The age of ads

Hullo, it’s Alex in London. Subscriptions failed to make a dent in the online ad industry this year. But first...Three things you need to kn [View in browser]( [Bloomberg]( Hullo, it’s Alex in London. Subscriptions failed to make a dent in the online ad industry this year. But first... Three things you need to know today: • The New York Times sued Microsoft and OpenAI for using its content to [train AI models without permission](. • Tesla lost the title of world’s [most popular electric-vehicle maker](. • The “magnificent seven” propelled [the stock market’s gains](. All about the ARPU It’s an oft-repeated adage that when the economy slows down, marketing is the first budget that companies cut. And advertising technology behemoths like [Alphabet Inc.](bbg://screens/GOOGL%20US%20Equity%20RV) and [Meta Platforms Inc.](bbg://screens/META%20US%20Equity%20FA) aren’t immune from the effects. In 2022, consumer goods giants Unilever Plc (Hellmann’s mayonnaise, Axe deodorant, etc.) and Procter & Gamble Co. (Gillette razors, Old Spice aftershave) were a useful yardstick. They both slashed spending on ads as a percentage of total revenue. Growth at Alphabet then slowed to the lowest on record, while revenue at Meta shrank — compounded by the double whammy of Apple Inc.’s crackdown on ad tracking. It wasn’t a coincidence that Meta Chief Executive Officer [Mark Zuckerberg](bbg://people/profile/15103277) started talking up the metaverse, and Google promoted its prospects in the cloud. In 2023, however, even as the global economy continued to stutter, the tech industry seems to have learned that advertising remains a pretty darn appealing business. Not only have both Meta and Alphabet returned to stronger growth (albeit still less than in their heyday five years ago), they’ve stopped talking quite so enthusiastically about those other new pillars of their business. And consider Elon Musk’s experience with X, formerly known as Twitter. Part of his plan was to place a greater emphasis on consumer subscriptions and less on advertising. And boy, how he’s done a good job on the latter. (“Go f--- yourself,” he told advertisers boycotting the service in November.) [Ad revenue]( is likely to total $2.5 billion this year, Bloomberg reported this month. The site generated $4.5 billion from ads back in 2021. The problem is that Musk hasn’t managed to plug that gap with subscriptions, which start at $3 a month. Total revenue is likely to be around $3.4 billion this year. The previous management had targeted $7.5 billion by the end of 2023. Sure, some of that shortfall can be blamed on the macroeconomic climate, but no one else has endured quite so precipitous and sustained a decline. The lesson is clear: Ignore advertising at your peril. It’s one that the tech giants have taken to heart. Amazon.com Inc., Apple and Microsoft Corp. will generate a combined $69 billion in advertising revenue this year, according to eMarketer estimates. For each of them it’s a small fraction of their total businesses but is still far bigger than X or other social media platforms like Snap or Pinterest. Meta’s experience over the next year will be instructive. In October, Facebook and Instagram, its two most lucrative platforms, started ad-free versions in the European Union for a monthly fee that starts at €9.99 ($10.97). The number to watch is the company’s average revenue per user, which hit $6.35 per month in Europe in the most recent quarter. If everyone in the region signs up, then it would clearly boost ARPU. But if mostly high-volume users in affluent markets — from whom Meta will likely be generating more ad revenue right now — decide to sign up, then it could be detrimental. It’s an experiment in whether subscriptions can be a better business for the social media giant than ads. The move, a response to regulations in the region, would be harder to justify in North America, where ARPU averaged $18.70 a month in the most recent quarter. It’s also worth considering OpenAI Inc., the breakout company of the past year and one whose main consumer-facing business right now is paid subscriptions. Users can pay $24 a month for [ChatGPT Plus](. But even the hottest startup in tech remains dependent on Microsoft’s backing to keep the lights on and the servers humming. Subscriptions alone appear unlikely to catapult a company into the upper echelons of tech and keep you there — even Netflix Inc., which was built on subscriptions, has branched into advertising in an effort to reinvigorate growth. It’s learning a lesson that legacy media companies like the New York Times Co. learned decades ago: it’s often easier to raise advertising prices than subscription fees. For a spell, ads were the grease that oiled much of the internet. The reason that so much content was free was that it was advertising supported. That paradigm has changed as Alphabet and Meta gobbled up an ever greater slice of global ad revenue. Yes, big tech rivals are entering the space, but smaller players continue to find it troublesome. Alphabet and Meta will attract $300 billion of digital ad spending this year, or about 50% of the global total, according to Insider Intelligence. For all of the doubts in 2022, this year showed that their grip on the industry is tight. —[Alex Webb](mailto:awebb25@bloomberg.net) The big story Apple’s patent fight with medical device company Masimo Corp. began with a middle-of-the-night email to Apple CEO Tim Cook. An appeals court on Wednesday gave Apple a temporary reprieve to a ban on the sale of its newest [Apple Watch models as a result of the patent dispute](. Looking back at 2023 Advanced Micro Devices unveiled its accelerator chip to rival Nvidia Corp. in the [exploding market for artificial intelligence](.  A corporate spy tried to steal the formula for the plastic liner that protects t[he can of Coca-Cola Co.’s namesake beverage](. Large-scale hacks, particularly [ransomware attacks, surged](. More from Bloomberg Get Bloomberg Tech weeklies in your inbox: - [Cyber Bulletin]( for coverage of the shadow world of hackers and cyber-espionage - [Game On]( for reporting on the video game business - [Power On]( for Apple scoops, consumer tech news and more - [Screentime]( for a front-row seat to the collision of Hollywood and Silicon Valley - [Soundbite]( for reporting on podcasting, the music industry and audio trends - [Q&AI]( for answers to all your questions about AI Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. 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