Welcome to Stuff I Thought About Last Week, a personal collection of topics on tech, innovation, science, the digital economic transition, the finance industry, and whatever else made me think last week.

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In today’s post: I explore the story of how the multi-hundred-billion-dollar digital advertising industry spawned tens of billions of dollars in R&D experiments on AI, connected hardware, apps, and other less-obvious sectors. The ad industry is also at the heart of the ballooning $100B content industry, large language models, and much more. New signs of austerity, both in the economy and at the mega tech platforms, indicate the days of trying to stack S-curves with massive spending on new projects may slow down, or even end. The tech giants' science experiments were too early, and they crowded out viable, innovative startups, but is a window now re-opening for new disruptive companies? As I explore this topic, I talk about storytelling, both the one that got us here, and the ones we might tell about the future.

Stuff about Innovation and Technology
Edible Drone
Drones with wings made out of rice cakes can be flown to people stranded in disaster zones or remote locations. The wings are precision cut by lasers and held together by gelatin. The drones could potentially carry additional food/water cargo as well. These could become very popular in the US if the developers figure out how to make wings out of pepperoni pizza slices.

Gifting Bots
IEEE has a robot gift guide for the holidays. The list of various items, from a tail-wagging pillow to a garden-roaming weed zapper, is amusing but largely impractical. Clearly, robots aren’t quite ready to take over our lives just yet. “Powered entirely by the sun, [the Tertill bot] slowly prowls around your garden, whacking weeds as they sprout while avoiding your mature plants. All you have to do is make sure it can’t escape, then just let it loose and forget about it for months at a time.” Heh.

End of Advertising-Funded R&D?
Over the past fifteen years, the mega platforms of the Internet era have amassed profit pools totaling hundreds of billions and a combined market cap in the trillions. Keenly aware that all S-curves in technology eventually plateau, the platforms have heavily invested in new markets in an attempt to stack new S-curves that would maintain or expand their relevance into the 2020s and beyond. Creation of the $500B digital advertising market has led to the largest profit pool to fund new growth areas in the last fifteen years. From a reductionist viewpoint, we could say that advertising funded new experiments in AI, voice assistants, connected hardware, autonomous vehicles, etc. Such investments at Google produced sundry products like Pixel, Chromebooks, Nest cameras, smart assistant speakers/displays, and Waymo. Meta has funneled money into VR, smart displays, large language models (LLM), and more. Amazon, with its large advertising, Prime, and AWS profit pools, invested heavily in Alexa, smart speakers/displays, tablets, Ring, eero, household robots, Rivian, Zoox, etc.

Now, changes wrought in the digital ad markets, combined with a looming recession (ending the free-money era that has fueled many ad-driven digital startups), could have far-reaching implications for all of these science experiments. While some of the digital advertising market was built on personal intent (e.g., Google search) and first-party data, most of the industry relies on spying and deceptive manipulation of personal data. Some of the newer media platforms, like TikTok, were recursively built with huge amounts of ad spend on other platforms (e.g., Meta’s apps and Snap). There is a small chance that the overall digital advertising market could shrink, as the new privacy paradigm implemented by Apple (and to a lesser extent Google) blockades collection of identifying information and cookie placement by third parties, severely curtailing targeted ads. However, with the analog-to-digital shift of advertising still incomplete, the market might continue to grow as one of the final analog pools of ad dollars – video advertising – shifts to digital. Another big pool of advertising sustaining the growth of digital is the multi-hundred-billion-dollar retail trade promotion industry, which is quickly shifting to digital to the benefit of online retailers. The FT has some details on this segment, which is already $37B in the US.

Over the last decade, professional and user-generated content has also seen massive spending (well over $100B in 2022) funded by ad revenues, among other sources (e.g., other businesses at Amazon, Meta, and Google/YouTube, as well as direct-to-consumer streaming apps from Hollywood and Netflix replacing linear-TV distribution). Another beneficiary of the ballooning digital ad market has been LLMs and AI assistants. These products are likely to be the future of most human-technology interfaces, along with generative AI, and I expect large investments to continue; however, even they might fall victim to changing priorities at the mega platforms. As the tech giants have funneled tens of billions of dollars into these potential next platforms for hardware and software, they have crowded out, and in some cases destroyed, many startups that might have otherwise had better odds at disruptive innovation.

It’s dangerous to oversimplify what has clearly been a complex interaction of behavioral changes, new technologies, new distribution methods, monetary policy, and creative endeavors. Yet, it’s quite tempting to do just that: decades of nearly free capital, creation of the huge digital ad market, and rising usage of smartphones and connected screens for content consumption, seems to have resulted in an S-curve-chasing spending bubble for smart (or AI-enhanced) hardware and assistants and the content they utilize/promote. Is this bubble now poised to pop? Will a crackdown on data collection/sharing severely limit the growth of (or even shrink?) the digital ad market and its subsidized products? Will the loss of free capital and a new content spending discipline curtail the advertising market and Hollywood’s long run? Questions that were unthinkable a few years ago now appear more open ended.

We have shifted from a period of abundant time/money and scarce content to scarce time/money and abundant content in the period of just a few years. We would have eventually gotten there, but the timeframe was likely compressed by outsized pandemic-era investments in digital content creation, and avenues for its consumption, by the Internet giants and Hollywood studios (not to mention the pandemic tidal wave of free money). Now, we see signs of layoffs and spending discipline beginning to appear: Amazon is rumored to be gutting Alexa, and Meta discontinued spending on devices like Portal. Google appears to still be investing, for now. Saddled with debt, Warner Brothers Discovery has slashed projects for its streaming services like HBO Max. Apple is just beginning to dabble in areas outside of its core hardware business (funded with hardware sales rather than advertising), with little so far to show for it. Only time will tell if these examples of stalled research and austere developments are portents or happenstance.

Last week, I talked about how stories define the world around us, and how they evolve over time with human behavior at the center of complex narratives. What I’ve done just now is tell (yet another!) story that might explain the ramifications of digital advertising's growth – and potential decline – for investments in content, AI, and connected hardware. It seems like a compelling story, and it might even be true. And, this story might be evolving as a consequence of the shift to scarce time/money and abundant content, along with changing privacy priorities and a new economic regime defined by higher cost of capital and lower risk tolerance. I suspect the old story that I told above will carry on with many more chapters to come, overlapping with a new, evolving narrative that will form new truths. One way the story could shift is that the large platforms could further consolidate share of advertising (including video and trade promotion spending) and content due to the increased value of first-party data and benefits of scale. Interest rates and the economy could find some degree of stability, and investments might resume. Regardless of what happens, the changing narrative might mark an end of a long-term trend of digital advertising funding content and new, experimental markets and S-curves. It’s possible the big platforms were trying to tell their stories of AI and new computing platforms 5-10 years too early. We may yet be living those stories later this decade. And, with major cuts in R&D at the big platforms, maybe the time is ripe for entrepreneurs with great stories (i.e., in hardware and software) to step back into the void. Will anyone be bold enough, and will they find the money to carry out their visions?

Another way to frame these stories is to say the current, Internet Age yarn is running a bit long (an indulgent director’s cut) compared to prior technological cycles. We are more than two decades into the commercial Internet, and fifteen years have passed since the game-changing introduction of the iPhone. The AR/VR/AI stories of the newly dawning AI Age may be a little too ambitious to be written with today’s tools. In the meantime, many aspects of the traditional economy outside of the tech sector are still early in adopting/leveraging the digital tools of the slowly maturing Internet Age. As investors in these stories, our job is to watch for new evidence that either supports the status quo or indicates the world may be entering a new chapter. And, for the entrepreneurs out there, your job is to write these new stories and will them into creation against all odds.

✌️-Brad

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The content of this newsletter is my personal opinion as of the date published and is subject to change without notice and may not reflect the opinion of NZS Capital, LLC.  This newsletter is an informal gathering of topics I’ve recently read and thought about. I will sometimes state things in the newsletter that contradict my own views in order to provoke debate. Often I try to make jokes, and they aren’t very funny – sorry. 

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