The Danger of Over-Monetization

on February 11, 2016

Monetization is one of those horrible neologisms that belongs to the modern era, especially in Silicon Valley circles. So I’ll apologize in advance I’m about to go one worse and talk about over-monetization.

In fairness, the term was coined earlier this week by Amir Efrati of The Information in a tweet, though he left out the hyphen. But regardless of the word (or words) we use to describe it, there’s a real danger among some ad-centric tech companies that they begin to overdo things in their bid to generate revenue, especially from mobile users, and that this comes back to bite them. There are two companies in particular that stand out as being at risk of this phenomenon: Google and Twitter.

Google and mobile search

In its earnings report for this past quarter, Alphabet appeared to signal it’s gaining some real momentum around mobile search advertising and analysts were heartened to see this. Certainly, revenue growth has been stronger of late and it appears it’s Google’s mobile search products that were the major driver. Given the concerns about Google’s ability to replicate its success in desktop search on mobile, that’s reassuring on the surface. But think about how Google is achieving this mobile search growth. If you’ve done a mobile search on Google recently, especially if it was for a product or a search term that could be interpreted as a product search, you were likely presented with a screen full of ads. Take this sample search I just did for “Flowers” while sitting at the San Francisco airport:

Google Flowers2

Look at that first screen I’m presented with. The first two items are clearly ads, but perhaps you might think the third is organic content. However, if you look at the second screen, you’ll see that it, too, is an ad. Below that is a map provided by Google with several more listings for local flower stores. It’s not until you scroll two full screens down you begin to see the first organic search results. Now, for some people, the ads and/or the map and local listings may be just what they’re looking for. But if what you want is what Google once provided so well – organic search results – then you’re having to work quite hard to find them. For other product searches, Google will serve up its own Google Shopping results in a similar way, again often pushing the traditional organic results down to the second or third flick of the finger.

Google’s biggest challenge in mobile is that, unlike a Facebook or Twitter, it has no stream or feed into which to insert ads. Its organic search results have always been so good, many users will click on the first one they see. As such, all its ads have to be crammed into the top part of the page, before that organic link shows up, because users generally won’t scroll down any further. On the desktop, this is less important because organic results have often still made the first screen. But, on a mobile device, it means the user has to work hard even to find the first organic result. There’s a real danger that, in attempting to cram more and more ads into the top part of the screen, Google is going to make its results less relevant and more frustrating for users. And users have alternatives: on iOS, users may well see results from Apple’s Spotlight search before they even get to Google’s results and, in some cases, they may pre-empt the Google search entirely. And for product searches, users who really want to see Amazon results may just skip the Google search in favor of the Amazon app. There’s a tipping point at which Google will go too far in pursuit of a higher ad load and end up pushing users away rather than generating ever-higher mobile ad revenues.

Twitter and ad load

Twitter’s results this week were the same mix we’ve come to expect recently: terrible user growth offset by strong growth in average revenue per user. But that ARPU growth is a direct result of a higher ad load. Twitter’s management was challenged on its earnings call by analysts seeking to understand how much room for additional growth there is here. But management dodged both parts of the question, referring to higher international ad loads rather than talking about the US, where there’s some evidence they’re reaching a ceiling, and refusing to talk about the impact on user engagement. But Twitter launched a new ad product this week which, like Google’s mobile search ads, is designed to be the first thing a user sees when loading up a new Twitter screen. It was this product which prompted both Efrati’s coinage of “Overmonetization” and a tweet of my own, which was the genesis of this post.

My concern here is that Twitter, like Google, is mortgaging the customer experience in pursuit of ever-higher ad revenues. Yes, in the short term, Twitter can keep generating higher and higher ad revenues per user by simply showing more ads. But, at some point, it will cross the line from tolerable to egregious and users will either stop using Twitter or start using third-party clients which don’t show ads. Either way, Twitter will lose the ad revenue it’s been so aggressively pursuing.

A threat not unique to these two companies

Though I’ve singled out these two companies as being at particular risk from the threat of over-monetization, it’s not actually unique to them. Facebook’s Instagram has been showing more ads lately, which was likely, in part, a driver of Facebook’s strong ARPU growth recently. But it risks alienating users who’ve objected to any ads right from the beginning. I’ve certainly noticed the increase in ad load and it’s becoming more and more bothersome. Essentially, any company with an ad-centric business model is going to be constantly tempted to turn up the volume on advertising to grow revenues, especially if user growth is slower than it would like. Television channels in the US have been steadily increasing the ad load over time as well, though lately some have backed off a little in an attempt to retain customers. Television executives have learned this lesson the hard way – there’s a point at which users start to find alternatives to sitting through your ads and none of them ends well.

Perhaps all this helps to explain why, arguably, the two most successful ad-centric online companies – Facebook and Alphabet – are investing so heavily in new initiatives that have non-ad-based business models. At Google, this includes smart home hardware, fiber broadband services, self-driving cars, and life sciences. At Facebook, it includes virtual reality gear and WhatsApp, which has firmly eschewed ad-based business models. These companies see the writing on the wall about an inevitable ceiling both to the overall ad market and their ability to tap into it and are wisely investing in new products and services which aren’t bound by that ceiling.