Memo: Linear Commerce and Content Fortresses

Apple’s intentions appear straightforward at first glance. The company wanted to improve the privacy of its end users. This virtuous effort came with a few additional outcomes.

By upgrading its privacy practices, Apple will impair large ad networks that have grown with the help of those end users. This could potentially cripple Facebook’s current model with its new privacy demands. Apple has also opened the door to an unintentional adjustment to its privacy mandate. In doing so, the Mark Zuckerberg-led advertising company (and social network) will adopt a new way to accomplish its most critical objectives: revenue growth and user utility. Facebook will become an eCommerce company instead.

The idea for the law of linear commerce was envisioned as a relationship between brands selling physical products and digital media. The first paragraph of the very first member brief read:

Linear commerce is a core tenet of 2PM’s understanding of an evolving commerce ecosystem. It is the prioritization of audience. Product manufacturers often outsource demand generation. Brands that are ahead of the curve emphasize their audience’s growth as much as they do their physical product’s manufacturing. Likewise, digital media publishers that follow these principles will prioritize organic and loyal audience growth over SEO or PPC-driven commodity clicks. [2PM, 1]

If you’ve built a great product, you’ll need a captive audience as a market for the goods. And if you’ve built a captive audience, you’ll need a great product to sell them. This can now be applied to software-driven audiences and the first-party products that monetize them. Mobile apps have, until now, been able to rely on valuable data derived from a tracking system called “Identifiers for Advertisers” or IFDA. As of the recent release of Apple’s iOS 14.5, this data source has been shut off.

Apple forced the advertising industry’s hand with its decision to implement new privacy policies. At the June 2020 WWDC event, Apple announced a new way that the mobile ecosystem’s IFDA would be accessible for advertisers. In the simplest terms, users would need to explicitly opt-in to allow an advertiser access to the IFDA, a $189 billion international industry. The App Tracking Transparency (ATT) framework is a detriment to advertisers who were dependent on this market for iOS customer acquisition.

Flurry Analytics, a Verizon Media company, tracks over 1 million mobile applications, aggregating data and insights from 2 billion mobile devices monthly. According to this data, worldwide opt-in rates are hovering around 11% for iOS 14.5 users. Shockingly, that number degrades further in the United States. It hovers around 4%.

Content Fortresses and “Other”

First-party data is this decade’s digital distillation column, the process that refines crude oil into a globally useful asset. In this analogy, crude oil is content. As I recently wrote on the reimagining of content’s value, it is now the core of all first-party data strategies. I explained:

First-party data will define the next wave of advertising and sales. American businesses are now in a race: They’ll build, acquire, or market to the audiences that have it. The independent media industry is quick to discuss outcomes but rarely do we dissect the early steps. As more pursue first-party data, audience development will become one of the most coveted skills on the market.

To acquire targeted customers, first-party audiences are replacing third-party collections. An early indicator of things to come: Over the past six months, two major newsletters were acquired by much larger companies. [2PM, 4]

Apple’s decision accelerated the adoption of linear commerce (media meets commerce) by years. Look no further than Facebook’s strategy to rely less on Apple’s ecosystem. With the iOS 14.5 update, Facebook’s ability to track view through conversions has been impaired.

That’s where these eCommerce products come in. If Facebook can sell more products through its own apps, it’s not so dependent on cross-site user tracking. [2]

While Facebook will emerge as an eCommerce company, they aren’t necessarily in it to compete with Amazon. They are likely to make a relatively small margin on the sale of goods. But the advertising of those products will move brand marketers to continue investing in running ads for their goods across Facebook-owned apps, including Instagram and its native shop.

When you make a sale, we deduct a fee from your payout automatically. We call this a selling fee. The selling fee is 5% per shipment, or a flat fee of $0.40 for shipments of $8.00 or less. You keep the rest of your earnings. [3]

When the intended target is reached, Facebook’s efficacy as an advertiser can be tracked no differently than it was before IFDA was impacted by the 14.5 upgrade. Facebook CFO David Wehner shared his optimism with analysts: “The impact on our own business, we think, will be manageable.” Facebook has long held a valuable audience and a recent commitment to native commerce; Apple’s privacy push has steered the Menlo Park company to prioritize its walled garden, a page taken from Amazon’s growth as a walled-garden advertiser.

Ad sales, which the company breaks out as “other,” rose 77% year-over-year to $6.9 billion, Amazon said in its Q1 earnings call on Thursday.

Amazon now encompasses 10.3% of the digital advertising market (up from 7.9%) in the United States with a projected 13% market share by 2023. Amazon’s walled-garden approach ranks them third in an advertising market that is currently dominated by Google and Facebook (one that Apple wants a piece of). Facebook’s walled garden approach is intended to help them climb to the No. 1 position. They are better positioned than Google in this respect.

The phrase “content fortress” was coined by Eric Benjamin Seufert, an analyst at Mobile Dev Memo. The walled-garden approach is indicative of a larger trend to acquire and monetize first-party data.

In early February, Applovin, the mobile ad network, acquired Adjust, a mobile attribution company. Beyond financial engineering (given that Applovin is approaching an IPO), there’s no strategic justification for this acquisition other than that Applovin is building a self-sufficient advertising ecosystem to connect its first-party properties. [5]

First-party data was well on its way to becoming the key asset for advertisers; Apple’s decision further moved advertisers to prioritize its collection, refinement, and monetization. Apple will eventually eliminate data sharing across vendors, a long-time complaint of many of its users. In doing so, walled gardens will take the place of the open web funded by this data practice. Media companies and commerce companies will become indistinguishable, in many ways. The law of linear commerce is no longer just about brands and their content strategies or publishers and their eCommerce development.

Facebook is an advertiser using commerce to sell more first-party ads. Amazon is an eCommerce retailer using first-party advertising to sell more goods. Apple may help the two companies accomplish both, all while bolstering its own privacy practices, which were a solution to an expiring era of advertising.

By Web Smith | Editor: Hilary Milnes

Member Brief: Pat McAfee and YouTube

 

When we think of independent creators today, we think of a finished product: polished, well-produced, perfected. Our mind conjures images of rambunctious YouTube videographers, vloggers, TikTok creators, artists, and larger-than-life independent journalists. Pat McAfee is neither of those, at least not in the conventional sense.

The difference between others’ work and McAfee’s is simple enough. Others deliver upon completion, not a moment before. The Pat McAfee Show isn’t polished or expertly-produced, but it is smart. And so is the show’s namesake.

This content is designed exclusively for Executive Members

Memo: A CPG Epiphany

A recent fireside chat between Parade co-founder and chief executive Cami Tellez and a small, private group of 2PM’s Executive Members was more than enlightening. It ended with one attendee proclaiming, “I was nothing at 23 years old” (Tellez is 23), and another confirming, “She’s ahead of the curve.” One of those responses was from a heralded retail executive with a decade of helping some of the most visible brands in America develop omnichannel presences. Every other member in attendance was equally esteemed in their own right.

Tellez represents many of traits familiar in the high-growth, modern retail industry, detailed in books like Lawrence Ingrassia’s Billion Dollar Brand Club. You know the commonalities weaved in and out of brands like Warby Parker, Away, Casper, and so on: the Ivy League pedigree, the summer internship with the well-respected Tusk Ventures, proximity to New York (or Los Angeles), and a coveted role with Rough Draft Ventures. But what separates Parade from earlier brands at similar stages is a combination of three attributes: profitability, supply chain management, and arbitrage in consumer behavior.

Ten minutes into the discussion with Tellez, it became clear. Her team identified a simple arbitrage that may define the coming years of desirable digitally-native brand growth. While Parade is an apparel and accessories retailer, the brand acquires and maintains customers like a consumer packaged goods brand. It’s more than a qualitative notion of community, brand awareness, or presence – terms that we often assign to apparel retailers. CPG brands operate quantitatively in distribution, shelf space, frequency, average order and lifetime values. Parade is a product that its consumers buy with a cadence more recognized in CPG or beauty brands. I recently spoke with Jann Parish, the former Chief Marketing Officer of Victoria’s Secret, about the opportunity ahead for Parade:

It looks like Parade is firing on all cylinders; product that performs, marketing that resonates and an avid, loyal (and growing) customer base.

Loyalty to an apparel manufacturer separates brands like Lululemon, Nike and Athleta from the specialty retailers that continue to struggle despite promotional events, large retail footprints, and unparalleled distribution. What separates brands like Lululemon from traditional retailers like Brooks Brothers, Aeropostale, or Forever 21 is two-fold: Winning brands require loyalty and repetition. This is where apparel culture meets CPG’s superpower.

On Applied Loyalty and Repetitive Sales

When you buy your groceries from Whole Foods, you choose the same products time and time again: Siete Foods for your tortilla chip cravings, Olipop for your root beer fix, and Jeni’s for your weekly ice cream binge. You do this almost without thinking, whether you’re purchasing through an Amazon app or roaming the store in person. You will find the same expressions of brand loyalty and purchase repetition in the aisles of Target. You choose the same diapers, the same premium razor blades, and the same non-aluminum deodorant. Again, you do this without much thought.

variants variance

While brands like Onnit, Native, Care/Of, or Schmidt’s exited for high eight or nine-figures, apparel brands who’ve grossed similar revenue figures have failed to achieve the same. This has been a bane to digitally-native brand founders like myself. But the growing successes of like-minded brands like Parade, Tracksmith, Madhappy, Summersalt, Rapha, and even Todd Snyder (founded in 2011 and acquired in 2015) may offer similar contexts. Parrish continued:

Parade has done a good job being an anti-Victoria’s Secret without calling itself one, that means less acquisition cost to fight VS and more dollars to its community. Similar to the approach Lululemon took years ago with its brand: it didn’t fight Nike. It won with performance and community. Parade has product performance and community nailed. A shrewd distribution strategy is its next step.

Community and loyalty can be interchanged in these assessments. Founded in 2019, Parade grew from zero to eight figures in annual revenue within 18 months. One of Maveron’s investors in the brand, Natalie Dillon, recently shared:

Their brand love is off the charts. In their first 12 months they acquired nearly 100,000 customers. The brand did $10M in sales in its first full fiscal year in 2020 with about 70% coming organically. [1]

These are extraordinary numbers, and while there are dozens of brands doing greater merchandise volume, few are selling to so many customers so early in their life cycles. Nearly 15 months into a pandemic that shuttered a large cohort of the retail industry, Parade’s latest valuation added to my curiosity about the brand. Tellez raised at a $70 million valuation from some of the smartest money in consumer investing: Lerer Hippeau, Greycroft, Vice Ventures, Shrug, and a who’s who of consumer founders and independent investors.

There are reputable, digitally-native fashion and accessories brands with gaudier revenue metrics but few if any have the ability to raise at a 5-6x multiple, a markup commonly held for brands that market repetitive products. And this is what may end up separating this new class of modern retailers from the 1.0 and 2.0 phases. They’ve figured out how to endear themselves to the customers in a manner reserved for another class of goods.

Like many business travelers, I likely own a dozen Lululemon tees in varying colors. Many were acquired on work trips after a number of near-instinctive visits to the retailer for a purchase that was as predictable as it could be. The 23-year-old brand is one of the rare apparel retailers to understand that “variants variance.” Lululemon manufactures and subtly markets products so effectively that customers find reason to revisit their stores, often for the same SKU in a different variant. This is CPG loyalty manifested by an apparel retailer. Once applied to an earlier-staged brand like Parade, it becomes difficult to question the valuation.

Brands like Parade excel at earning loyalty expressed through repetition. Their marketing dashboard likely shares “repeat purchasers” as a key performance indicator whereas many apparel brands associate average order value (AOV) and “time to payback” as their key metrics. More brands of this generation will pattern themselves like the consumer goods that own the right shelves on the right aisles of your favorite grocery and market retailers. In doing so, they’ll teach the old dogs the tricks that they should have already learned.

By Web Smith | Editor: Hilary Milnes