Content Fortresses and the new privacy landscape

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Last week, Instacart, the private grocery and CPG delivery company that is poised to go public imminently, appointed Fidji Simo, a long-time Facebook executive, to its CEO position. Ms. Simo is primarily credited with having built Facebook’s mobile advertising platform — and mobile advertising now represents roughly 92% of Facebook’s total revenue. This appointment elevates to Instacart’s chief executive position a seasoned product executive, but also someone with invaluable experience in scaling an advertising business. Instacart did $300MM in advertising revenue in 2020; some believe it could generate $1BN in annual advertising revenue by 2022.

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Instacart allows users to purchase groceries and other packaged goods from nearby stores via Instacart’s mobile app and from its website. Instacart’s ad product allows brands to display their products prominently in various placements (search results, category discovery, post-checkout suggestions, hero banner) based on relevance. Notably, this “Featured Products” ad product is designed for brands to drive sales of their products, but brands aren’t selling the products directly to consumers: rather, shoppers purchase those products from local retail outlets. Brands configure their campaigns directly through Instacart’s self-serve tool, and ad placements are served entirely within Instacart’s first-party content environment. The user and contextual data used to target Instacart ads is all proprietary, the placements are all serviced within its product, and advertising conversions are all measured natively in a first-party setting.

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In other words, Instacart is a Content Fortress. I conceptualized the notion of the Content Fortress in this article and defined a Content Fortress as: any platform or portfolio of products supported by a rich advertising ecosystem serving owned and operated inventory using only first-party data. The relevance of Content Fortresses is self-evident in the new environment catalyzed by Apple’s App Tracking Transparency (ATT) privacy policy, as I describe in this piece, in this piece, and in this podcast.

And ATT was really just one incremental progression across a vector that Apple has been pursuing for years: Limit Ad Tracking was introduced in 2016, SKAdNetwork was introduced in 2018, and Private Relay, which will essentially give Apple total gatekeeper control over the services with which iPhone users interact, is set to be introduced in iOS 15. It seems as if every company across mobile that endures a dependency on advertising or carries acute exposure to third-party data transmission is investigating how they either become a Content Fortress or align tightly with one so as to preserve their commercial status quo using only first-party data.

Because Apple isn’t the only entity that is diverting the orientation of the mobile ecosystem away from third-party data. Last Friday, the Biden White House published an Executive Order relating to competition that takes aim squarely at the “information technology” sector and, specifically, “the aggregation of data, unfair competition in attention markets, the surveillance of users” and “unfair data collection and surveillance practices that may damage competition, consumer autonomy, and consumer privacy.” While much of the scope of the Executive Order related to information technology seems to be focused on M&A activity, the privacy lens is invoked multiple times. This makes sense given that Lina Khan, the newly-appointed Chair of the FTC, is considered the spiritual leader of the New Brandeis movement of anti-trust scholarship and is seemingly committed to prosecuting what she has described as privacy abuses across consumer technology and in digital advertising. A full analysis of the Executive Order is outside of the scope of this article, but this blog post provides a very useful summary.

First-party data is a commercial necessity in this new climate: any logic applied to first-party data in service of advertising efficiency doesn’t constitute “tracking” as it is generally defined and is wholly compliant with Apple’s privacy policies. The race to agglomerate as much first-party data in light of these ecosystem changes has already begun, with frenzied M&A in both the ad tech and mobile content spaces, as I theorized as a potential consequence of ATT in this article.

Recent cases of Content Fortress entrenchment serve as helpful illustrations of how this strategy is taking root. For example:

Shopify announced in June that it will make its Shop Pay product available to all retailers selling through Facebook and Google, regardless of whether they are Shopify merchants or not. This is a deeply impactful infrastructure change that would be easy to miss; Ben Thompson offers some excellent analysis in this blog post. Essentially, Shopify is committing itself to serving as the “pipes” of e-commerce as opposed to a marketplace itself; rather than restrict access to its suite of e-commerce tools to Shopify Merchants, many of whom will feel pain from the aforementioned tectonic shifts in the privacy landscape as they are unable to efficiently drive users to their storefronts, Shopify is leaning into the Content Fortress paradigm by allowing major platforms to avail themselves of its tools. Per 2PM, a DTC analytics consultancy, about 59% of DTC brands sell through Shopify. If privacy regulations will soon undermine the viability of independent storefronts, why shouldn’t Shopify expand its payment offering to non-Shopify merchants?

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Some information, albeit fairly cryptic, has also emerged around a potential Shopify audience construction tool that will connect directly with advertising platforms to allow Shopify merchants to target past purchasers. It’s unclear how this tool can interface with ads platforms in a manner that is privacy compliant with eg. ATT, but it nonetheless supports the notion of a commitment to serving Shopify merchants wherever they sell, which will increasingly be on Content Fortresses like Facebook with Facebook Shops and Google with Buy on Google.

Zynga in May announced that it will acquire Chartboost, an ad network, for roughly $250MM in cash. This example is interesting mostly as a model for the kind of M&A activity that is percolating across the mobile gaming ecosystem at the moment. Zynga had hinted at making an acquisition of an ad network in a previous earnings call, and its purchase of Chartboost makes eminent sense: the company can tie its large portfolio of games together with ad tech infrastructure that allows it to systematically move users throughout titles using first-party data.

And in late June, TikTok revealed Jumps, a tool that allows TikTok creators to bring “mini-apps” into their videos to expand engagement and, presumably, monetization. TikTok Jumps is similar to Snapchat Minis and Facebook Instant Games, wherein developers produce HTML5 products with which users can interact from within the context of the original app. Jumps aligns with the vision I posited of what the “next generation” of app stores would look like, although this “instant apps” construction persists only for Apple’s munificence related to a strict interpretation of its “no app stores within the app store” rule, which can’t be taken for granted as a permanent proposition. Regardless, that TikTok will allow users to host HTML5 apps on the platform and link seamlessly to them within their core content is a clear shift to Content Fortress strategy: if external apps are harder to promote via performance advertising with TikTok ads, brands and app developers are better served to distribute their content from TikTok directly.

The market shift being observed now with Content Fortresses is ultimately a consolidation trend that collapses the various layers of consumer technology up into the apex predator platform companies. Consumer companies used to see Facebook’s massive audience as a resource to tap via performance advertising in pursuit of building their own. In the Content Fortress environment, because digital marketing is so much less efficient, these large platform audiences are only valuable through a form of Faustian partnership: with content interactions taking place in the first-party environment of the platforms such that developers can continue to advertise effectively but sever their direct connection to consumers.