Volume 173: 10lb of You-Know-What in a 5lb Bag.

10lb of You-Know-What in a 5lb Bag.

tl;dr: Things that caught my eye this week.

After a monster two-issue spread on Valuation Narratives, I’m afraid this week will be rather less organized—AKA, a Random Walk Through Paul’s Head.

Following up on last week's theme, the big tech firms just reported earnings, allowing us to see the generative AI valuation narrative playing out in real-time. Google, Microsoft, and Meta all reported big quarterly gains. However, investors only rewarded Google and Microsoft with a lift in stock price. Why not Meta? Well, investors balked at Meta investing $12bn in generative AI. It’s funny. Investors love sustained performance gains and stories of potential, but they hate it when corporations put money where their mouths are and invest in future success to achieve that potential. Why? Well, at its simplest, the reasoning is that this capital could have been returned to shareholders instead, either as a dividend (which Google parent, Alphabet announced) or via stock buybacks, rather than investing it in a risky source of future return that might not pay out for many years. Bah, humbug.

Of course, this is daft on its face. Especially when we consider the returns on innovation that have historically played out. But, let’s take it to the ultimate extreme - if a corporation did nothing but return all excess capital to shareholders every quarter, then sooner or later, it would be signing its own death warrant since it would no longer be able to keep up with competition and the terminal value of the corporation would begin an inexorable slide toward zero. So, there will always be times in the history of any public corporation when boards and leadership teams have to be willing to take the short-term pain of investor punishment against the long-term gain of innovations that are necessary to drive new sources of growth, margin, and differentiation. It’s just the way it is.

Sticking with Meta for a moment, its pivot toward generative AI as a core technology underpinning its advertising business has been far from smooth as clients are increasingly concerned by a worrying tendency to blow through budgets… As an aside, Meta gets itself into so much legal trouble that it must treat fines as a cost of doing business. What’s interesting is that no matter how many ‘innocent mistakes’ Meta claims to have made, these errors always result in economic benefit to itself. I’m no statistician, but surely, if these were genuine errors, the distribution of who gains versus who loses would be rather more balanced…

Switching gears for a moment, it seems that Econometrics/Marketing Mix Modelling/MMM is having its moment, as various parties mull the efficacy and value of Google’s recently released MMM offering. I only have three things to say. First, anything that does a better job of measuring effectiveness than today’s shitty attribution dashboards is probably a good thing. Second, anything that makes MMM easier, faster, and cheaper to run is probably a good thing. Third, allowing Google to grade its own homework is objectively a very bad thing.

Ah, well. I guess we don’t get to have everything in life.

Since Google is on my mind, this was quite the read on how and why Google’s search product has become so bad over the past few years. What’s fascinating is that this looks strikingly like what happens to all monopolists eventually; they eat themselves at everyone else’s expense. What struck me about this article was less how one person was able to claim such power but how Google allowed short-term greed to enshittify and make brittle its flagship product at exactly the moment it faces a larger competitive threat than at any point in the past decade. While it hasn’t played out yet, it’s entirely possible that generative AI might disrupt search entirely…

…which neatly brings me to the strikingly significant problem that half of all internet traffic is made up of bots rather than people. I’ve wondered for years, often via this newsletter, at which point the other shoe will drop, and marketers will wise up to the fraud ecosystem their budgets support. Yet it never happens. Everyone knows fraud is rampant, and in private, everyone accepts that it’s a huge problem. Yet, nobody is willing to do anything about it. It’s just weird to me that marketers under such extreme pressure to be efficient are happily spending money on fraud because the fraudsters are smart enough to make their bot clicks look efficient. Surely, if there’s one thing we’d want our finance teams to go through with a fine-tooth comb, it’s this. But nope. Instead, we get procurement departments using fraudulent media inventory to baseline acceptable media cost ranges. FML.

If this teaches us no other lesson, it teaches us this. While corporations talk a big efficiency game, the reality is that they’ll almost always take the path of least resistance rather than tackle anything genuinely difficult. And, contrary to what they say, finance and their indentured servants in procurement are often the worst offenders.

Thinking of the easy path to efficiency, I stumbled upon this article on utilization the other day. It won’t come as a surprise to anyone working in advertising to consider the idea that over-utilizing humans can be as big a problem as under-utilizing them. One of the huge issues I see in advertising agencies is that they increasingly appear to have business models based on wage arbitrage. In other words, the only way they can make money is if their young, inexperienced, and cheap, salaried employees work more hours than they’re being paid for. Clearly, this is long-term unsustainable. However, compared to the challenge of disrupting the model and creating an approach that significantly lowers the cost of operation, it’s easier to sweat the assets. (BTW, if you’re wondering why advertising seems only ever to get worse, never better, then having a non-viable business model operating on a category-wide basis might be a good place to start).

And, finally, Walmart is launching a new value brand for groceries. If anyone is unaware, grocery shopping represents a huge competitive battleground in the US as retailers like Walmart, Target, and Amazon seek to take an ever greater share of wallet from the pure-play supermarket chains like Kroger, Albertsons, Publix, etc. With the advent of high inflation, value-priced products that are easy on the eye make much sense. While the new brand, ‘Bettergoods,’ is supposedly targeted toward ‘Gen Z,’ we all know by now that generational segmentation is about as useful as the stuff that erupts from a male cow’s rear end. Instead, when I look at the friendly, contemporary packaging, I see an effort to connect value pricing to a healthier image, using design to reinforce that you’re buying quality above its price point. I’d say this is representative of some pretty universal cross-generational trends, which means I’m more likely to see Bettergoods products in my in-law’s cupboards next time we visit than mushed into the seats of my son’s car.