How many ads have you seen in the last 24 hours? If you had to guess you might say 50, 100, or even 200. The answer is likely much higher, with Digital Marketing experts estimating that Americans are exposed to around 4,000 to 10,000 advertisements each day. The omnipresence of ads in our everyday lives has important implications for ad-driven business models, as well as highlighting the opportunity to cultivate business models that go beyond traditional advertising revenue streams.
While the 4,000 to 10,000 ads per day number sounds absurdly high, it’s arguably not when you account for direct and indirect advertising impressions. So rather than just counting billboards and TV ads, it’s possible to construe the colorful logo on your cereal box, or the brand on your T-shirt, as indirect ad impressions. Either way, what this statistic suggests is that we are bombarded with ads – more than we could ever possibly absorb and remember. This is problematic for firms seeking to capture our attention, or eyeballs in advertising speak, as a way to monetize.
Firms, particularly in the U.S., broadly follow two modes of monetization: (i) advertising, where the goal is to maximize engagement and eyeballs; or (ii) subscription and transaction models, where the goal is to lower the hurdles to checkout and convert people to paying customers. While the U.S. is home to a number of pioneering technology companies, their monetization models are not very diverse, and rather simplistic compared to what we observe in countries such as China.
Companies including Snapchat, Yelp, and Facebook at their core follow the same advertising model – users get to use the service for free, but they must view ads that are paid for by advertisers. Companies in China go beyond this, and many of them have outgrown the simplistic advertising models of the West. Looking at some of these more advanced monetization models holds important lessons for what traditional tech platforms could pivot to in the future.
For example, the podcast market in the U.S. was estimated to be $314 million in 2017, driven entirely by ads. And there was nothing creative about this type of advertising, with host-read ads representing two-thirds of those podcast ad dollars. In contrast, the podcast market in China was estimated to be worth c.$7bn in 2017, more than 20x greater than that of the U.S. The difference arguably lies in more sophisticated, and innovative methods of monetizing podcast content in China (n.b.: while in a technical sense the Chinese monetization models still conform to advertising and subscription/transaction models, they are more heavily-featured, and more advanced).
In China, podcasts feature elements of gamification and social interaction. One platform in China called Ximalaya has different levels that users can progress through. Podcast listeners can move to the next level by spending more time listening, or by spending money and earning coupons in the app. There is also the option to give tips to podcast creators whose content you enjoy, enabling funding to support future content.
Beyond podcasts, other businesses in China have been very creative with their monetization models. Pinduoduo (Nasdaq: PDD) for example uses a “team purchase model” which turns online shopping into a social experience. Users share product information on their social networks and invite their friends to form shopping teams in order to lower prices. This highly unique model was described by the CEO as combining Costco and Disneyland.
These Chinese monetization models are not merely interesting to observe, they can open our eyes to the possibilities for Western technology platforms in monetizing their (often very large) user bases. We are already beginning to see U.S. tech business diversify away from traditional revenue models. Perhaps one of the more interesting shifts is Instagram’s recent announcement that it is adding a checkout feature in the app.
Instagram is a highly visual medium full of photo and video content that lends itself to the discovery process. This has made Instagram the go-to social media channel for brands. Before the checkout feature, users would find an item they like but then be forced to go to a clunky web browser to make a purchase. Instagram is expanding beyond what has traditionally been an advertising platform and is building out additional capabilities to capture a share of transactions that happen on its platform (i.e., moving from a strictly advertising based model to a combination of advertising and transactions).
Going back to the estimated 4,000 to 10,000 ads per day we are exposed to, there is a natural limit as to how many ads humans can effectively process in a given period. While not all ads are created equal, and Instagram has an incredible amount of user data to deliver relevant ads, we view Instagram’s decision to graduate from traditional advertising revenue streams as one that is highly positive, and speaks to the possibility of future monetization routes we are yet to even think about.
Montaka owns shares in Facebook
George Hadjia is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.