SITALWeek #428
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: The trillion-dollar advertising industry is fueled by products that aren't good for you, but will GLP-1s begin to erode it? YouTube's $50B flywheel is fueling an expansive array of high quality, always on content; sugar eating enzymes; the US is more dependent on China than ever before; and much more below.
Stuff about Innovation and Technology
Can Advertising Stomach GLP-1s?
Ever since I started thinking through the knock-on effects of GLP-1s on overall healthcare spending three years ago and the potential impact to the food supply chain in #379 last year, I’ve also wondered how the trillion-dollar advertising and trade spending industries might be impacted. I touched on advertising in #379, but, as we see reduced demand on the margin at places like Walmart, afternoon snack wars, and worried beverage makers – “24% of daily coffee drinkers say they now drink less since using a GLP-1”, according to a Bernstein survey – it’s worth considering how marketing strategies inside the advertising and trade spend behemoth might react. I can envision a few different scenarios, but the main point I’d like to make is that we are seeing these changes within the context of a classic complex adaptive system, and the only real conclusion to be drawn at this early stage is that the range of outcomes for both the consumer and healthcare industries is widening, which could ultimately impact the advertising industry. Perhaps it will lead to disruption, or perhaps the status quo will reign; but, the odds of the future looking different than the past are increasing. Even a marginal decline in demand for food, drinks, and impulse buys across all types of consumer categories could put enough pressure on revenues that companies spend less on marketing. Or, we could see companies use marketing as a weapon to defend share. Last year, Molson Coors successfully ramped up ad spend to take advantage of the competition and grow market share. The motivation to keep your factories running is high given the fixed costs, extensive supply chains, and jobs involved; so, an increase in advertising may be in order until a Darwinian battle weakens some brands, likely causing a reshuffling of market share and a wave of M&A or bankruptcies (like Interstate Bakeries following the Atkins craze). Companies with the strongest balance sheets, least debt, and savviest marketers are likely to emerge larger in this scenario. I’d probably bet against the consumer brands that have been acquired by private equity and leveraged up to a point where they may no longer be able to adapt. Product innovation will likely be key; for example, healthier frozen meals are growing in popularity with patients on GLP-1s. And, when all else fails, shrinkflation will allow brands to cut portions while still charging the same or more.
While we often think of ads for fried buffalo chicken sandwiches, etc., on TV/streaming video, billboards, and the like, the market for “trade promotion” (which encompasses in-store advertising, product placement, specials, etc.) is estimated to be over $500B worldwide. This enormous figure, which is crucial to many retailers' profit margins, rivals the advertising market for all types of products, not just consumer goods. Another old stat puts spending on trade promotion at 20% of the revenues of consumer packaged goods companies. Again, one can imagine a significant decline in spending, or a war for customer attention being fought in stores and on ecommerce sites. There’s a familiar analogy with tobacco that is tempting to make. As demand for nicotine declined over the decades, the makers of the products attempted to raise prices to offset volume drops. We don’t need to go as far as saying Starbucks’ sugary, caffeinated concoctions are as addictive as cigarettes to make a prediction that certain purveyors of consumer vices will be able to raise prices for their addicted, ahem, consumers. Perhaps, in a decade, a latte will be $35 and a two-liter bottle of Coke will cost $50, with such beverage indulgences reserved for special occasions and addicts. As I mentioned, this isn’t just about food and drinks; if GLP-1 usage expands, there are other large, will-power-crushing impulsive consumer habits that have a lot of advertising dollars behind them, such as sports betting. I’ll reiterate what I said before: the best way to think about the potential impact of GLP-1s is as a widening of the range of outcomes, with a potential skew toward negative developments for some industries, but it’s too early to draw any major conclusions. And, who knows, it’s possible advancements in AI will allow consumer goods companies to slash expenses and drive higher returns on their ad spending (I am contractually obligated to mention AI in every section of SITALWeek, so I had to slip that in). If you spend time researching, working in, or investing in these potentially impacted industries, I’d suggest keeping in mind our frameworks for adaptability and non-zero-sum outcomes (outlined in Redefining Margin of Safety).
Ambient YouTube
Longtime readers may remember some of the quirkier types of videos that populate my YouTube feed, ranging from meditative walking tours to classic TV ads. Over the last year, I’ve found even more excuses to have YouTube playing in the background. I’ve formed what you might call an ambient YouTube feed. For example, when I sit down to write SITALWeek, I often play a driving tour (which has replaced the Beverly Hillbillies rerun channel on Pluto). I have a rather large TV screen about five feet from the couch where I write, so it feels like the front windshield is just beyond my laptop screen. This week, I “drove” the scenic roads of Arches National Park in Utah while writing. I am also fond of exploring dying malls, especially ones I frequented during their heyday.
While everyone might enjoy different genres of meditative, ambient content on YouTube, the overall numbers suggest that YouTube is winning share from other forms of viewing. Nielsen reported that YouTube was the top streaming platform for the last twelve months at 8.6% of all minutes. (As an aside, TV viewing is rising again after declining out of the post-pandemic period, perhaps indicating fatigue with social networking/gaming following the pandemic uptick, but also likely thanks to the debut of new content after a successful resolution of the writer’s strike, as well as a strong Taylor-Swift-driven NFL season). And, of course, I am having a little bit of fun here describing my ambient YouTube viewing because obviously the growing amount of interesting content, which is clearly not ambient, is the real value for most people on YouTube.
It’s worth understanding why this unending array of long-form, high-definition content is being produced in the first place. Why on Earth would anyone drive for several hours each day in silence and then upload the 8K video to YouTube? The answer is simple: because it pays to do so. YouTube has a high non-zero-sum business model and flywheel that incentivizes creators to spend significantly more effort producing quality videos vs. other platforms. We previously dove into this strategy with our look at Tik-Tok creators' lose-lose predicament. In 2023, YouTube generated $31.5B in advertising revenue [PDF]. And, Google also recently reported that YouTube Premium, the ad-free version of YouTube that also includes YouTube music (I highly recommend YT Premium if you or your kids watch it a lot), passed 100M subscribers, up from 80M in November of 2022. If I extrapolate from these numbers that, on average, Google had around 90M premium subs for 2023 and assume a somewhat conservative ARPU of $10/mo (the service is $14/mo in the US, but it’s cheaper in some countries, and some folks use VPNs to get a cheaper price, although YT is cracking down on this practice and ad blockers), that’s another $11B, for a rough estimate of over $42B in YouTube revenues in 2023 (for reference, the second largest video platform, Netflix, had 2023 revenues of $34B). Google’s overall subscription revenues grew by $5.6B in 2023 to $34.7B. The company’s 10-K noted that this figure was “primarily driven by growth in subscriptions, largely for YouTube services”, which would also have included YouTube TV, the linear-cable replacement that recently crossed 8M subscribers (note: at ~$75/mo, subscription fees would add another $7B in revenues; however, the bulk of this figure is paid out to Hollywood studios and sports leagues via the cable networks and broadcasters rather than to YouTube content creators). All in for YouTube advertising, Premium, Music, and linear TV, that’s close to $50B in estimated 2023 revenues.
YouTube’s leading video app generally pays out around 55% of revenues to content creators, which, ceteris paribus, would translate to about $23B of the $42B in ad/sub revenues last year (there could be reasons why this number is lower, but we don’t have perfect transparency from Google on this). That’s an astonishing honeypot that drives creators to, well, record themselves driving, as well as produce a long tail of highly entertaining and informative content. And, the figure is clearly growing as YouTube gains share, particularly in living-room viewing, which demands higher quality/resolution long-form content (that said, even YouTube Shorts are also popular in the living room). Tara Walpert Levy (YouTube’s VP, Americas) noted recently in a Deadline interview that: “The number of creators who are seeing the majority of their watch time come from the television versus other devices is exploding. I think it was up 400% last year. There are some parts of that that we did not expect. For example, Shorts has taken off in the living room.” Walpert Levy also discussed the network effects at work: “Obviously, creators have always been at the heart of YouTube and I think they are now recognized as maybe the no-longer-so-secret weapon in the streaming wars. They’re the studio and the writer and the actor and the director all in one and they’re connecting with people in really new and authentic ways. The second thing is the viewing experience itself. We’re absolutely committed to offering best-in-class products across everything that we do, and to make sure that they’re easy to use and have features this would enhance rather than take away from the viewing experience.”
This is, of course, all part of the infinite content trend as video shifts away from increasingly niche Hollywood studios to an array of independent creators (covered in more detail in “Will it Play in Peoria?”). YouTube is 19 years old now, and it’s remarkable to see the role it has played in democratizing content creation and distribution. I’ve held the belief for a couple of years (e.g., see #359) that YouTube is in the best position to bundle all forms of content and drive the highest value for creators and viewers, and this position of strength is clearly growing. And, tagging onto my post last week about the home holodeck, I can’t wait for ambient VR/AR content to enjoy in the future. And, fulfilling my contractual obligation: more and more of this content will be created by AI.
Miscellaneous Stuff
Enzyme to Let You Eat Your Cake Too
A startup is looking to use an enzyme food additive to transform sugar into fiber during digestion to reduce the negative health impacts of sugary foods: “The enzyme Zya is developing comes from a family called inulosucrases, and is naturally made by a strain of bacteria found in the human microbiome that’s capable of converting sugar to fiber in the gut environment. This enzyme acts on sugar before it can be broken down and absorbed by the body. It works by rearranging sugar molecules into inulin fiber, a type of soluble fiber found in plants such as chicory root that fosters the growth of beneficial gut bacteria.”
Stuff About Demographics, the Economy, and Investing
China’s Export Obfuscation
More evidence is emerging of how US retailers and other corporations are using Mexico to land imports from China, confounding the official stats that show China’s exports declining. I recently covered (#426) a related issue of how the hundreds of billions of dollars in “de minimis” shipments are circumventing US accounting and tariffs; however, these low-dollar direct imports are rivaled by the high volume of all types of overseas commercial goods being re-routed through Mexico. The FT has more stats on containers landing in Mexico from China: 881,000 in 2023, up from 689,000 in 2022 and 600,000 pre-pandemic in 2019. And, Aaron Rubin, founder of one of the largest third-party logistics providers to ecommerce companies in the US, outlines how sellers are using loopholes to land US-destined packages in Mexico and Canada without tariffs. As the FT points out, this changing trade pattern is generally assumed to be a workaround in response to tariffs levied by Trump and sustained by Biden as tensions remain high with China. As I noted a couple weeks ago, the US appears to be as dependent as ever on China, despite the misleading headline numbers showing significant declines in taxed imports.
✌️-Brad
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