Part 1: How Ads Worked, When Ads Worked

Welcome to the first ever Taking Inventory newsletter!

For anyone who has listened to our podcast, you know that we speak with the founders, product leaders, engineers, and investors who are shaping the future of advertising. We want to take that one step further and explore the ideas, products, and trends that are changing the advertising landscape.

We’ve spent the last 20 years in advertising and tech, including helping to build Snapchat’s advertising business into one of the fastest platforms to achieve $1B in annual revenue. We’ve founded, operated, and worked with some of the biggest companies in the world, and now we want to share an inside look at the industry.

We’re going to kick it off today with how digital ads have worked for years until Apple broke the model.

In our next newsletter we’ll take a look at the one company that was unaffected and actually thrived when things broke.

And finally we’ll close things out by exploring how companies are rebuilding post-Apple and what it means for all of us (spoiler alert: we have a new cookie even if Google says they’re going bye-bye).

How Ads Used to Work

This week, let’s start off by breaking down how a good ads business used to work.

  1. Inventory: Get direct access to content and the people who interact with that content. This is the hardest part. Once you’ve done this, congratulations you have inventory! Bonus points if you get the people interacting with your content to also create the content; you now have a social network and free content.

  2. Impressions: With all of this inventory the next step is to start showing ads on your site. Maybe you want it to be in between content, maybe you want it to be on the side of the page, or maybe you want to put a lot of ads everywhere!

  3. Outcomes: Now that ads are being shown, you get to "observe" what happens after someone sees it. This used to be pretty straightforward (Thanks Google and Apple!) when you could follow the user on their browser or phone. We like to call this passive spying – you’re not doing anything, you’re just watching. If that user ends up buying the thing that was advertised then you have a positive outcome.

  4. Auction: You’ve got inventory, you’re serving ads, and you’re driving outcomes. It’s time to hire a team of really smart people, usually from Stanford, to build an auction (i.e. do a ton of math and help engineers write code) that predicts which ads should be shown to which people to get them to buy stuff.

  5. Math Loop: Your auction is getting better at showing the right ad to the right people and you’re driving more outcomes. You’re also starting to get way more data from spying observing. So keep updating the math and eventually you can start charging more and more for every ad because you’re really good at getting people to buy stuff.

  6. $$$: Make money! You are now basically a digital real estate broker. You get to guarantee tenants (i.e. advertisers) that if they give you a few dollars, you’ll help them earn a whole lot more. Welcome to passive income.

Easy Money, Until It’s Not

So building an ads business is that easy! Okay, maybe not that easy, but that is how ad tech used to work and why platforms like our old employer Snap were able to build a billion dollar businesses practically overnight.

So what happened? Apple came around and ruined the party. Apple basically told ad supported businesses that they can “observe” (remember outcomes and math?), but only if they tell people they’re going to watch them and ask for permission. Unsurprisingly, people don’t want to be spied on so they said no. Without the ability to see the outcomes from their ads, all that math that the guys and gals from Stanford wrote, broke. Sure the big players still have a ton of digital real estate to sell, but it’s really hard to prove that the ads are a good investment.

That is, until a company who got its start slinging books was unaffected in its ability to sling ads. That company was Amazon, and next week we will take a deeper look into how they circumvented problems that were plaguing the entire digital advertising industry...

Don’t miss our next newsletter where we dig into the Amazon playbook and how other businesses have taken notice

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Wishing you all the best and have an amazing weekend.