U of Digital Newsletter - 12/4/24 (free)

November 27th-December 3rd

Below is a roundup of last week’s notable industry news, with summaries and our opinions. We’ve been doing AI in ads for quite some time now. But ads in AI? That’s new(ish)…

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Top Story 👁️ 

OpenAI explores advertising as it steps up revenue drive
Source: FT
December 2nd, 2024

Summary: OpenAI, the company behind ChatGPT, is reportedly evaluating an ads model and has been hiring advertising professionals from Meta, Google, and other tech companies. OpenAI is restructuring as a for-profit company and is looking for ways to generate more revenue from its wildly popular generative AI products, including its AI-powered search engine called ChatGPT Search. OpenAI has raised about $6.6B in funding, has a $157B valuation, and generates about $4B in annual revenue, mostly from ChatGPT licensing and its API, which lets developers build on top of its tech. But it's burning through a ton of cash—about $5B to date—to develop its AI models.

Advertising could open up a promising revenue stream. CEO Sam Altman is reportedly becoming more receptive to the idea, and the company could be setting itself to make a run on an ads business. Its CFO is Sarah Friar, who has held executive roles at Salesforce, Square, and Nextdoor. OpenAI's chief product officer is Kevin Weil, who previously developed ad-supported products at Instagram and X. And its vice president is Shivakumar Venkataraman, who led Google’s search advertising team. OpenAI also just hired its first CMO🔒and is adding creative talent too.

After telling FT that OpenAI would be “thoughtful about when and where we implement them [ads],” Friar said in a follow-up statement that the company had "no active plans to pursue advertising" but was "open to exploring other revenue streams in the future."

Opinion: 

Ads are inevitable for any consumer-facing business such as OpenAI; not monetizing via advertising would create a major revenue disadvantage versus other AI companies (like Google and Perplexity), among many other reasons. They have to do it, and they clearly will.

But what exactly will it mean for their business? Will it create a windfall of ad revenue that will enable OpenAI to become the newest, massive ad company, given their anointed status as the next major gateway to the web, à la Google? Not necessarily…

A few thoughts:

1. Unlike 10 years ago, users today go to a variety of places to search for things on the web. There is search fragmentation unlike we’ve ever seen before (Google is dealing with this in a major way); it’ll be hard to consolidate the entire pie.
   

2. The fragmentation of search can roughly be aligned to the marketing funnel in this way:

To explain this in simple terms, every Amazon query is a user looking for a specific product, and the user is usually ready to buy. Example: user goes to Amazon and searches for LED light bulbs. Ads work extremely well in this context, in that they drive immediate outcomes. But a lot of AI queries are users asking ponderous questions or asking AI to perform utilitarian tasks. Example: user goes to ChatGPT and asks “What is the true meaning of life?” or “Write me a short blog post about why every company needs to invest in ad tech and mar tech education for their employees in order to be successful in 2025”. Ads may not be relevant in these instances. At least not immediately, and definitely not towards a specific outcome. 

3. By this logic, if generative AI is more suited for the “upper funnel” but also 100% text-based with no sight, sound, motion, and utility-focused as opposed to entertainment-focused, is it really a good fit for upper funnel advertising?

We have no doubt that AI and advertising can go hand-in-hand, especially when AI is used for product research and recommendations, and that generative AI will become the next great frontier / channel for advertising. Just be wary of thinking it’ll be as simple as moving over the Google Search ad model of 10 years ago with Google Search scale over to ChatGPT… 

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That’s It For This Week 👋

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