Issue 26 - On monopolies & recessions

It’s the dog days of summer, typically a slow period for most e-commerce and DTC brands (unless you’re in the outdoors category). 

Most families are trying to squeeze in the last of their warm-weather vacations before the kids go back to school. The next major “shopping event” on the calendar is Black Friday, which is three months away (have you started planning yet?). 

At this point, a lot of operators and decision-makers are in a kind of holding pattern, waiting for the summer to tail off and Q4 planning to kick in.

In the background, we’re gathering as much tactical intelligence from DTC’s thought leaders as possible for when the fall is in full swing. 

This week, though, we’re looking mostly at macro waves.

• The Google monopoly ruling

• The latest Meta bug (check your ads manager for this…)

• What to do during a recession

• Quick hits - including a product strategic framework from Netflix

Let’s start with Google… 

GOOGLE RULED A MONOPOLY

Google is involved in not one, but two antitrust cases right now, one for Search and one for Ad tech (covered in our earlier issue here). Federal judge Amit Mehta ruled Google had a monopoly over the search engine world. 

Why? 

And what does this mean for the future of the internet? 

Breakdown

Google has exclusive agreements with a number of browsers (like Apple’s Safari or Mozilla Firefox) to be the preset search engine. 

In exchange, Google pays these browsers a percentage of the revenue it makes from search ads. In the case of Safari, this amounts to about $20 billion per year. In total, Google forks over $26 billion each year to all browsers combined. 

Now, the problem judges have is that it’s really hard to outcompete Google for this default search engine position. Further, 50% of users stick with the default engine, meaning Google is really, really likely to be your search engine. 

But why is it so hard to outcompete them? 

Well, Firefox once ended its contract with Google and let Yahoo! get its default search engine position instead. Customers didn’t like the experience and Firefox lost users, plus Yahoo! made them less money. 

But it gets worse. Remember how we said Google pays a percentage of its search ad revenue to browsers in return for default position? Microsoft found that, even if they paid 100% of their search ad revenue for the top position, they would generate less money for the browser than Google. 

Google’s product simply generates more search ad revenue than any other search engine. 

So: 

• Most browsers set Google as the default search engine, and Google therefore has an enormous market share among everyday searchers (about 90+% on mobile, 82% overall). 

• Google runs studies and finds out (big surprise) that it can increase prices for advertisers and lose very few of them. 

Big market share and the ability to mess with prices unpunished. 

These are signs of a monopoly. 

Which is exactly what the judge said. 

What next?

No remedy has been decided yet as Google will appeal the decision, but if the ruling stands, there are two possible outcomes. 

1. Google alone is banned from competing for the default browser position. 

First, Browsers will lose the significant portion of revenue that Google pays them. . 

And then Google will lose the users who stick with the (new) default search engine, though some of these might turn out to be Google adherents who will make the effort to switch back through browser options. 

2. Everyone is banned from purchasing default browser position. 

This would most likely result in something similar to the rules enforced under the EU’s DMA, where browsers offer a comprehensive choice of all search engines to new users. 

In this case, browsers are the big losers, since they wouldn’t get any more revenue from the winners of the default browser bid. 

Google likely loses some share, but probably not much, AND it gets to keep all of its search ad revenue. 

It would retain a massive market share and therefore the ability to overcharge its advertiser clientele, which means it stays a monopoly. 

The judge would be ill-advised to pick option 2. 

Takeaway: Eliminating Google from the default search engine competition is harsh, especially since its unfair advantage stems from better performance. Getting rid of the competition altogether likely means Google stays a monopoly, just a slightly different flavor of one. 

Where Google overreaches is in increasing prices for advertisers in a way it couldn’t were there more competition. 

The real solution would be someone to come along and knock out the incumbent somehow with a better service. Is that were a new AI-powered search engine could become a disruptor? I guess we’ll see.

Hat tip to The Monopoly Report and Mobile Dev Memo. 

Gotta Catch’Em All - More Meta bugs

Barry Hott, renowned DTC marketer, has caught the newest Meta bug. 

Barry warns that if this is happening to “Engaged Audience”, it could be happening to other custom audiences like “Existing Audience”. 

Specifically, he suspects that audiences that aren’t actively being used in an ad set might not be updating properly. For instance, if an account is using a "180 Purchaser" audience based on pixel data (tracking users who made a purchase in the last 180 days), but that audience is not currently targeted in any active ad set, the audience might not be updating as it should.

This could cause problems for operators running ASC campaigns where targeting is critical. 

You can let Barry know if you’re experiencing something similar by commenting on his thread here. 

What to do during a recession

As you may or may not know, there is talk of an imminent recession in the US. 

Warren Buffett has sold a significant portion of his stocks, unemployment is up and other indexes like Japan’s Nikkei are dropping in response to fears of a recession. 

But if you’re worried this will affect your DTC business, Stefan Georgi, has some advice for you. 

Just “ignore it and keep operating your biz as normal”. 

Stefan relays learnings from the Great Depression, where companies that advertised as usual, or even doubled down on it when things got bad, ended up taking over their markets. 

For instance, says Stefan, Ford had been outselling General Motors (GM)-owned Chevrolet by 10:1 during the 1920s. When the depression hit, Ford cut back on ad spend. Chevrolet significantly increased theirs instead. 

By 1931, Chevrolet was the top car maker in the US. 

Thing is, it isn’t quite that simple. 

As the depression hit, Alfred P. Sloan, GM’s President and later Chairman from 1923 to 1956 reacted fast. They cut costs, laying off workers and scaling back production of middle-market and high-end brands, while reducing the breakeven point on their cheapest brands like Chevrolet. 

But that’s not all. 

They got rid of inventory by cutting higher-end car prices by 70%.

They merged their sales forces across middle to low-end brands to get more efficient. 

They used the same engine parts across brands and models to redistribute inventory. 

And only lastly did they go all in on the lower-cost Chevy.

Not only did they shift their remaining production capacity and ad spend towards it, but they also offered financing as a way to attract customers at a time when banks weren’t lending. 

So GM did much, much more than continue business as usual. 

This doesn’t mean Stefan was wrong, just that things are often more complicated. Here’s the thing – Stefan says “don’t cut back on advertising”, which GM leaders would have agreed with. However, they might have added that you’d want to be smart about where you put that advertising money. Products and offerings that worked during good times probably aren’t the same that will work during a recession. 

If you think all of this talk about the Great Depression is outdated, you might find it interesting to know that during the Covid pandemic, P&G increased its marketing budget while Coca-Cola reduced theirs. 

Can you guess what happened? 

P&G posted its “strongest share growth in many years”, while Coke saw an 11% reduction in net revenue in 2020. 

Takeaway: If a recession is coming, it doesn’t mean you should either cut back indiscriminately or continue to blindly plow ahead. 

A recession, just like other macro tailwinds, may have specific impacts, implications, and even opportunities, for your business. You’ll need to have your ear to the ground and think strategically to both survive and thrive.   

Some of the strongest, most enduring companies of the past were either born or gathered steam during ostensible down times. But it’s because they made specific tactical decisions relative to their competitors that enabled their growth.  

QUICK HITS