the buy side, they control the sell side, they even control the middleware. So you could argue that they control the auction for most mobile apps, in a way that almost Google used to control or people say they control for the web. But AppLovin has built an amazing engine to deliver mobile app installs at a certain cost. So that's the other second way to do it. You deliver an outcome at a certain cost. The third way to do it is if you are the exclusive provider for a large advertiser or a large source of demand. A good example is a company called The Trade Desk, where Procter & Gamble, for example, go to The Trade Desk and say, "I spend with Google. I spend with Facebook. All my ad display budget. Trade Desk, here you go. You can figure out how to distribute it and how to run it." And so those are the three ways, but you've got to be exclusive. Those are the three ways that you can make money. No other ways of making money. [00:00:00] S0: What business ideas don't work in advertising? What are the business models that just are doomed to fail?
· Patrick O'Shaughnessy, Gokul Rajaram
[00:00:00] S0: What business ideas don't work in advertising? What are the business models that just are doomed to fail? [00:00:00] S1: Trying to be a middleman on top of these large platforms. From my understanding, The Trade Desk, I know, doesn't work on Google or Facebook at all. It doesn't work with Google or Facebook as a first party. But AppLovin, I think only a little bit works on Google and Facebook. Mostly they do their stuff on the unwashed web, basically outside. So you've got to stay out of Google and Facebook's ecosystems. Because if you're trying to build your business on top of Google and Facebook, or probably soon OpenAI as an ad company, you're going to get squeezed. Every time you build a new capability on top of Google, turns out Google learns what you're building. And Google has the best engineers on the planet. So do Facebook. They will take your capabilities and incorporate it into their platform. Let's see if I'm proven right or not. My take is that there's going to be almost certainly a cottage industry of companies that are going to come and say, "I'm going to help you optimize ads in ChatGPT." And there's already companies that help you optimize placement in what is called these answer engines, called AEO instead of SEO. All of those are not going to create durable income.
· Gokul Rajaram, Patrick O'Shaughnessy
[00:00:00] S1: Trying to be a middleman on top of these large platforms. From my understanding, The Trade Desk, I know, doesn't work on Google or Facebook at all. It doesn't work with Google or Facebook as a first party. But AppLovin, I think only a little bit works on Google and Facebook. Mostly they do their stuff on the unwashed web, basically outside. So you've got to stay out of Google and Facebook's ecosystems. Because if you're trying to build your business on top of Google and Facebook, or probably soon OpenAI as an ad company, you're going to get squeezed. Every time you build a new capability on top of Google, turns out Google learns what you're building. And Google has the best engineers on the planet. So do Facebook. They will take your capabilities and incorporate it into their platform. Let's see if I'm proven right or not. My take is that there's going to be almost certainly a cottage industry of companies that are going to come and say, "I'm going to help you optimize ads in ChatGPT." And there's already companies that help you optimize placement in what is called these answer engines, called AEO instead of SEO. All of those are not going to create durable income. [00:00:00] S0: What would you be worried about if you were one of these fairly monopolistic owners of a massive ad network like the ones we've discussed? We could throw Uber and Amazon in the mix, DoorDash, Facebook, Google. If you were there, running their ads businesses, what would scare you?
· Gokul Rajaram
[00:00:00] S1: Consumer behavior change, where they don't open up the apps anymore, but they use agentic interfaces. They use AI interfaces, which are not owned by my company or this company, to do their transactions. If you assume that a big percentage of things are repeat, then could you put those repeat things on autopilot through an agent and you never open the app? And so you lose opportunities to then advertise. And you lose the relation with the customer over time because the customers are trusting the AI agent. You can't bury your head in the sand. You have to go and experiment. That's why when ChatGPT opened up their apps platform, all of the commerce platforms are experimenting. And the thing I would look for very carefully is, there are going to be early adopters in the app. Obviously, they're going to connect their Uber account with their ChatGPT account. I'm going to look to see these people who have connected. How's their behavior on my app? Are they going to my app or not? Are they opening the app much less frequently? Because if that's the case, then obviously this experience is so compelling that I would then have a choice to make. How do I make this experience maybe not as compelling as my app experience, or how do I incentivize them here to open up my app?
· Patrick O'Shaughnessy
[00:00:00] S0: There's a new battle happening for that first category, which is a new interface to be owned. We know ChatGPT does – I'm curious, if you think being the first mover matters to build a new ad network because there's Gemini, there's Anthropic, there's a bunch of people that have tons of users using this new interface. How do you think about the landscape of the new potential entrants to build the next dominant ad network? What advice would you give these various parties?