In 2018 the global advertising industry is projected to surpass $550 billion with revenue from advertising driving Google’s valuation to in excess of $700 billion, and Facebook to over $500 billion. But all of that is about to change.
What if I were to tell you that the advertising business as we know it today is about to disappear… Collapse… Dematerialize?
Let’s dive in.
The TV show Mad Men fictionalized the classic 1960’s Madison Avenue advertising agency, where print, TV, and radio ruled the roost and defined how companies pushed their products to the consuming public. There’s no question that when the dot-com revolution came along, few understood the disruptive impact of the technology. Now, less than two decades after the dot-com bust, Google, and Facebook combined, command more of the advertising market than all print media on the planet.
To provide perspective:
Both Google and Facebook, companies that are roughly a decade old, together make up roughly 25% of all global advertising expenditures. In these ten years, virtually the entire advertising industry has transformed itself into a digitized social media marketing business, fueled by open-source e-commerce platforms, mobile devices, and breakthroughs in digital payment infrastructure.
The purpose of today’s advertising whether print or digital is to convince you to buy something. Advertisers extol the benefits. Buy this product because… it will make you more popular, more sexy, more successful, and so on. But what happens in the future when it’s not you making the purchasing decisions, but instead, your AI? Imagine a future when you simply say to JARVIS, your personal AI butler (named after the AI in Ironman) “Hey, I’m low on toothpaste, buy me some.” Does JARVIS watch the TV advertising campaign filled with bright-white smiles? No, of course not. In a nanosecond, the AI considers the molecular formulation of all the options, the pricing, the published client-satisfaction reports and finally, perhaps, evaluates your genome to understand exactly which flavour formulation is likely to excite your taste buds. And then it purchases.
Frankly, in the future, you’ll never have to actually ask your AI. JARVIS will be monitoring your supply of regularly consumed items, from toothpaste to butter, and will be able to order them “auto-magically” before you even know you need them.
How about the purchase of something new? Say, for example, a drone your son wants for his birthday. In this case, you’d likely just specify the functionality desired and ask “Hey JARVIS, could you buy me a drone for under $100 that is easy to fly, and that takes great photos?”
Even today, there are very few things that I want to go and buy myself, to look at advertising, do comparison shopping, and so forth. But what about fashion decisions? Are you going to trust your AI to choose your clothing? Probably not, but I do imagine an AI that listens to my daily conversations, tracking my eye movements as I window shop, and actively pattern matching me across my social circles. That AI will know what I like, which of my friends I tend to dress like, and it will do a pretty good job of selecting clothing choices for me.
We’re heading towards a future where, regardless of the product or service category, your AI will make the majority of your buying decisions. This is the paradigm shift that poses a tremendous threat to traditional advertisers and a revenue disrupter to the current online models subscribed to by Google and Facebook.
I often speak of the six D’s of exponentials: Digitized, Deceptive, Disruptive, Dematerialized, Demonetized and Democratized. Right now, we are experiencing the dematerialization and demonetization of advertising thanks to the power of artificial intelligence and the prominence of social networks. But perhaps there is a seventh D… Dismissed. Meaning that companies are going to be dismissed by the consumer, who will delegate their AI to make all purchase decisions. At the end of the day, my AI will make purchases for me based upon fundamental metrics: which product choice is the healthiest, the lowest cost, the safest, and best aligned with my social graph. I will not care about any advertisement, and when I have my AI make optimized decisions for me, I will no longer trust traditional advertising. For the consumer, and for those of you in the advertising business, the change is about to occur at an unprecedented rate.
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Spending habits around the world tell a pretty consistent story. We tend to spend money on many of the same basic products and services. Take a look at how consumers spent their money in three large economies: The United States, China, and India.
In the U.S., in 2011, 33% of the average American’s income was spent on housing, followed by 16% spent on transportation, 12% spent on food, 6% on healthcare, and 5% on entertainment. In other words, more than 75% of Americans’ expenditures come from those basic requirements.
In China, per a recent Goldman Sachs Investment Research report, there is a similar breakdown — food, housing, mobility, and well-being make up the majority of Chinese family expenditures. Interestingly, in China, consumers care significantly more about looking good and eating better (and less about having more fun) than in the United States with nearly half of consumer income going to clothes and food.
In India, with a population of 1.2 billion people, expenditures on food, transportation, and miscellaneous goods and services are most prominent. Rent or housing and healthcare represent a smaller percentage.
These differences are likely cultural but overall, you see that the majority of expenditures cover these seven categories:
Now, imagine what would happen if the cost of these items plummeted.
Here’s how…
Rapid Demonetization – What It Means
I define “demonetization” as the means by which technology takes a product or service previously expensive and makes it substantially cheaper, or potentially free. It literally means removing money from the equation. Here are some industry examples:
In the Kodak years, photography was expensive. You paid for the camera, for the film, for developing the film, and so on. Today, during the Megapixel era, the camera is free in your phone, no film, no developing. Completely demonetized.
In years past, collecting obscure data was hard, expensive in time if you did it yourself, or expensive in money if you hired researchers. Today in the age of Google collecting data has become free and its quality is 1000 times better. Access to information, data and research, like photography, is fully demonetized.
Consider live video and phone calls. Skype, Google Hangouts, and others have completely demonetized both.
The list goes on:
Demonetizing More Than $900,000 U.S. Worth of Stuff We Take for Granted
In the back of my book Abundance (Page 289 of the recent edition), I provide a chart showing how we’ve demonetized $900,000 worth of products and services that you might have purchased between 1969 and 1989.
People with a smartphone today can access tools that cost thousands a few decades ago. Twenty years ago most well-off American citizens owned a camera, a video camera, a CD player, a stereo, a video game console, a cellphone, a watch, an alarm clock, a set of encyclopedias, a world atlas, a Thomas travel guide, and a whole bunch of other assets that easily add up to more than $900,000. Today, all of these come for free with your smartphone. What is strange is that we don’t value these things when they become free. We just expect them.
So now, let’s look at the top seven categories described above, where people globally are spending their cash today, and how these things are likely to become demonetized over the next two decades.
Transportation: The trillion dollar automotive market is already being demonetized by startups like Uber. And when Uber rolls out fully autonomous services, the cost of transportation will plummet even further.Think about all of the related costs that will disappear: auto insurance, auto repairs, parking, fuel, parking tickets… The overall cost of “getting around” will be 5 to 10 times cheaper when compared to owning a car.This is the future of “car as a service” with even the poorest of us being chauffeured around.
Food: As I noted in Abundance, the cost of food has dropped thirteenfold over the past century. That reduction will continue (see chart below). Additional cost reductions will occur as we learn to produce foods locally and efficiently through vertical farming (note that 70% of food’s final retail price comes from transportation, storage and handling). Also, as we make genetic and biological advances, we will learn how to increase agricultural yields per square meter.
Healthcare: We can define healthcare services in four major categories:
The plummeting cost to sequence the human genome (Source: NHGRI)
Housing: Think about what drives high housing costs. Why does a single-family apartment in Manhattan cost $10 million, while the same square footage on the outskirts of St. Louis can be purchased for $100,000? Location. Location. Location. People flock to high-density, desired areas, near their jobs and near entertainment. This is the market demand that drives up the price. But housing will become demonetized for two reasons. The first is because of two key technologies which make proximity of a home to your job irrelevant, meaning you can live anywhere, specifically where the real estate is cheap. These technologies are:
The second group of drivers includes robotics and 3D printing. Both will demonetize the cost of building structures. Today a number of startups are exploring how 3D printed structures and buildings can dramatically reduce construction costs and the time to build. For example, a company out of China, Winsun, has recently 3D printed an entire apartment building as seen below.
6-storey building 3D printed by Winsun
Energy: Five thousand times more energy hits the surface of the Earth from the Sun in an hour than all the energy we humans use in a year. Solar is abundant worldwide, and better yet, the poorest countries on Earth are the sunniest. Today, the cost of solar energy has dropped to approximately $0.03 per kilowatt hour. This cost will continue to decline with further material science advances, for example, replacing silicon with perovskite, making solar panels even more efficient.
Education: It is already being demonetized in many respects, as much of the information learned in classrooms can be found online, for free. Coursera, Khan Academy, and schools like Harvard, MIT and Stanford have put thousands of hours of high-quality instruction online, available to everyone on the planet with connection to the Internet. And this is just the beginning. Soon the best professors in the world will AIs, able to know the exact abilities, needs, desires and knowledge of a student and to teach them exactly what they need to know in the best fashion at the perfect rate. Accordingly, the child of a billionaire or the child of a pauper will have access to the same (best) education delivered by such an AI, effectively for free.
Entertainment: In the past video and gaming historically required significant purchases in equipment and services. Today, with the advent of music streaming services, YouTube, Netflix, the iPhone and Google App stores, we’re seeing an explosion of available entertainment types and selections while the cost continues to rapidly decline. YouTube today has more than a billion users, almost one-third of all people on the Internet. Every day, people watch hundreds of millions of hours on YouTube generating billions of views.
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Is the world described by Diamandis no more than a technological Utopia, a pipe dream? Or is much of what he presents going to come to fruition? Your thoughts and predictions are welcomed.
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