Should you buy Meta ads? Or just the stock? Of all the money ‘invested’ in Meta ads by DTC brands, would they have been better off just buying Meta stock? A friend who is an experienced investment banker focused on consumer brands told me about a conversation he had with an investor a couple years ago. “We don’t invest in companies like those because ultimately the largest economic benefit from the investment accrues to Meta, not the company and the investor.” By ‘those companies’ the investor meant DTC and ecommerce companies with a heavy focus on advertising and in particular advertising on Meta. From the investor’s perspective, there are a lot of places she could put her money. So, if a big chunk of the investors’ money is advertising and those ad dollars have more benefit to Meta than to the ecomm company, what’s the point? In other words, why not just buy Meta stock instead of Company A stock whose business model is predicated on buying services from Meta? I run a thought experiment with Allbirds to see the value creation from ads versus buying Meta stock. You can read the full post 👇 👇 👇 https://lnkd.in/eiakbfhb
Wow, great reframe here. So true, particularly as Meta CPMs have been mounting over the years - Meta controls auction pricing to preserve its own margins, while simultaneously degrading the margins of advertisers participating in it. The only way DTC companies can make money off of ads (like Meta does) is by having a firm grasp on their unit economics and understanding at what point scaling Meta ad spend = losing money vs. making money. The problem is, though, most DTC brand owners don’t have that real-time understanding, and perhaps *that’s* what Meta is banking on 🤷♀️
Butterfly effect - maybe cutting ad spend develops into a trend & snowballs as other companies join suit - Meta stock price = depressed 😞
This is very interesting Ben. A take I have not seen.
Practically the definition of ROI.
A couple comments. First, at peak 2021 tech bubble, it was estimated that over half of VC startup investments were being funneled directly to Meta, Google, et al in an attempt to build brand. Second, I can’t remember the exact statistic, but it was along the lines of: if you simply bought the top ten market cap companies in the Nasdaq and rebalanced every year, you would outperform 90% of VC funds over the past 20 years. Not to diss on VC funds, but if those two observations are close to true, it does seem a great deal of money is being lost to friction and that friction is being collected as rent by the market leaders.