Volume 91: Big tech, big moves.

1. Digital advertising under the looking glass.

tl;dr: Converging narratives accelerate change. It’s coming to AdTech.

If you work in the strategy field in any capacity, you’ll recognize that there’s an acceleration and amplification of change when narratives converge. As an example, just this week, Microsoft made a huge bet on the convergence of gaming with the metaverse, which I’ll talk more about below.

However, in slightly less well-publicized news, another convergence suggests that we might be on the brink of a shift in how corporations view the economics of digital advertising. To understand why, let’s start with canary in the coalmine, Bob Hoffman, self-proclaimed ad-contrarian. Recently, he added the outputs from various research studies into the “programmatic poop funnel” and concluded that only 3 cents of each digital dollar make it to ads seen by human beings. The rest is lost to AdTech intermediaries, fraud, and a digital “angels share” where money simply vanishes into thin air. Even the forensic accountants at PwC can’t figure out where it goes.

Whether or not this 3 cents figure is accurate doesn’t much matter. What matters is a wall of evidence that’s building to support the case that there isn’t just leakage from the system but a veritable flood of digital dollars going to waste. You don’t have to be a rocket scientist to realize that at some point, corporations are going to wake up and start doing something about it.

And what might the precipitating event be that pushes them to do so?

Well, there’s a good chance that anti-trust action against Google and Meta might be it. To cut a very long story very short, there are multiple major court cases against both corporations where legal minds believe them to be “absolutely screwed.” To dive deeper, I’d recommend following Jason Kint, but in essence, Google and Meta are alleged to have, among other things, illegally manipulated advertising auctions and colluded in an agreement to fix prices and defraud advertisers, consumers, and publishers. Oops.

And while the PR chum is already flying in an attempt to “flood the zone with shit,” there’s no escaping the fact that once these cases get going in earnest, it’s going to be hard to miss the narrative that the two most dominant forces in advertising got there via illegal and fraudulent means.

This likely means digital advertising is going straight to the top of the CEO agenda, where otherwise it likely would not. And what happens when firms start digging into how much they’re spending and what they’re spending it on? That’s right; we’ll turn full circle and end up at the conclusion that up to 97% of that spend might, in fact, be utterly wasted.

So, yeah. While this will be particularly painful for Google and Meta, not least because the CEOs of both firms are directly implicated, anyone working in AdTech and digital media better start armoring up. Because it ain’t going to look pretty when the dominos start falling, and clients start asking tough questions like why they’re paying 50c on the dollar for targeting and where that “angels share” is really going.

2. Xbox Activision is more about optionality than just the metaverse.

tl;dr: Microsoft kicks the anti-trust hornet nest to see what happens.

This week, to much metaverse fanfare, Microsoft made its largest-ever transaction, paying almost $70bn in cash to purchase video games behemoth, Activision Blizzard. A deal that likely works for both as it provides Microsoft with strategic flexibility and nets Activision Blizzard shareholders a nice premium over what has been a faltering share price caused by deeply concerning tales of a highly dysfunctional frat-boy culture.

Now, while the press coverage has largely viewed this as a shot-fired moment in the war for the fledgling metaverse, the truth is almost certainly a little more nuanced. Truly, this appears to be more about optionality.

What do I mean by this? Simply put, purchasing a business like Activision Blizzard gives a buyer like Microsoft multiple options and strategic flexibility. There isn’t just a single way to make it successful. Let’s walk through a couple of the most obvious possibilities:

First, as a standalone business, A/B owns a portfolio of valuable franchises in a growing industry, is highly profitable in its own right, and is currently run by a CEO who isn’t particularly popular among either his staff or his customers. By doing little more than running it properly, Microsoft buys growth and gains a valuable contribution to future profits.

Second, Microsoft has Xbox Gamepass, which is its version of Netflix for gaming. Here 25 million customers (and growing) pay a monthly fee to access a library of games rather than purchasing each outright. Adding Activision Blizzard to the mix means Microsoft can now add blockbuster franchises like Call of Duty to this mix. However, the long-term play for a service like Gamepass is to bypass the console entirely to make games playable on any device via the cloud. With its Azure infrastructure, Xbox brand, and growing portfolio of proprietary franchise games, Microsoft is uniquely positioned to make a bet that could potentially add a Netflix-sized valuation ($226bn) to its own market capitalization.

Third, and this is something almost nobody has been talking about, there’s a developer angle here, connecting the dots between Activision Blizzard, Github, and Azure in a play to control a significant part of the gaming developer ecosystem, which will likely be critical as we move toward the building of the metaverse (whatever that ultimately becomes). Not just mining for gold, but selling shovels to the miners, which is a business Microsoft is very familiar with.

Finally, this brings me to the metaverse itself. This acquisition adds core competencies in developing virtual worlds, games development, and the benefit of blockbuster franchises, giving Microsoft greater flexibility in whichever metaverse bets it chooses to make.

So, is this just about the metaverse? No, it’s about more than that. It positions Microsoft for multiple future outcomes, which likely makes it good for Microsoft shareholders…unless it fails anti-trust scrutiny. Let’s see.

3. Competitive disadvantage.

tl;dr: Marketers aren’t the only ones who lack business skills.

A popular trope right now is that marketers lack business skills, which is why the marketing function is slowly but surely being re-engineered into the “shapes and colors” department, with responsibility for little more than the promotional P within the 4Ps of the marketing mix.

While there’s clearly an element of truth to this, what I find more interesting is that while we’re quick to question the business skills of marketers, we’re much slower to question the business skills of the accountant’s marketers are increasingly held accountable to.

Take the dogmatic devotion to ROI. Because of its misapplication, this has become the single most destructive metric in marketing. Why? Because it measures efficiency rather than effectiveness. Attracting customers who’ll buy from you anyway makes for high ROI even though the spend is wasted. By contrast, attracting a customer who wouldn’t otherwise buy from you is expensive yet essential for growth. This means that at some point, ROI will go down as customer growth goes up because you’re attracting customers who wouldn’t otherwise buy from you. It seems logical, but when was the last time you saw an accountant demanding to see ROI go down as an essential part of growth going up?

And, there’s the rub. If corporations viewed marketing as an essential driver of business outcomes like growth, they’d focus on the effectiveness measures and financial modeling necessary to deliver that growth. (As an aside, the closest thing I know of today is what Diageo are doing with “Catalyst” as they attempt to grow market share by 50% over the next eight years)

Instead, many (perhaps most) corporations take a cost-first approach, where the underlying assumption is to eliminate waste rather than grow the business. Why do I say this? Because rather than focus on marketing’s contribution to growth, many corporations use accounting practices as a blunt tool focused only on optimizing marketing costs.

Now, it’s obvious this creates a conflict for marketers if they’re being judged on their ability to drive growth but managed solely based on financial efficiency. However, less obviously, it also challenges the financial professionals they’re being held accountable to because focusing only on the cost side of the ledger does nothing to advance their own ambitions to have a more significant strategic role in directing the organization's future.

Anyway, the solution to this competitive disadvantage creating disconnect seems frighteningly simple. Instead of setting up marketing and finance in opposition to each other, where one believes its job is to “reign in,” eliminate waste, and mandate cost-control, they should instead be incentivized to work collaboratively in driving the growth outcomes the company demands and to work together building the models, metrics and operational KPI’s best suited to deliver them.