Comment by bearjaws
10 hours ago
There is something to be said about the state of advertising.
Increasingly it seems you must go to the almighty Google or Meta in order to launch any business.
We're looking to expand into a new business line and have out grown our pharmacy capacity.
The new business line will cost about $2M in software dev, and $3M for the new facility. The advertising budget? $40,000,000 (annual).
We can build 10 robotic pharmacies (~10 staff per 4000 fills daily, each) for the price of just the advertising.
Increasingly we wonder why America doesn't build more and here is why. You are going to give all your revenue to two platforms. Unless you operate in a business line with 50% margin you are screwed.
I don't know what the solution is, but its clear that the platforms are figuring out how much margin everyone has and slowly eroding it. Somewhere between 8-15% of the cost of all products we purchase is advertising spend.
Advertising spend being too high is a symptom of a supply glut. Too many products in the marketplace, not enough consumers to buy them.
In a different world where there are higher wages, more people would have more spending power. Then companies wouldn't have to spend as many dollars on advertising, which they could split between higher wages, higher margins and lower prices.
Alas, the short-term single-firm directional incentive for company decision makers in that world leads to marginal prioritization of higher margins. The loss of wages leads to loss of consumer spending power but it's spread across the economy. But every firm has the same incentive so they all do the same thing, and the good thing gets ruined.
This line of thinking leads to a Georgist-ish conclusion: The class conflict shouldn't be between workers and employers. They should be allies; the real cause of nobody being able to afford anything is rent extractors. (Writing in the 1800's, George [1] was most concerned about land rents; but the advertising monopoly of Google / Meta may be another form of extractive rent with similar characteristics.)
Maybe Henry Ford was on to something when he shocked the world by paying his employees enough to afford the product they were making (more than doubling many workers' wages)...
[1] https://www.astralcodexten.com/p/your-book-review-progress-a...
>Maybe Henry Ford was on to something when he shocked the world by paying his employees enough to afford the product they were making (more than doubling many workers' wages)...
That's a nice story to tell, but the economics never works out if you do the math. Whatever extra wages you pay, you only get a fraction of that back in increased sales. How much percent of a worker's income do you think is spent on a car? As a rough measure we can use the BLS's CPI weights for "new and used vehicles", which comes in at 7.4%, with an extra 1.4% if you include maintenance and parts. By that alone "paying his employees enough to afford the product they were making" is going to be a losing proposition, because Ford can only hope to get 8.8% of whatever they paid in wages back as revenue. And all of this is ignoring the fact that you can't pay extra wages out of revenue, only profit, so you can only hope to recoup a fraction of that 8.8%.
thats an overly simplistic way to look at it. Of course you can never get more money from your employees' purchases than you give them, that makes no sense. The point is using your market power as a large employer to raise market salaries. People will not want to work for your competitors or other sectors if they pay half what you do. So when you rise, naturally other salaries will rise too. And those other workers will also be buying cars.
Whether that makes sense economically is a difficult problem to quantify, especially over any fixed timeframe. I would guess not, at least if your brand isnt insanely strong (on the level of half or more people with enough money would buy it)
Obviously this would never work with a single employer. But I think the point is moreso that if every employer, in an altruistic sense, decided to pay their employees enough to afford more purchasing power, the entire market would grow faster
It's a collective action problem. If everyone pays higher wages, there's a greater supply of money for buying stuff / solving problems (assuming the higher wages aren't eaten by rents). No individual form recoups all of the higher wages they pay their workers, obviously, but there's a larger market for the goods of everyone has more money.
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> the economics never works out if you do the math
The economics work out pretty well if you are the only game in town where your employees can purchase what you have marketed to be the next big thing and status symbol that everyone must have.
Your logic is flawed. 8.8% of total wages vs 0% of some lesser number isn’t 8.8% of the difference.
If hypothetically you are paying 99x a year and bumping that to 100x means someone buys an 8.8x product that could be a win.
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Ok, so if he still makes a profit, so what? There are numerous other advantages to a happy and well-compensated workforce, even completely ignoring the societal benefits beyond just the company.
The idea is to use that as a marketing ploy on all sides.
On one side, paying high wages is marketing on the employment market - enticing people to work at Ford's rather than somewhere else.
Then, you got the government side. A factory providing a town with a lot of high quality employment leads to a lot of purchasing power from the employees and thus to a growing city. Wolfsburg in Germany, the best example, literally was founded by/for Volkswagen. Being respected by local politics for that growth, in turn, leads politicians and city management to... be lenient in enforcing regulations impeding the business. The best example here is Tesla in Brandenburg near Berlin. With any other company in any other place in Germany, they would get hammered with fines. Tesla in turn set up shop in a destitute area, so politicians bent over backwards and looked aside despite numerous violations and transgressions.
And finally, you got the customer side. The story of a quality product, made by well-paid domestic workers, was as powerful a story as it still is today, at least in affluent circles.
The microeconomics of that decision are poor for the company, but the macroeconomics are great. But the macro angle has been reduced to "Fed interest rate" in America.
> In a different world where there are higher wages, more people would have more spending power. Then companies wouldn't have to spend as many dollars on advertising, which they could split between higher wages, higher margins and lower prices.
Interesting hypothesis. I looked it up in Wilkinson and Pickett, The Spirit Level.
The authors provide cross-sectional data across 23 rich nations, showing a strong positive correlation (r~=0.70) between income inequality (Gini coefficient) and advertising expenditure as a percentage of GDP.
They attribute it to increased status competition & anxiety in more unequal societies, leading to pressure to consume more.
>The authors provide cross-sectional data across 23 rich nations, showing a strong positive correlation (r~=0.70) between income inequality (Gini coefficient) and advertising expenditure as a percentage of GDP.
Why only rich nations? Many of the most unequal countries are also poor (or at least, not rich), so why do they get a pass?
https://en.wikipedia.org/wiki/File:Gini_Coefficient_of_Wealt...
https://en.wikipedia.org/wiki/File:World_Bank_Inequality_202...
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I'm just going to add a recommendation for the book 'Technofeudalism' by Yanis Varoufakis. The short version is that the current cloud economy is similar to serfs working under a feudal lord.
> The class conflict shouldn't be between workers and employers.
Then why don't employers, the ones with essentially all the power here, tend to choose actions that go against the interests of the working class? Simple: regardless of what you think "should" happen, a study of history tells us what actually tends to happen in reality, and that tendency is towards class war between the ruling and exploited classes.
Anyways, in what way is "ownership" not rent-extracting in general? If you own shares of a stock and you get paid a dividend, that is rent plain and simple. All the arguments you can make against that being the case -- eg that you deserve a premium for parking your capital in a risky asset -- apply to advertising conglomerates and even literally renting out land too, so either they're all renting or none are.
Because employers don't tend to make choices about the "interests of the working class", they make choices about what benefits them specifically in the moment or near future. You need to get some sort of alignment on their interests and the interests of the working class to create change, whether that's via government intervention or otherwise.
And I hear you on ownership. It's "just" figuring out how to make that change.
>... so either they're all renting or none are.
The article in the parent comment specifically spells out why renting out land is different than say, "renting" out a car factory (or any other productive asset).
Stronger unions would help bring wages up.
I dont think you have to go georgist for that take, adam smith’s whole “free market” originally meant “free from economic rent”
I don't think that's how it works. These companies have all the visibility control and make you invisible by default unless you pay them. It has very little to do with quality, demand, or any of the rest.
I'm not familiar with Georgism, but employers and rent extractors (e.g. the majority stock owners) seem to be one and the same pretty often, at least in the US.
> The new business line will cost about $2M in software dev, and $3M for the new facility. The advertising budget? $40,000,000 (annual).
The reason the advertising budget is such a high number and a recurring charge is that effective advertising returns an ROI on each dollar spent.
If the software budget was increased 10X to $20 million, would the company get 10X as many customers? No.
What about the facility? If you 10X the facility budget to $30 million would you get 10X as many customers? No.
However, advertising is a customer acquisition activity. Every dollar you spend on advertising provides additional customers. This is saturable, but the ceiling is very high. Much higher than spending on software or facilities.
The reason your ad budget isn’t so high isn’t because Google and Meta invented the discoverability and distribution problems or basic economics. It’s because it has been determined that acquiring new customers via advertising has a high ROI and therefore it’s a smart move to pour as much money as possible into customer acquisition.
If every $1 you spend on advertising produces $2 in customer LTV then your company should be maximizing ad spend until evidence of saturation starts appearing.
This commonly frustrates engineers who think it’s a wasted investment. The question is: Compared to what? If you could have the same number of customers and same amount of revenue without advertising then you should do that! However, you can’t. This isn’t a licensing fee that’s being paid. It’s putting money into a machine that returns more dollars back than you put into it.
I doubt the ROI would be so high if organic results stood any chance.
The ROI on bribes is very high too, but we haven’t legalized those (officially).
> I doubt the ROI would be so high if organic results stood any chance.
This is just the same fallacy. In what world are people going to organically share ads for this company on their Facebook feeds? Who is going to Google the company name before they know about it?
Every business needs to proactively acquire customers.
Distribution and CAC are top of mind values for any growth business. It has been this way long before Google and Meta existed. Digital advertising actually makes it cheaper and easier than ever to acquire customers at scale.
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> Every dollar you spend on advertising provides additional customers.
If you’re just taking these customers from competitors, the marginal utility can be pretty low.
e.g. If you consider a world where there are no ads for cars, people aren’t going to meaningfully lose out of the utility they get from cars, carmakers simply avoid the prisoner’s dilemma of having to advertise as much as the next manufacturer.
I had this exact epiphany when I ran a side business selling niche widgets. Every dollar I spent on Facebook ads returned me $5 in revenue (at 40% margin) and it wasn't obvious how much I could spend before that stopped being true.
it surprises me how many people simply don't get the point. they say "they make more money this way, so it's ok". no big picture at all.
What big picture? Can you elaborate, or just snide drive-by criticisms?
I mean I understand that a lot of people in this comment section wish ads didn’t exist and that everyone just automatically knew about relevant products and services without ads, but it all reads like utopian fantasy stuff.
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That misses the point though. Google and Meta have designed systems which capture nearly the entire surplus. In a non-monopolistic environment you'd expect somebody to be willing to step in at a bit less than Google's rates and offer the same outcomes.
The parent comment did a sneaky thing and gave the advertising budget then pivoted into rants about Google and Meta. They never actually said “All of this money goes to Google and Meta”. It was just expected that on HN everyone would assume as much because that’s what everyone is familiar with.
In the pharmaceutical industry, I can guarantee their advertising funnel is much wider than two social media platforms. Think about all the places you see pharmaceutical ads: TV, billboards, even ads on buses, that sketchy doctor’s office full of company swag. That $40 million is not going all to Google and Meta even if the GP comment tried to imply it was.
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They have all the control and no competition. The time for breaking these companies up or hamstringing them at least a little bit is many years past due.
The problem is that monopolies are extremely profitable and are as "American as apple pie," despite the prevailing healthy competition myth that goes alongside it.
This is very correct, the only thing I as an engineer care about is that we rigorously optimize our spend to get the best possible CAC (Customer Acquisition Cost) It’s an incredibly hard problem and has many variables, that’s why the platforms charge what they do, they allow you to work with these variables in a somewhat approachable way.
> I don't know what the solution is
Just spitballing, but how about a total ban on behavioral targeting?
I'd go further, with a ban on possession of the data, with a provision for statutory damages.
You can still derive a lot of info without having possession of the data through the use of PETs. There's a reason why companies like Google and Tik Tok make heavy use of PETs for their advertising products.
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An environment like that is where SOLID, or something like it, could thrive.
We could just start to enforce the laws as they're written.
If I was to follow a stranger as closely as an entitty like Facebook or Google does and compiled a dossier on that stranger in many countries that would be considered stalking and would be illegal.
Incorporating and doing the same thing to society en masse doesn't somehow make it legal despite it somehow makes people disinclined to prosecute.
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Wouldn’t that increase the ad spend? You will need to show more ads to find your target audience
This would predominantly affect businesses where that audience is not trying to find that business.
Which sort of businesses are those?
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In order to sell anything, people need to know about it. Google and Meta provide a way to make this possible. If they didn't exist, you wouldn't somehow have a more affordable way to get people to know about your product. However frustrating the current situation is, it is still more accessible than needing access to the airwaves or print media to try to sell anything new.
> In order to sell anything, people need to know about it. Google and Meta provide a way to make this possible. If they didn't exist, you wouldn't somehow have a more affordable way to get people to know about your product. However frustrating the current situation is, it is still more accessible than needing access to the airwaves or print media to try to sell anything new.
The places people can find out about your product are controlled by a very small number of companies. And those companies not only own those spaces, they also own the means of advertising on those spaces. So if you have a product you want to advertise, you're not paying to distribute your message broadly to consumers, you're paying a toll to a gatekeeper that stands between you and your potential customers.
but that’s not really true. You’re not paying, you’re bidding. You are competing against thousands of other advertisers for eyeballs. If you are the only advertiser targeting a group of people, you will spend almost nothing to advertise. If you are targeting a group of people that everyone targets (e.g: rich people in their 30s) you will pay through the nose.
Facebook, Google etc. are the most “fair” forms of advertising. We can dislike advertising, their influence, product etc. but when you compare them to almost every other type of advertising, they’re the best for advertisers.
The reason they generate so much revenue is because they are so accessible and because they are so easy to account for. The reason LTV and CAC are so widely understood by businesses today is because of what Google, Facebook etc. offer.
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That's generally my thought as well, I am not implying you don't need to advertise. I just believe the industry has more or less reverted to an even worse version of what we had before (TV & Radio ads). At least before, there was ~100 networks you could sell to, now there's basically 10 if you include major networks. Of course you don't actually launch new products with TV ads, so it is more or less 2 platforms.
The problem is that most businesses used to be local. This naturally limited competition and gave your business a chance, even if it sucked. Nowadays the competition is global.
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So another platform disrupting the duopoly would be good, no?
There are lots of ways to find out about products. We don't need Google or Meta to do look at a review site or ask a friend or search a directory or to solicit offers.
Adverising isn't there to push ideas into people who didn't need to know about it. Many industries would be better off without advertising (see e.g. cigarettes) because it ends up in an arms race.
If google and meta didn't exist, it is possible that the advertising market could be more competitive, so the amount companies would need to spend would be lower.
There is no competition in the ad space, so those companies can continue to just parasite their way to record earnings by stealing every other businesses profits. They create almost nothing of actual value, they are just heads of an ecosystem they totally control. Parasitism as a business model.
“Your margin will soon be my margin.”
The solution was/is and most likely will be antitrust but which administration will shatter the US tech market we are yet to see.
Well, both are 100 pct in the pocket so the only possible answer is a third entity which is highly unlikely.
Biden appointed Lina Khan. "Both parties are the same" is lazy and unhelpful.
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I don't think it's outright corruption so much as quid quo pro. Think about PRISM and other such things. US tech companies operate globally, hoover up a vast amount of personal information, and pass it all right along to the US intelligence agencies.
So the more intrusive and vast these companies become, the more the US intelligence apparatus gains from it. Polls consistently there's extremely high levels of concern about what companies are doing what people's information, and we have a million 'real life' privacy laws. The complete absence of anything meaningful on the digital front, from either party, is highly conspicuous.
What would your hypothetical antitrust solution accomplish in this case? Can you be specific?
This is kind of broken logic. You’re not required to advertise. If you want to scale your business into millions in revenue, then you’ll likely need to advertise. The best ROI is generally google/meta, but you have countless other options. You can buy ads directly from most websites, it just doesn’t scale.
The best ROI is google/meta if you're an expert and have unlimited time to dedicate to making and running ad campaigns. For the rest of us there's much better tools that give us better ROI than if we did it on our own.
> You're not required to advertise.
https://en.wikipedia.org/wiki/Arms_race
If you are considering human society as a whole, it is a disastrously poor use of resources. But if you are an arms merchant (or dominant advertising platform), it is fabulously profitable.
> it is a disastrously poor use of resources
For it to be a poor use of resources, you have to have some goal you are optimizing against.
And I think you'll come to find that the assumed goal in your head is not one that's widely shared across what people in society actually want.
Okay, maybe the digital ad is a waste of resources. But is it any more of a waste than the gender reveal confetti that it was advertising? How about even the idea of a gender reveal party.
What about an enamel pokemon fridge magnet?
After a very low bar (for 2026), human essentials are taken care of and people mostly want luxury/leisure consumer goods for entertainment.
Doesn't this point more to a saturated market and the need to manufacture demand to keep growing?
That is very good framing for the problem with advertising today.
It also says that if you can find an audience to build a new ad platform, the incumbents have created enormous margin for the new platform.
Just to verify--as I truly do have a contempt for big tech oligopoly that extract rent from everyone to do anything at all, but am just unsure this specific problem is a ramification of such--are you sure you would not have had a large advertising budget pre-Google, or even pre-Internet? You used to pay to pay for limited space in newspapers and limited time on TV/radio stations, which also had high theoretical per-unit margins, or for a massive pile of physical mailers and door hangers, along with the cost of the delivery.
To the extent to which our current situation costs more, I'd think it might merely be because of increased worldwide competition: it used to be that the people trying to advertise to any specific random community were also likely local, and probably had a legit attempt at a business model... only, now, the rise of online companies funded by speculative venture capital means that an attempt to advertise a restaurant to people who live in a 10 mile radius must compete against a company that raised $400m to sell an online engagement platform that cares not one iota who uses it as long as the conversion cost is cheap, bidding up ads everywhere.
(One place that does seem to me to be uniquely the fault of these modern tech companies, though, is that if a newspaper published a scam ad, whether or not they had legal culpability, I think they and their surrounding community did at least strongly feel that they had some level of moral culpability. In the current tech environment, people seem to want to believe Meta/Google should be allowed to indiscriminately publish ads from bad actors, so you now must also compete to bid for limited attention with obvious-to-most-but-not-all scams and grifts that make money out of nothing but bullshit and are thereby willing to again bid up prices anywhere and everywhere.)
Is your product offering anything unique to the consumer other than blasting them with more ads than the competition?
The solution is to prevent the privatization and wealth accumulation that flows from control of infrastructural technology platforms. Netscape, google, computer os, machine learning were all public or university research projects until the first movers (andreeson, brin/page, Ellison, gates) stole them, gatekept and IPed them, and then exploited wide user base to accumulate absurd amounts of wealth for just themselves. These people either didn't create anything at all or made very slight variations before deploying them. They were smart in seeing the trends before they happened, but should they really be entitled to 50% of a countries wealth just because they were lucky enough to be first? Especially now that we see how they behave once they get that control?
There is no reason at all why the US govt. can't control this better, they just refuse to do so.
“ Increasingly we wonder why America doesn't build more and here is why.”
Building another advertising network isnt like building a factory or a bridge. Its not something money can magically make appear.
You need to build something that is either very very addicting to use or an universally useful online product like ChatGPT or a new search engine.
If it was that easy, capitalists would be building another new advertising network in droves
Advertising is a tax that goes to an oligopolistic cartel.
I've never gotten $2 for $1 of tax I paid. At best I'm getting $1 of services back, usually much less.
Have you actually accounted for all the services you’re receiving from the government? Road construction and maintenance, schools, availability of clean water, safe aviation, trustworthy financial markets, public universities, funding for research that improves your health and happiness, and so on? I don’t think you can even really put a price on most of those, because they simply could not exist without a centralized system funded by taxes.
Money is fungible, but there are various government expenditures that generate positive returns, either in direct revenue (e.g. tax collection enforcement) or knock-off economic benefits (e.g. libraries) some proportion of your taxes go to these services where you are effectively getting more back than what you’ve paid for these services.
(Economically, governments should spend more on such services until the marginal returns are no longer positive, but tend not to for political reasons.)
What “service” do you think you get from the ads you pay for?
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Rent seeking is all Capitalism is about.
They call it a moat.
This is misuse of language. Rent seeking is anti-competitive by definition. The current system, as far as it encourages and rewards rent seeking, is anti-capitalist.
Getting into a position where you can tilt the playing field exclusively in your benefit is 100% the logical outcome of for-profit companies in capitalism.
It’s so transparently and frequently stated outright, that building companies geared around achieving that has become the norm: it is the fundamental business-model of _every_ _single_ unicorn startup, or the company that buys them. Launch, squeeze out competitors by relying on VC money, capture the market, and become the sole dominant force in that market and use your position to then pull up the ladder behind you and cement your position. Uber and Facebook are prime examples of this.
It isn't.
Both perfectly competitive markets and monopolistic markets are part of the broad term capitalism.
Capital consolidates over time and seeks to influence policy-makers to create anti-competitive regulations.
Every single time.
Anticompetitive behavior is completely within lines for capitalism. Survival of the fittest and efficient marketplace and all that.
Besides, what's the other option, rent seeking is socialism? A barter system?
If monopolies are "non capitalistic", then why has every capitalist economy in history had such a tendency towards creating large monopolies? The same cab certainly not be said any those economies producing, say, worker control of the means of production.
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Just like communism practice is not communism in theory.
Meta, TikTok and social media create the cultural celebration of thinness that makes it possible for you to sell 25mg semaglutide tablets to everyone. In my opinion, they deserve more than 50% of your margin: you didn’t invent the drug, the FDA is basically letting you break the exclusivity policy for no particularly good reason, and you didn’t create the audience.