Invest Like the Best with Patrick O'Shaughnessy
· 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?
· Gokul Rajaram
[00:00:00] S1: The good news is being first doesn't matter because especially if you're in category one, which we described, you control your first party inventory. In fact, being second or third, you can learn from the iterations and mistakes that the first one makes. Your inventory is not going anywhere. Now, some might have more urgency to monetize than others, but Gemini doesn't need to monetize anytime soon. So they can just sit back. They have a lot of ads expertise and data from Google. They can sit back and wait till they need to monetize. In fact, a good strategic move for them might be to say, "I'm the zero ad platform." Google can claim that Gemini has no ads in it. And there is a certain set of customers or consumers who care about that. The biggest thing is, and OpenAI has done a good job of articulating this, ads should not influence the content that is served to me, or the recommendations that AI gives to me. I think they should be relevant, but they should not be influencing the recommendations. And second, you have to keep a high bar for engagement and usefulness. Unfortunately, however relevant ads are, the reality is – and this has been proven – is that once you start showing ads in a previously unmonetized zero ads surface, engagement of users goes down over time. Because some of the engagement gets siphoned off by ads, and some of it gets siphoned off in different ways. But there's many holdout groups across many companies that have proven this. So the question for any one of these companies is, how much engagement are we willing to take in exchange for monetization? First, you need to have a holdout group of people who never ever see any ads, because that's your fresh group that never sees ads. And you need to understand that's their behavior. And then you need to always understand how people with ads are behaving. And then you need to figure out what the engagement hit is from each quantum of ads. And you need to then give your ads team a certain engagement budget. So that's what, at Facebook, there was an engagement budget every year that between the News Feed team and the ads team, we had to adhere to. In other words, yes, we wanted this much revenue, but the check metric on the revenue was, we can't take more than X percent dip in engagement overall for News Feed.