Weekend Reading #13

This is the thirteenth weekly edition of our newsletter, Weekend Reading, sent out on Saturday 20th March 2019. To receive a copy each week directly into your inbox, sign up here.

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Ad nauseam.

Advertisement. A word that hails from the old French ‘advertir’, in its current form ‘avertir’: to warn, or notify in advance. And where it holds true that ‘knowledge is power’, the French quantify it. ‘Un homme averti en vaut deux’ - a warned man is worth two.

At the heart of advertising is a simple principle: AIDA. Attracting Attention and raising it to a level of Interest triggers Desire, subsequently leading to an Action, for example a purchase. For more on this, check out Alec Baldwin’s toe-curling call to arms to a bunch of washed out sales guys in the movie Glengarry Glen Ross.

If you think advertising is a ‘modern construct’, think again. Throughout history, advertising has served a key purpose – letting people know something exists that might be helpful to them. From wall and rock paintings in ancient Arabia and Rome, to papyrus pamphlets in ancient Egypt, to copper plates advertising ‘Jinan Liu’s Fine Needle Shop’ in the Song Dynasty (AD 960-1279) – advertising has been a key part of commercial, political, social and cultural life for as long as human communication has existed. 

They tried to make me watch an ad and I said no, no, no!

Something's changed. Ask anyone about advertisements now and you will likely get a less than effusive response. Annoyance, irritation and even outright contempt characterise the discourse around advertising. Ad blockers have become so ubiquitous that online publishers are explicitly requesting (begging) they be turned off in order to access content. Some offer an option to pay for a subscription. Others simply let out an exasperated sigh and let users carry on regardless. The rejection of advertising in the West has been stark, with advertising blamed for everything from election meddling to mental health issues.

The Internet made the impossible possible for advertisers. In exchange for ‘free’ services like email, games, messaging and social media, platforms companies like Google, Facebook and Tencent signed users up into what many are now discovering to be a Faustian pact. The deal was simple – we’ll provide you with utilities you use in everyday life for free, but in return, you let us take a look at what you’re doing.

What seemed like an innocuous proposition at the start has kickstarted a fundamental debate about privacy and freedom. The assertion,‘Google or WeChat knows more about people than they do themselves’ may actually be true. Yet whilst the West has struck back with a huge consumer outcry and ever-stricter regulation, the East has embraced advertising as part of a broader quid pro quo. And thus we find ourselves in a microcosm of our theme The Great Game. Let’s call it the bifurcation of advertising. 

You take the high road, I'll take the low road.

The western Internet is dominated by a handful of platforms (10-20 names) with niche segments and very little overlap in channels. Selling user data is a no-go. As regulation continues to tighten around the usage of data in serving ads, questions are being asked about whether advertising becomes more informative or more intrusive.

The Eastern way is completely different. Where Google remains the default outside China, its dominance is waning as the Chinese model percolates through the region. In this construct, we think there are effectively only two companies that count: Tencent and Alibaba. If you’re thinking of buying something, go to Alibaba’s Taobao or Tmall; for everything else, go to WeChat.

Cross-pollination is impossible between the Tencent and Alibaba ecosystems, but within them, it is absolute. Social media interactions, videos, photos, location data, shopping history, cash balances, bill payments, investments, food delivery. If data is the new oil, then Tencent and Alibaba are the only majors, sitting on reserves that are continuously growing.

And what about Baidu, the so-called ‘Google of China’? Indeed it is the Google of China: its business model is almost a carbon copy of Google’s, with its iQiyi video streaming platform analogous to ‘The Netflix of China’. But therein lies the problem – where (almost) every online journey in the West starts with a Google search, it is simply not the case in China. The Alibaba/Tencent duopoly is almost absolute, and whatever they don’t control (e.g. video and music) is highly competitive. 

The magic formula is losing its touch.

The ‘Google’ model of using Search data as the basis of serving advertising, which has worked so well, seems to be losing its touch. Restricting data use wears down its edge. Simultaneously, mindshare of search ads (placing an advertisement based on a user’s search query) is falling in Asia. While intuitively described in the AIDA framework as ‘an interested user with a desire for something’ and therefore ripe for a call to action, the reality is that a better alternative has presented itself: social advertising. Put differently: ‘If my friends are interested in it, I want in.’

The numbers couldn’t be more stark. In the US, a recent survey puts Google Search and Facebook as the top two online advertising platforms used, with Google Search now seen as the highest ROI channel available. Yet in China, the reverse is happening, with ads on social media feeds taking market share, while search ads are declining from almost a third of the advertising mix to just over an eighth.

Convergence? Or a new way?

In an environment where time is the only scarcity, our theme of Competition For Time also comes to the fore. In the handful of seconds an advertiser has to serve an ad to a user before they scroll away, that ad needs to trigger all four steps of AIDA.

The Chinese model has the edge of FOMO and social pressure on its side, while the Google model is facing strengthening headwinds. It’s still the best thing out there for advertisers, but for how long? Given the regulation on data protection, convergence is out of the question. So are we doomed to a choice of either being served annoying, irrelevant advertising, or giving up privacy so platforms can tell us what we want to hear (and ultimately make us want what they want to tell us)? Not necessarily, but it will take a hard reappraisal of the entire business model of advertising to find a solution.

A potential remedy?

One innovative approach that we have encountered in our research process is a company called Brave, which has completely reimagined the content ecosystem and built a browser which sidesteps the intrusion of privacy (cookies, scripts, trackers etc) and seeks to allow users to be paid for clicking on advertising that they deem of good quality and relevant. 

The underlying premise is simple – online advertising as a model is broken, but people still want to see good content and be notified about products and services that could be relevant to them. What is the best way to incentivise good content and good advertising to go with it? Pay to be served an ad! 

That’s a completely new business model, one we think might be revolutionary. So much so, we’ve signed up our website and blog as a registered content creator on Brave, with a browser download referral link here (full disclosure: for every download of the Brave browser, we get some tokens sent to us).

Will this be the game changer? We honestly have no idea. But if you’re up for some follow-up reading, we strongly recommend Brave’s Basic Attention Token white paper. BAT is Brave’s cryptocurrency, which falls into the utility token category. We love the business model and it's one of the few cryptocurrencies with a possible current use case. However, at this stage we're still trying to get our heads around whether the token is where the value will accrue, so this is definitely not to be construed as investment advice! If anyone has a view, we would love to discuss this with you.

What we're doing.
This week we started building v1 of our P2P network for investing in private markets. The bottom line is that we believe private markets are broken. Deal discovery, vetting and execution are stuck in the dark ages. Drawing from our experiences as investors in Emerging Markets, we’re seeking to create a fully transactional private market platform that aggregates all investor due diligence, KYC, AML, settlement and valuation reporting functions into a single protocol. We aim to enable self-custody of assets and biometrically-signed transaction authorisation, allowing one-click investing and access to global opportunities in private markets. We know it’s going to take time, creativity and hard work to get there, but it’s exciting that the build is underway. 
What we're reading.
"We promise that every town and city with a Nationwide branch today, will still have one for at least the next two years. Nope, we're not going anywhere."
– Nationwide

Eugene spotted this advert near the office on Camden High Street. There’s a lot going on in this message, which is equally amusing and ridiculous. For the uninitiated, Nationwide is a traditional building society, the UK's biggest. Its reluctance to commit to the high street for longer than two years is a real tell. Change is coming to financial services much quicker than the industry is anticipating, and the death of high street banking is the tip of a monumental iceberg that could sink more than a few household names.
What we're watching.
You’ve probably heard of Free Solo, the new(ish) film documenting free climber Alex Honnold’s (frankly unbelievable) ascent of El Capitan, a seemingly impossible 3,000-foot rock face in Yosemite National Park, California. But you might not have come across The Dawn Wall, which explores American climbing prodigies Tommy Caldwell and Kevin Jorgeson’s attempt to climb a previously unscaled face of El Capitan in 2015, igniting a frenzy of global media attention. Caldwell’s story is incredible and inspiring, blurring the line between dedication and obsession. It reminds us that success doesn't come for free – successful people make great sacrifices to get what they want.
What we're listening to.
The China Tech Investor podcast might not have the most imaginative name, but it always has something to say. It features two guys who know what they’re talking about – Elliott Zaagman, writer and contributor to TechNode, and James Hull, a professional investor – going under the surface of what's happening with listed Chinese tech companies. The latest episode is a must for anyone interested in the future of the domestic market in China. The guys quiz WSJ’s Jacky Wong on China’s new technology board and its implications for investors, companies and the Chinese capital markets. Look out for our forthcoming note that covers this very topic.