Peak social media: The ads machine

This is an audio transcript of the Tech Tonic podcast episode: ‘Peak social media: The ads machine’

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Elaine Moore
So here’s a question. Who does the founder of Facebook, Mark Zuckerberg, turn to for advice? There was a time when that person was Roger McNamee. He’s a veteran tech investor. And in 2006, he was sitting in his office in Silicon Valley when his phone rang. (Phone ringing) 

Roger McNamee
I get a phone call from one of Mark’s senior executives who said, “My boss is facing a huge crisis and he needs to talk to somebody who is very experienced but not conflicted. Would you be willing to take a meeting with Mark?”

Elaine Moore
McNamee had been putting money into tech start-ups since the 1980s. He knew the scene well. His opinions were respected. Mark Zuckerberg had started Facebook just two years earlier, but his new social media platform was already taking off, gathering millions of users. And Zuckerberg had a big decision to make. 

Roger McNamee
Mark came by my office. And keep in mind, he was 22. So this was the middle of 2006. He was 22. I was 50. And he looked just like Mark Zuckerberg. I mean, you know, he had the sandals and the skinny jeans, the grey T-shirt, the hoodie. And we opened the meeting by me introducing myself and saying, “Mark, if it has not already happened, either Microsoft or Yahoo is going to offer $1bn for Facebook. And everybody you know — your board of directors, your investors, your employees, your management team, your parents — are gonna tell you, Mark, sell the company. You’ll have $650mn of your own money. You can go out and change the world. Your venture capitalist will offer to back your next company. He’ll tell you it will be better than Facebook. And I’m here to tell you that that’s all garbage.”

Elaine Moore
McNamee had already watched several tech companies change the face of the internet. He’d seen Google dominate the search engine and Amazon master online shopping, and he thought Facebook had the potential to turn social networking into something just as big. So he told Zuckerberg, don’t sell — not even for $1bn. 

Roger McNamee
You’re gonna have the first really huge social media platform that does a really good thing for society, and it’ll only happen if you see this through. If you sell the company, it won’t work that way. He doesn’t say a thing. He goes through a series of thinker poses. He’s obviously thinking really hard about what I said to him, you know, I mean, the presence of an Olympic-class thinker and . . . after five minutes he goes, “What you just said, that story you told, that’s why I’m here. Yahoo’s offered $1bn.” And I said, “Well, do you want to sell the company?” He goes, “I don’t want to disappoint everybody. But no, I don’t want to sell.” And so I explained to him how he could very gracefully explain to everybody that, “Hey, we’re doing really, really well. This is not a good time to sell the company. You signed up to back my vision, and I still believe in my vision, so let’s go for it.” And I was a true believer. 

Elaine Moore
Zuckerberg didn’t sell. Instead, he went on to turn Facebook from a social network with a few million users into a global giant that ended up connecting 3bn people around the world. And in the process, he turned social media into a moneymaking machine and Facebook into one of the biggest and most powerful companies in the world. How did he do it? Well, as he told the US Congress years later: with advertising. 

Orrin Hatch
Mr Zuckerberg, I remember well your first visit to Capitol Hill back in 2010. You said back then that Facebook would always be free. How do you sustain a business model in which users don’t pay for your service? 

Mark Zuckerberg
Senator, we run ads. 

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Elaine Moore
This is Tech Tonic from the Financial Times. I’m Elaine Moore. This season of the podcast is about the future of social media. I’m asking whether the era of social media — one created by platforms like Facebook more than 15 years ago — is coming to an end. And if so, what comes next? In this episode, how Mark Zuckerberg used ads to turn social networking into a trillion-dollar business and why, after a decade of incredible growth, he now thinks the future of the company lies in a completely different direction. 

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Advertising powers social media. That’s why the likes of Instagram, Facebook and WhatsApp are free. But advertising wasn’t always going to be the dominant business model of the internet. 

Ethan Zuckerman
It seemed really peculiar in the late ‘90s that we were going to use the same business model as, say, print magazines. Everyone felt like advertising was just a very poor compromise. Even in the late ‘90s no one liked it. We just couldn’t make anything else work. 

Elaine Moore
Ethan Zuckerman is a professor at the University of Massachusetts. He focuses on public policy and media. But back in the ‘90s, he co-founded an internet start-up, a kind of precursor to social media, and it had a problem common to start-ups: how to make money. 

Ethan Zuckerman
I was one of the founding team for a company called Tripod.com. Tripod was one of the very first user-generated content sites on the web, which is to say our business model was giving people a little bit of internet space with which they could build their own personal homepages. This turned out to be incredibly popular. We had millions and millions of users who wanted their own little piece of the web. They wanted to talk about their hobbies. They wanted to talk about their interests. What they did not want to do was pay. 

Elaine Moore
Zuckerman and his colleagues hoped people might sign up for a subscription to use their platform. But no one was interested. They thought about some kind of system of micropayments, but that didn’t work either. The only way to make money was to sell space on the platform to advertisers. This led to some interesting early innovations in the world of online advertising, like the one that Zuckerman himself invented: the pop-up ad. 

Ethan Zuckerman
Advertisers were not completely comfortable with the idea of being on content that didn’t have editorial control. They were very worried that users might say things that were racist or inflammatory or stupid or in some way in conflict with their brands. And so my boss asked me, can you find some way of putting some distance between the advertisement, which we need to survive and the user’s content, which is where we were getting all of our traffic? And in a fit of whatever is the opposite of genius, I came up with the pop-up ad. So the idea was, well, they’re not in the same window anymore. Your homepage is in one window, the ad is in a different window. Everyone will be happy. Spoiler alert: no one was happy. 

Elaine Moore
If you used the internet in the late ‘90s and early 2000s, pop-up ads were the bane of your existence. Everywhere you went little adverts would appear all over your screen. It was like a game of Whac-A-Mole. You’d have to go around closing them before you could see the web page you were trying to visit. If that rings any bells, Zuckerman is full of remorse for the hassle he inadvertently caused you. By the early 2000s, browsers started to block pop-up ads. They’re now a relic of the ‘90s internet. But other innovations around advertising were more successful. Early internet builders like Zuckerman found that web pages made by users themselves, user-generated content, told you things about their creators. And it turned out that this information was really useful to advertisers. 

Ethan Zuckerman
We were interested in targeting ads based on the content of a user’s page. We used very primitive, very early machine learning to say this is a page about cars or this is a page about video games, and tried to target based on that. Where it’s gone from here, of course, is it’s gotten vastly more surveillance. The way that ad targeting works now is we follow you all over the web and then we try to make guesses at who you are based on what you do. 

Elaine Moore
When Facebook came along, it took this idea of targeted advertising to a whole new level. Facebook was attractive to advertisers because it had so many users. That meant a lot of potential customers to see ad, click on links and buy products. But it also had a lot of information about those users. When you signed up for a profile, you provided things like your birthday, your hometown, and your relationship status. Using the like button, you told Facebook all about your interests. But the real turning point came when Facebook started to absorb even more data — tracking the activity of its users, even when they weren’t on Facebook. 

Roger McNamee
For the longest time, Mark’s view was “I’m only gonna use the data that people give us inside Facebook.” And Facebook gave advertisers access to things they couldn’t get anywhere else — all kinds of emotional and personal data. But in 2013, Mark changed his position. 

Elaine Moore
For the Silicon Valley investor Roger McNamee, Zuckerberg’s decision to start gathering vast amounts of data on users from all over the web was the turning point for Facebook’s business. It could offer advertisers something they couldn’t get anywhere else. 

Roger McNamee
They essentially went from not having third-party data to having every piece of third-party data imaginable. And with it, the targeting went from whatever it was, which was not good enough, to something that advertisers perceived as absolutely unique, better than anything available anywhere else. And Facebook, because it had more users than anyone else, could credibly argue in 2013 that they could provide an advertiser with the equivalent of the US Super Bowl, 365 days a year. And that changed everything overnight. 

Elaine Moore
Facebook could build up a comprehensive profile of you, putting you into specific categories of consumer and then offering advertisers the opportunity to put exactly the right adverts tailored to you in front of you when you went online. After his first meeting with Zuckerberg in 2006, McNamee began regularly advising the new founder. He invested in the company and says he helped Zuckerberg recruit Sheryl Sandberg, credited with driving the growth of the ads business. But in recent years, McNamee has started to speak out against Facebook’s data-gathering habits and the way that he believes users can be manipulated by disinformation campaigns that undermine society. He says he tried to warn Facebook. 

Roger McNamee
I reached out to my former advisees, Mark Zuckerberg and Sheryl Sandberg, in October of 2016 to warn them because I thought that it would be bad for the company to get a reputation for undermining civil rights and democracy. I don’t think any company wants that. But it turns out that the temptations offered by data and the ability to manipulate people’s choices, they were irresistible because in the end, every time you did one of the things that caused harm, your stock price went up a lot because those things were so profitable. And when I began talking about the harms of Facebook, people looked at me and go, “Roger, what are you talking about? The stock is going up every day.”

Elaine Moore
It turned out that using data to sell targeted ads was extremely lucrative. The money poured in. Along with Google, Facebook came to dominate global digital advertising. By 2021, it had become a trillion-dollar company. But lately, there are signs that Facebook’s astonishing growth is faltering. At the end of 2021, the platform’s user base shrank for the first time. Last year, for the first time ever, revenues also fell. It led investors and analysts to wonder: is Facebook running out of steam? 

Facebook turned itself into a social media giant by gathering huge amounts of data and perfecting the digital ads business. 

Steven Levy
Facebook was able to get an amazing amount of information on people with relatively few inputs. 

Elaine Moore
Steven Levy has followed Facebook since the beginning. He’s editor-at-large at Wired and spent years embedded with the company for his book Facebook: The Inside Story. He says the sophistication of the ads business that Facebook built is extremely impressive. 

Steven Levy
One turning point was the like button. By simply indicating what pieces of content you liked, Facebook knew an incredible amount about you. One researcher figured out that with 10 likes, Facebook could figure out your political affiliation, your sexual orientation, and other things. With 30 likes, it would know you as well as a friend. With 100 likes, it would know you as well as a close friend. And with a couple hundred likes, it would know you as well as your spouse. 

Elaine Moore
But today there are questions about whether targeted ads can keep delivering the same level of growth for Facebook. It’s getting harder for companies that rely on this business model to make money. Last year, social media companies saw their share prices plummet. Snap, the company behind Snapchat, fell 80 per cent, and Facebook, now rebranded as Meta, saw its market value fall 64 per cent. In response, Zuckerberg cut thousands of jobs.

One problem is that there’s been a general downturn in the economy, which means companies have cut back on the money they spend on advertising. But there’s a broader cause for concern — that the endless stream of data gathered from users, the fuel that powers the whole digital advertising machine might be drying up.

Recently, Apple made a small but significant change to its iPhone privacy settings. Before, apps like Facebook could track user behaviour automatically unless users opted out. Now users were being explicitly asked if they wanted to be targeted for ads. The majority appear to have said no. Meta estimated that this move alone could cost the company $10bn in lost ad revenue. 

Steven Levy
When Apple made it more difficult for them, that was a blow because I think Facebook came to take it for granted that its . . . our business was inviolable. They thought that they keep raking it in through advertising and they would have that data that no one else had and deliver value to advertisers that no one else could match. And they wouldn’t have to worry about that. 

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Elaine Moore
The thing is, Apple changing its privacy settings may not be the last restriction on user data. Over the years, there’s been a growing concern about the amount of information that social media platforms gather. Around the world, regulators want to better police how that data is used. That could mean even less access to data for platforms like Facebook. And as a result, less ad revenue. But some people think there’s an even more fundamental problem — that targeted digital advertising was never as effective as it claimed to be. Maybe the model that helped to build the modern social media economy was always flawed. 

Tim Hwang
The dream of digital advertising, you know, what Facebook was selling early on was, “Hey, we’re an advertising company, but we’re way better than traditional advertising. I can find the consumer that is just poised to buy your product. I can deliver this message to them at the right place at the right time, and they will go buy the product.” There’s a lot of research to suggest that those things might just fundamentally not be true. 

Elaine Moore
Tim Hwang used to work for Google, the other major seller of digital ad space along with Facebook. He says the whole idea of targeted advertising — using data to offer effective ads — might be oversold. 

Tim Hwang
It’s actually unclear whether or not the ad ever, in fact, reaches a person at all. So there’s some data to suggest that basically about 56 per cent of ads are never seen, right? Like it’s delivered to someone’s screen, but they just browse through it. They don’t see it. There’s also a lot of fraud in the system. So it’s actually unclear whether or not that click-through, right, actually belongs to a person or belongs to a bot. So some estimates suggest that even like one out of every $3 spent on the ad ecosystem is fraudulent. Actually, it’s delivered to a bot or delivered to what’s known as a click farm, or someone is sort of paid literally to kind of click on ads. 

Elaine Moore
Hwang also says that even when ads do reach the right person, it’s not clear they actually encourage that person to buy the product. 

Tim Hwang
What the advertiser sees is we put money into online ads and a person bought the product. One of the interesting things about those consumers is that they would have bought the product anyways even if you hadn’t advertised to them. And so actually in many cases you’re just targeting consumers that would have purchased anyways. 

Elaine Moore
But surely digital advertising, it is going towards a more specific group than if you just put an advert into a newspaper?

Tim Hwang
Well, I would actually even challenge that as well. There’s a study that basically suggests about 41 per cent of ad data may be inaccurate. So, you know, the dream is, hey, you can target Tim Hwang. He’s a male, 25 to 35, you know, living on the East Coast of the United States. When actually the ad arrives, it turns out you’re targeting female, 75 to 95, living in the UK. And so I think there actually is real questions even about the veracity of the data collected and whether or not, in fact, you are getting better results. 

Elaine Moore
Hwang thinks the entire digital advertising industry is in a bit of a bubble, and he says the current troubles in the ads market — advertisers spending less, worries about access to user data — could expose that. 

You talk about this idea that the digital advertising ecosystem is at risk of collapsing or potentially is about to collapse. Why is that happening right now? 

Tim Hwang
So I think there’s a couple of things. First one is just the larger macroeconomic environment. The sort of downward pressure on the global economy is causing a lot of industries to pull back on their advertising spend. There’s kind of a question about, like, once you cut all this ad spend, is there actually a change in the bottom line of these businesses? That’s one thing that could really shake the confidence of the industry is, like, what was all this advertising for? If when we cut budgets, there’s not really a huge material impact on our outcomes. 

I think the second one that I’ll point out is that there is indeed a big push both on the government side, right, through, say, the EU GDPR or California’s CPRA, and also on the company side, right. Like Apple is increasingly implementing all of these privacy rules. And the worry that you’ve heard from the ad industry is, OK, well, once we lose access to all this data, we just won’t be able to get ads to work as well anymore. And they think we’re about to run this really big experiment, which is, is that the case? Are we actually gonna live in a world where, like, ads are way less effective than they used to be? We may just discover that, like, actually we didn’t need all this data to begin with for ads and that programmatic advertising might have been built on kind of the dream of targeted ads more than the reality. 

Elaine Moore
Even if the digital ads market doesn’t crash, as Tim Hwang says it might, it’s no longer providing Facebook with the same levels of growth it once did. The Facebook platform is reaching saturation. It has nearly 3bn monthly active users around the world, but it looks like that might be the limit. Steven Levy, who wrote a book about Facebook, says this is a real problem for Mark Zuckerberg, who he says has been obsessed with growth above everything else since the beginning. 

Steven Levy
There’s only so many billions of people on Earth. You can’t get to the people in China, which is the biggest user of the internet and social media in the world. And the last couple of billion are really, really hard to reach. They don’t have much money. And even if you got them on social media, they couldn’t deliver you much profits. So when he goes to Wall Street and announces that there’s no growth, the stock goes down, sometimes dramatically. Without growth, he’s in trouble. 

Elaine Moore
Levy says this search for growth explains one of the biggest decisions Mark Zuckerberg has ever made. In 2021, he took his company, the most successful social media company in the world, and changed its name from Facebook to Meta. He announced that the company’s focus was now on building the metaverse. 

Mark Zuckerberg
We believe the metaverse will be the successor to the mobile internet. We’ll be able to feel present like we’re right there with people, no matter how far apart we actually are. We’ll be able to express ourselves in new, joyful, completely immersive ways, and that’s going to unlock a lot of amazing new experiences. 

Steven Levy
Zuckerberg’s holy grail is to move our social media to the metaverse. It makes sense if you’re obsessed with growth as the pillar of the way you operate a business, then when you can’t keep growing at the rate you were and you are really reaching the ceiling, move to someplace new where you could start from scratch and then grow billions from a few thousand rather than try to eke out the last billion or so. 

Elaine Moore
Zuckerberg envisions repeating the success of Facebook in a completely new realm, with users wearing Meta VR headsets to access Meta-run virtual worlds. 

Meta video clip
Oh, hey, Mark . . . Hey, what’s going on? Hey, Mark . . . Hi . . . What’s up, Mark? Whoa, we’re floating in space? Uh-huh. Who made this place? It’s awesome . . . This place is amazing. 

Elaine Moore
Right now, the jury is still out on whether this huge bet will pay off. So far, take-up has been slow and costs have been high. Operating losses attributed to Meta’s Reality Labs — the part of the company working on the metaverse — exceed $37bn. But there are questions about whether any of us really want to spend our time wearing bulky VR headsets. If Zuckerberg is right, then maybe the future of social media will be in the metaverse. But in the meantime, Levy says all that time and money is adding to a sense that the old Facebook social media platform is stagnating. Not only is it not growing at the same pace, he says, it’s not innovating either. 

Steven Levy
You could argue that the social media site has not been particularly innovative for probably a decade. They have generally been mimicking what seems popular in social media at the moment. So Snapchat comes up and Facebook, after unsuccessfully trying to buy it, comes up with a clone. Snapchat comes up with its stories feature, Facebook successfully copies that, first in Instagram, then in Facebook. Clubhouse, which is an audio-only social media product, looked like it was exciting and it’s going to be a big thing. And Facebook came up with its own version, right? You really would be hard-pressed to name a breakthrough product in social media in the last decade that Facebook came up with on its own. 

Elaine Moore
Levy says Zuckerberg’s focus on the metaverse isn’t helping with this lack of innovation. He says all the talented people at Meta are working on metaverse projects rather than how to make the existing social media platforms better. So has Zuckerberg given up on Facebook? 

Steven Levy
Well, Zuckerberg would never say that he has given up on Facebook, but he should be thinking just as innovatively in the social media as he is in the metaverse. It is a social media company. Its revenues come from social media. And if I were running that company, it would seem to me that my challenge would be to bring innovation to social media. And I don’t think that’s impossible. Maybe if that was your focus, they say, how can we reinvent social media without having to put a headset on but use just the tools of mobile and this connectedness to come up with something new like TikTok did. Maybe that would be the path for Meta. 

Elaine Moore
If you want an example of peak social media, Facebook might be it. The breadth of its social connections will be hard for any company to ever replicate. But for many of us, it’s no longer engaging. Its ads business is less robust these days, and there are questions about its appeal to younger users. Even the man who made it all happen, Mark Zuckerberg, is more keen to talk about AI and VR than Facebook communities. 

Whether we do or choose to one day live in the metaverse or not, Facebook’s reign as the most important social media platform in the world may be over. But despite this, it’s worth remembering that Facebook is still the biggest social media platform by far. If this is the beginning of its decline, Facebook watchers say that it’s likely to be a long and slow one. And that might be true of social media as a whole. 

Steven Levy
Well, giant platforms just don’t go away all at once. They slowly fade. But ultimately, I think people are questioning whether the social media era where social media is, like, a dominant force, is coming to an end where it’ll still exist but no longer be the growth platforms. So there is a sense that social media has sort of reached the end of its innovation and growth stage. 

Elaine Moore
In the next episode of Tech Tonic, social media is supposed to be fun, but maybe it’s just not good for us. 

Emma Lembke
Why? Like, why is it that my phone has so much control over me? How am I allowing it to do that? And why is no one speaking up about this? 

Elaine Moore
US lawmakers are worried that social media is harming us and young people in particular. What does that mean for the future of the platforms? 

Katie Paul
Kids are a huge market for these companies and it will really cut into their bottom line if they can no longer collect these data points on children. 

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Elaine Moore
You’ve been listening to Tech Tonic from the Financial Times with me, Elaine Moore. The producer is Josh Gabert-Doyon, and the senior producer is Edwin Lane. Manuela Saragosa is executive producer. Sound design is by Breen Turner and Samantha Giovinco. Original scoring by Metaphor Music. 

And before you go, we’re keen to hear more from our listeners about this show, and we want to know what you’d like to hear more of. So we’re running a survey which you can find at ft.com/techtonicsurvey. It takes around 10 minutes to complete, and we’d appreciate your feedback. 

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