Issue 12 - Rock The Boat

Once you’ve been in business for a while you realize there are always factors beyond your control. Black swan events like the COVID pandemic (and related government policies to deal with it) created major, unprecedented headwinds and tailwinds, depending on your product or category. 

It’s not just about the seismic tidal wave of a once-in-a-lifetime occurrence, though. Even regular, recurring, or semi-predictable ripples can rock the boat enough to change the operating environment. 

This week we look at some macro waves in the DTC pond:

• The TikTok Ban 

• Meta’s Earnings

• The Election Impact

TikTok Banned(?)

The US Senate just passed a bill forcing TikTok to sell ownership or face a ban due to the risk that it’s a propaganda tool for the Chinese government. Here are some of the key details of how we got to this point: 

• ByteDance, the startup behind TikTok, is likely to challenge the US decision in court. Their chief defense: First Amendment rights.
  

• They have a good track record with this tactic. Donald Trump, while in office, tried to force its sale or ban and failed because federal judges saw it as an attempt to shut down a platform for expression. Next, Montana tried to ban TikTok due to its ties to China, but failed for similar reasons. 

• Texas banned TikTok from its state-owned devices. US professors were the ones to challenge the ban as it stopped them from studying an important social phenomenon, but the ban was upheld. 

It remains unclear how TikTok will divest its US operations from the rest. Will they hand over their algorithm? Even if they wanted to, they don’t get the final say. China keeps a tight grip on its technological advantages, which it considers a matter of national security, and has laws in place to block IP export. 

What if the bill passes?

• Bill D’Alessandro laid out an interesting scenario.

• China could put the US government in a tricky position by refusing to sell, says Bill.

• The US would then be forced to ban and face the ire of its 170 million TikTokers, whose propensity to go viral is higher than most. All this while going into an election, no less. 

• The other option is letting them stay after they refuse. This sets a horrible precedent, and the US looks weak. Either way, they lose. 

• Sam Ross (@SpamRoss), founder of Numeral, says the TikTok news isn’t great for DTC brands:  

1. Think about diversifying your channels from TikTok

• If you read our issue from two weeks ago: “Beyond the Metaverse”, you know brands like Brez have met wild success on TikTok leveraging TikTok Shops and affiliates. But Brez also has eggs in the Meta basket.

• DTC brands relying too heavily on TikTok need to start thinking about diversification now. 

• While the algorithms guiding products like Instagram Reels and Youtube Shorts aren’t nearly as powerful as TikTok’s (yet?), you can be sure both Meta and Google will jump into the void left by a departing TikTok. 

• Many professional creators on TikTok will likely flee to these alternatives, rather than simply going down with the ship.

2. Prepare for more expensive Meta Ads

• Meta’s average price per ad has been rising steadily since Q1 2023 and it doesn’t show any signs of slowing. 

• Were TikTok to go, Meta would likely soak up a lot of the traffic and ad activity, further increasing ad price in response to demand.

3. Expect a culture shift

• TikTok is more than just another place to advertise. The culture on the platform is markedly different. 

• If its users were to migrate to Instagram, things wouldn’t be as simple as “we’ll reach them there with run-of-the-mill IG marketing.”

• TikTok users will want to reproduce what they had wherever they end up. 

• This might cause a shift in the type of content that appears on different platforms, and thus what kind of ads work in those places. 

DTC operators who keep an ear to the ground could capitalize on the shift, but those overly reliant on TikTok for sales or virality could be in tough. 

Takeaway: A TikTok ban could cause a big shift in who wants to see what, and where. Keep an eye on IG Reels and Youtube Shorts since short-form video seems to be here to stay, even if TikTok isn’t. 

Hey, maybe “X” will re-launch Vine?

META - cash up, stock down (for now)

Speaking of Reels, Meta just released its Q1 earnings. Despite the loud complaints about unstable ad performance this year, the behemoth nevertheless increased its revenue and profit.

• Topline grew ~27% and net income 117%, but Meta also reported higher-than-expected capital expenditure of $35-40 billion as they “continue to accelerate [their] infrastructure investments to support [their] artificial intelligence roadmap”. 

• They opted not to provide guidance for next year but announced they expect this Capex to increase as they “aggressively” pursue AI development. 

• Investors pulled out, and Meta stock is down 10%, after hitting a -15% low. 

• The issue is Meta’s lack of clarity regarding these AI investments. Is it just to stay competitive? Or to get an edge? How much is being funneled into the Reality Labs project, which won’t be profitable anytime soon, or Llama 3 which has yet to prove itself?

• According to Eric Seufert, analyst and investor at Heracles Capital, investors might be overreacting. 

• He shared a quote by Tom Alison from early March 2024, explaining that Meta’s hefty “AI” investments are dedicated to revamping their computing infrastructure with more GPUs to support algorithmic revamps. 

• According to Alison, early testing of the new model on Instagram Reels yielded an 8% to 10% increase in watch time. 

• If the capex increase is responsible for such competitive improvements, then it is warranted, says Eric.  

• By the way, Meta’s impressions and average price per ad are up 20% and 6% YoY this quarter.

• It’s all AI-driven, so at what point does this make their continued investments in the technology trustworthy to investors? 

Takeaway: As James Borow, founder of @WithMarketAI explains, AI is working for them and they’re doubling down. 

As a result, negative sentiment over Meta’s earnings report will probably be short-lived. The real question is, will their investments in AI also benefit advertisers?  

Election Impacts

Biden’s 2025 Fiscal Crackdown

President Biden announced higher taxes to come for businesses and wealthy individuals in his recent State of the Union address. Sure enough, the White House released a Fiscal Year 2025 Budget which DTC operators should take note of. 

Here’s how the proposed changes could affect your operations:

1. Corporate Tax Rate Increase: The proposal raises the corporate income tax rate from 21% to 28%. That’s less cash on hand for businesses moving forward. That’s less profit to re-invest into R&D and new hires.

2. Stock buybacks tax increase: Taxes on stock buybacks will increase from 1% to 4%. It’s back to your calculators as you determine whether it’s worth doing them over dividends now. 

3. Higher foreign-derived intangible income tax FDII: The proposal to repeal the reduced tax rate on FDII means you’ll have to reassess whether overseas sales are still worth it.

4. Capital gains & Wealth taxes: Biden proposes a 44.6% capital gains tax for people earning above $1 million (highest ever), plus a 25% tax rate on unrealized capital gains for high earners – at death. As Mike Beckham  of Simple Modern says, this is de facto a higher inheritance tax.

5. Operational and Compliance Costs: Tightened rules and complexities you’ll need to speak to your accountant about. 

6. Consumer Spending and Market Dynamics: While the rich will be taxed more, there are tax credits for lower-income consumers, potentially boosting demand for affordably priced DTC products.

7. Impact on Investment and Funding: tougher times mean tighter funds. It will be harder to secure investment so buckle down and plan to do what you can with what you’ve got. 

Pre-election advertising

Speaking of Biden (these transitions, am I right?), elections are coming up soon.

• If you’ve been in the game for over four years, you know it's a crazy time to advertise. In 2020, the combination of Presidential election, Senate, House, Government, and other election campaigns added up to $8 billion in ad spend. 

• This year, it's expected to hit $10 billion. 

• Marketing firm BrandMuscle says DTC operators should prepare for a 15-50% increase in CPMs for ads at the peak of the election campaigns (mid-September to early November).

Takeaway: Some platforms might deprioritize or even ban political advertising. That’s where cost-efficiency may be found. 

If not, think about employing bid/cost caps for CPA or throttle spend/deactivate ads entirely on key dates like November 3-4 (right before election day).

Here are some election dates to keep in mind, courtesy of Socium Media:

• March 5: Super Tuesday

• July 15–18: The Republican National Convention

• August 19–22: The Democratic National Convention

• September 16: The first presidential debate

• September 25: The vice presidential debate

• October 1: The second presidential debate

• October 9: The third presidential debate

• November 5: Election day

Quick Hits

• Mehtab Karta on how to save money on parcel shipping in DTC:

• Counter-intuitive take on the correlation between sales and FB metrics by agency owner Peter Quadrel.

• Outdoor Voices is facing bankruptcy

• Thrasio senior executives might face allegations of fraud

• The four financial phases every CEO should master from Taylor Holiday.