U of Digital Newsletter - 8/28/24 (free)

Author

Shiv Gupta
August 28, 2024

August 21st-August 27th

Below is a roundup of last week’s notable industry news, with summaries and our opinions. Advertising is coming to AI (earlier than we thought)…

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Summary: Perplexity AI is an AI-powered search startup that will begin selling ads later this year at $50-plus CPMs. Perplexity's advertising categories will include technology, food and beverage, health and pharmaceuticals, finance, and other topics to begin with, as well as sponsorships of "related questions" below answers and display inventory near answers. Launched in 2022, Perplexity's app has already been downloaded more than 2 million times, and it says it answers more than 230M queries per month. The company said in a pitch deck that more than 8 in 10 of its users have an undergraduate degree and 3 in 10 have senior leadership positions.

Last month, Perplexity introduced a revenue-sharing model with publishers whose content is referenced in answers; partners include Fortune, Time, and The Texas Tribune. The idea would be to split ad revenue with publishers if their content is used in responses. However, publishers such as Wired and Forbes have accused Perplexity of plagiarizing their content. That didn't stop the company from raising more funding in April, when its valuation topped $1B; that's double its valuation from just three months earlier.   

Opinion: Is it us or is Perplexity rushing this whole ads thing? It seems inevitable that AI consumer tools (especially those that are trying to be Google Search replacements) will sell ads in some form, but what’s the hurry? Scaling an ads business is hard. First, you need to nail your product / market fit and then your user growth model. THEN, you do ads. The last thing you want to do is to stifle user growth early on, which could happen if ads are introduced too early and turn consumers off. Perplexity was just founded in 2022 and only has a few million active users.

Timing aside, their CPM (cost per thousand impressions) model makes sense, even though a lot of people think “Google replacement” and expect to see a CPC (cost per click) model. Here’s the thing: Perplexity doesn’t work like “traditional” search. In traditional search, users are doing a lot of the work and clicking lots of links to get the information they need, so a CPC model works great. But in AI-assisted search—which aims to be more helpful and save users’ time—user journeys live entirely inside the app, which conveniently curates all the information the user needs. Clicks are not necessary and the user is captive, therefore a CPC model doesn’t make as much sense.

Sure a $50 CPM seems high. But why sell yourself short? Perplexity can negotiate down from that starting point (like Netlifx).

Just like Google intermediated everyone’s daily life 20+ years ago, companies like Perplexity believe that AI will do the same thing. And when you intermediate the daily lives of billions of people, you can then monetize access to those people. But who knows exactly how that monetization will ultimately work? A vanilla CPM or even a CPC ad model feels like an unlikely end state. If it’s not that, then what exactly might it be?

Here’s an idea. If AI is meant to act as an intelligent “agent” for everyday people, maybe it makes sense to look at the way agents have always been paid: on commission. If I’m an AI agent essentially brokering exchanges between human buyers and companies selling goods and services, shouldn’t I be paid a cut for my effort and expertise, not to mention the fact that I probably saved both sides a TON of time and hassle?

Maybe we’re wrong on the commissions thing, but CPM feels like a stepping stone; a weird, experimental phase in a monetization strategy that’s far from being figured out.

And maybe weirdness is just part of their strategy. After all, their name is “Perplexity”…

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That’s It For This Week 👋

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