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

November 27th-December 3rd // Estimated Reading Time: 9 minutes

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… 

Other Notable Headlines ✍️

Canada's antitrust watchdog files lawsuit against Google over its ad business - Google's antitrust headaches continue. Canada slapped Google with a lawsuit last week that accuses the company of illegally creating a monopoly across its ad tech products, which it says has stifled competition, driven up advertising costs, and hurt publishers. Canada's Bureau of Competition Policy is asking the nation's Competition Tribunal to force a sale of Google's publisher ad server (DoubleClick for Publishers) and ad exchange (AdX) and impose a penalty that could cost up to 3% of Google's global revenue, which topped $305B in 2023🔒. The bureau says Google has 90% market share in publisher ad servers, 70% market share in ad networks, 60% market share in demand-side platforms, and 50% market share in ad exchanges. The case is similar to the lawsuit brought forth by the US Department of Justice, which recently went to trial and concluded with closing arguments last week; a decision is expected by early 2025. Google also faces a separate but similar case filed by a group of US states led by Texas that will kick off in early 2025. Antitrust pressure is mounting on Google from all angles. 

Bluesky’s user surge spurs brand scrutiny—just in case it becomes ad-ready🔒- X copycat Bluesky has been rapidly picking up users since the presidential election and is said to now have 20M users. As its buzz grows, brands are keeping an eye on the platform in the event that it one day becomes a bona fide alternative to X and Threads, Meta's own X copycat platform. At this point, however, Bluesky doesn't have advertising and reportedly has no plans for it. It does, however, seem to be trying to get influencers to join the platform. There also appears to be political undertones on Bluesky, which is a no-go for many brands, and it's not at all clear what kind of data, tracking, or measurement the platform could provide to brands. Threads now seems to be in consideration for brands since they are familiar with Meta's advertising infrastructure and the platform already has 275M users. Threads is reportedly close to offering ads. For publishers, Bluesky has major upside, with 3-4x higher engagement than other platforms.

Ipsos In Talks To Acquire Kantar Media - Market research firm Ipsos could scoop up Kantar Media, which is known for its audience measurement services for broadcast, print, streaming, and other channels. Reuters reported that Kantar Media may fetch $1.3B. It currently operates as a division of Kantar Group, which is owned by Bain Capital (60% stake) and WPP (40% stake). Kantar Media has been for sale for almost a year. In 2019, WPP sold a controlling stake in Kantar Media to Bain in a deal that valued the company at $4B. Ipsos, based in Paris with a $2B valuation, partners with Kantar Media on audience measurement in countries like the Netherlands. Ipsos faces a deadline this week to submit a bid. Private equity companies like Cinven may also explore a deal. 

Why Publicis Is Winning - Major agency holding company Publicis has been killing it, thanks to technology strategy, leadership, and deal-making, according to LUMA Partners’ Terry Kawaja. As we've noted in our quarterly earnings coverage, the French agency holding company has been outperforming its peers, enjoying a 5.8% increase in organic revenue in its most recent Q3 earning report. But its overperformance dates back years, Kawaja says. Its market cap has soared by 160% in the last five years, from $10.5B to $28B. In comparison, Omnicom and IPG grew by 24% and 25%, respectively, while WPP’s market cap fell 21%. Publicis has won a ton of new clients, helped by its Power of One platform, which centralizes its data for use across all Publicis agencies. Kawaja also credits Publicis CEO Arthur Sadoun's progressive leadership approach and well-executed acquisition strategy for giving the holding company an edge. For a deeper dive into the management styles of the major agency holding companies, check out Michael Farmer's analysis here. 

FTC takes action against companies accused of unlawfully tracking and selling location data - The US Federal Trade Commission has banned Venntel and its parent company, Gravy Analytics, from “selling, disclosing, or using sensitive location data in any product or service.” The FTC says the company collected and sold consumer data without proper consumer consent. Gravy Analytics went so far as to create geofences to “identify and sell lists of consumers who attended certain events related to medical conditions and places of worship,” according to the FTC. These practices violated the FTC Act and exposed consumers to "potential privacy harms," the agency said. 

Other Notable Headlines
(that you should know about too) 🤓 

Google Must Face Suit In Battle Over Children's Smartphone Data, Judge Confirms - A group of parents sued Google for collecting data from smartphone users under 13 years old. 

Black Friday hits a record $74.4B in sales online, up 5% on last year - Both Adobe and Salesforce measured record-breaking sales for the official start of the holiday season.

Walmart Closes $2.3 Billion Acquisition of Vizio - The companies will operate separately “for the foreseeable future,” but Walmart plans to integrate Vizio’s ad business with Walmart Connect, its commerce media arm. This is a huge deal in ad land.

Mediaocean gets investments from Interpublic, Omnicom and WPP - Mediaocean's new partner program gives the holding companies a small equity stake and a chance to integrate with its ad serving, ad verification, and creative optimization platforms.

Roku is building its content into Google TVs - Google TV users will be able to directly search for content from The Roku Channel.

Stoli vodka files for bankruptcy in the United States - Pour one out!

That’s It For This Week 👋

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