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I'm not sure that answers the question. It's not impossible that Facebook and Google capture all of the value--or more--that their clients generate by running

I'm not sure that answers the question. It's not impossible that Facebook and Google capture all of the value--or more--that their clients generate by running ads: Bob's Burgers runs $500/mo worth of ads, only generates $400 in (new) profit from them, but is afraid to stop because Paul's Pizza is also running ads and they might lose even more marketshare.

jamiequint 6y ago
That's theoretically true but not true in reality, ask one of any of the thousands of new (in the last ~8 years, since FB launched lookalike targeting) businesses that grew to millions of dollars of revenue off of FB ads. I personally know at least 10 whose primary early growth mechanism was Facebook ads. They work.
- mattkrause 6y ago
  As a counterpoint, you may be interested in this 2015 paper by Blake, Nosko, and Taldelis: https://www.nber.org/system/files/working_papers/w20171/w20171.pdf https://www.nber.org/system/files/working_papers/w20171/w201... They found that paid (i.e., ads) and unpaid traffic were nearly perfect substitutes for brand names: people will either to get to eBay. For non-brands, clicks go down, but sales don’t; ads are mostly attracting “browsers”, rather than buyers. The real answer is that it probably depends a lot on the industry, market, and individual business.
  - deleted 6y ago
    [deleted]
  - jamiequint 6y ago
    That paper is mostly referencing brand search at large companies which is completely different than lookalike ads for small, unknown companies. I'm not really sure how the comparison is relevant. If your point is that effective advertising strategies vary by company then I agree, but that is a tangential and meaningless point in the context of the above conversation.
    - mattkrause 6y ago
      You pointed out a niche where internet ads apparently worked well (though isn’t some of that just survivorship bias?) I found the eBay data interesting because AI had assumed that they would have a fairly sophisticated online operation, and yet neither the branded nor non-brand ads really helped (for the latter, removing ads led to -40% on clicks, but -2% on sales). I can’t imagine that the neighborhood pizza place is really doing a top-notch job on ad attribution; it seems a heck of a lot more likely that they throw a few ads up because everyone else does too.
      - jamiequint 6y ago
        That “niche” is the reason Shopify is a 100+ billion dollar company. With respect to eBay, proving someone sucks at running ads isn’t the same as proving ads suck. (also it matters a lot more what % of sales the ads in this case represented, rather than just the absolute change in sales). I agree with you about the neighborhood businesses fwiw.
manigandham 6y ago
The increase (or lack of decrease) in marketshare has to be factored as part of the return on investment, in which case the result is positive. Otherwise why continue to run the ads? A smaller but profitable marketshare is better than a larger but negative one.
- ummonk 6y ago
  If it's about lack of decrease in market share, then the existence of the ads product is not a net positive for small businesses. It is potentially just extracting a rent out of them without any aggregate benefit by pitting businesses against each other in a coordination problem.
  - manigandham 6y ago
    If a company creates better kitchen equipment that allows one shop to make better food, isn't that the same thing? Is it now rent-seeking that anyone who can provide an advantage can potentially sell that to all the shops so they all remain competitive and not lose market share? All competition is a coordination problem.
- mattkrause 6y ago
  Uncertainty, perhaps? Prediction and attribution are really hard. I linked a paper below showing that eBay was wasting money on entirely ineffective keyword ads. I can’t imagine that most small businesses (especially brick and mortar ones) are much savvier.
  - manigandham 6y ago
    Why is uncertainty specific to ads? That's part of anything in business whether it's a new office, new equipment or new salesperson. Whether something provides a return or not for your specific situation doesn't have anything to do with whether the product itself is working and valid. Ebay situation is different because search is as close as you can get to "intent" in advertising. You don't need user-targeting when you have a search query telling you exactly what they're looking for. Targeting is a proxy for that kind of intent when it's not available.

jamiequint 6y ago

That's theoretically true but not true in reality, ask one of any of the thousands of new (in the last ~8 years, since FB launched lookalike targeting) businesses that grew to millions of dollars of revenue off of FB ads. I personally know at least 10 whose primary early growth mechanism was Facebook ads. They work.

mattkrause 6y ago
As a counterpoint, you may be interested in this 2015 paper by Blake, Nosko, and Taldelis: https://www.nber.org/system/files/working_papers/w20171/w20171.pdf https://www.nber.org/system/files/working_papers/w20171/w201... They found that paid (i.e., ads) and unpaid traffic were nearly perfect substitutes for brand names: people will either to get to eBay. For non-brands, clicks go down, but sales don’t; ads are mostly attracting “browsers”, rather than buyers. The real answer is that it probably depends a lot on the industry, market, and individual business.
- deleted 6y ago
  [deleted]
- jamiequint 6y ago
  That paper is mostly referencing brand search at large companies which is completely different than lookalike ads for small, unknown companies. I'm not really sure how the comparison is relevant. If your point is that effective advertising strategies vary by company then I agree, but that is a tangential and meaningless point in the context of the above conversation.
  - mattkrause 6y ago
    You pointed out a niche where internet ads apparently worked well (though isn’t some of that just survivorship bias?) I found the eBay data interesting because AI had assumed that they would have a fairly sophisticated online operation, and yet neither the branded nor non-brand ads really helped (for the latter, removing ads led to -40% on clicks, but -2% on sales). I can’t imagine that the neighborhood pizza place is really doing a top-notch job on ad attribution; it seems a heck of a lot more likely that they throw a few ads up because everyone else does too.
    - jamiequint 6y ago
      That “niche” is the reason Shopify is a 100+ billion dollar company. With respect to eBay, proving someone sucks at running ads isn’t the same as proving ads suck. (also it matters a lot more what % of sales the ads in this case represented, rather than just the absolute change in sales). I agree with you about the neighborhood businesses fwiw.

manigandham 6y ago

The increase (or lack of decrease) in marketshare has to be factored as part of the return on investment, in which case the result is positive. Otherwise why continue to run the ads? A smaller but profitable marketshare is better than a larger but negative one.

ummonk 6y ago
If it's about lack of decrease in market share, then the existence of the ads product is not a net positive for small businesses. It is potentially just extracting a rent out of them without any aggregate benefit by pitting businesses against each other in a coordination problem.
- manigandham 6y ago
  If a company creates better kitchen equipment that allows one shop to make better food, isn't that the same thing? Is it now rent-seeking that anyone who can provide an advantage can potentially sell that to all the shops so they all remain competitive and not lose market share? All competition is a coordination problem.
mattkrause 6y ago
Uncertainty, perhaps? Prediction and attribution are really hard. I linked a paper below showing that eBay was wasting money on entirely ineffective keyword ads. I can’t imagine that most small businesses (especially brick and mortar ones) are much savvier.
- manigandham 6y ago
  Why is uncertainty specific to ads? That's part of anything in business whether it's a new office, new equipment or new salesperson. Whether something provides a return or not for your specific situation doesn't have anything to do with whether the product itself is working and valid. Ebay situation is different because search is as close as you can get to "intent" in advertising. You don't need user-targeting when you have a search query telling you exactly what they're looking for. Targeting is a proxy for that kind of intent when it's not available.