I have long argued that there is an escalating “arms race” for online demand. There is an ever-increasing fight for the attention, engagement and spending of consumers. And to a lesser degree for the attention and engagement of other online user groups (merchants, content creators, developers, etc.).

And this is a natural result of our age of abundance. There are now more and more products, services and content than consumers could ever consume. And it keeps increasing.

But there is a limited amount of consumer time, attention and money. Therefore, it is just getting more and more difficult and expensive to reach, capture and retain consumers. And we are seeing this struggle in business after business. For example, every business is struggling with the increasing marketing fees of Google, Facebook and Amazon. But they have to keep paying them in order to keep reaching their customers. This is particularly painful for online travel companies like Expedia that are have to continually re-acquire customers.

And that’s just for referrals and acquisition. Getting actual engagement and participation by consumers is even harder. You need to them to leave comments and search. They need to share and browse. It is engagement that builds the relationship and generates the data.

If you read the annual reports of digital companies, which is my favorite thing to do in life, (for better or worse), they will always tell you about their DAU (daily active users), MAU (monthly active users) and probably GMV. They will tell you about customer acquisition costs, retention and churn. But the first thing that will be listed in their Risk Section (my favorite section) is that they are dependent on continually attracting, engaging and retaining consumers. That is always the number one risk. Consumer engagement is the engine of most digital businesses. Absent physical assets like stores, users are usually their main intangible asset.

And this risk is particularly acute for platform business models, where the value is created by user interactions and the data this activity generates. It’s not just about selling sneakers or watching Netflix videos. You have to get consumers to match and engage with other users. The network effects of the business rise and fall with this engagement and interactions. And the resultant activity data is the fuel for matching, AI and improving the user experience.

A few years ago, I had good discussions with heads in AI at JD. And the conversation quickly shifted to this same idea of an “arms race” to thrill and satisfy consumers. Consumers just have too many options. You have to keep offering them more and more to get them to keep paying attention to you.

If JD is now offering conversational AI for multi-modal engagement (which we talked about), then their competitors have to offer this as well. And if JD offers personalized services and inventory, then competitors need to do offer that as well. The fight for attention and engagement just keeps getting harder and harder. It’s a never-ending arms race.

Winning in Digital Is Mostly About Demand-Side Scale

I use the below graphic a lot. It argues that you need to get to demand-side scale ASAP. This is for a platform business model but it is key for most digital business. In practice, getting to demand-side scale means building three intangible assets: users, engagement and data.

 

If you can do this and monetize (to some degree), you can then build in lots of directions. And you have solved the hardest problem, the user attention arms race. If you don’t have demand-side scale, you are in a weak position and things just get harder and harder.

This is one of my standard quotes.

Within this demand-side competition, there is also an ongoing fight to stay at the front of the consumer relationship. To be the primary interface for users. For example:

• Mozilla browser displaced the Microsoft operating system on PCs as the front of the cue for consumer attention.
• But then Google Search displaced Mozilla as the key point of interaction for users accessing the internet.
• And then Android and iOS displaced PCs, browsers and search when consumers switched to mobile devices.
• And then (in China) WeChat displaced the mobile operating system as the primary interface for users on smartphones.

Basically, whoever is the front of the cue for consumer engagement tends to be in the strongest position. And as the supply of goods and services keeps growing, everyone else struggles. Are merchants really serving the customer or are they serving the Google search algorithm (which is ahead of them in the cue)?

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So it’s mostly about winning in on the demand-side with ever increasing supply. And we can basically put supply into four categories:

• Digital products and services
• Physical goods
• Standardized services
• Differentiated services

For digital goods (movies, videos, texts, eBooks, apps, software, SaaS, ERP, etc.), it usually costs little to create, mass produce and distribute new products. There are now billions of user generated videos online you can watch on YouTube and TikTok. There are millions of ebooks available. The number of free plugins you can use on WordPress is crazy. And the supply keeps growing.

For physical goods, the explosion of supply arguably began with book stores. It used to be that retail book stores might have 10-20k books in their inventory that you could browse. Then Amazon began offering millions of titles that could be shipped from warehouses. This massive increase in available titles was awesome for consumers. But it made being an author a much tougher business. Prices dropped. And getting readers became much, much harder.

Services (whether standardized or differentiated) are the latest frontier. We are currently seeing a transition from simple services like transportation (Uber), food delivery (Meituan) and rentals (Airbnb) to more complicated and advanced services like medicine, legal and accounting. And in every case, it is the same pattern.

Some digital business creates a new tool that empowers small suppliers. This is heralded as “democratizing” the sector. Suddenly everyone with a car can be a taxi driver. And it is great for consumers. But over time, it is usually brutal for the suppliers. Just like for authors, they are competing with a sea of supply. And platform business models are intent on commoditizing them.

A final comment on this. This increasing supply was nice but not staggering for US and European consumers. Yes, Amazon has tons of stuff, but so did Walmart already. However, in much of China, Asia, Africa and Latin America, there has been very little selection for consumers up until recently. Your typical small town in Indonesia had a few small markets and some convenience stores. The dramatic increase in supply has been fantastic for consumers. Suddenly, Indonesian village consumers can buy virtually anything online from anywhere in Asia. It’s a pretty amazing jump forward.

Filters and Matching Are Critical for Online Demand and Consumption

I remember when the internet started in the mid-1990’s. You could suddenly search on Mosaic browser for little websites for Nasa, Stanford, individual writers or whatever. It was awesome for like five minutes. And then it was bad. There were just too many webpages. And most of them sucked. In theory, it had everything. But in practice, you couldn’t find anything. It was like entering as massive library with tons of garbage books and no card catalog.

Enter search engines Alta Vista and then Yahoo, which provided filtering and matching. They provided the card catalog. It turns out in a sea of supply, you simply can’t consume efficiently or effectively without filters and matching. Abundance is amazing but it can be a real negative in terms of value if consumers have to swim around in a sea of irrelevance. You need filters and matching that ensure relevance and quality.

The filters and matching at the center of online consumption is a fascinating subject.

• The Facebook newsfeed is a “push” filter based on past actions, social signals, connections and other factors. It does the filtering for you and promotes passive consumption, which is something WeChat creator Allen Zhang argues strongly against (Allen Zhang On How Information Flows Are Shaping Our Lives).
• The newsfeed of Twitter is another passive-type, push filter. But it much more based on recency in time. And it is based on who you choose to follow, not who you know.
• Google’s search engine is a “pull” filter which requires active intent by users. They have to say what they are looking for. This is more accurate but most online consumption of information happens passively in newsfeeds.

So filters and matching are a key part of all of this. Although I tend to think of this in terms of curation vs. customization. You see a lot of news on this.

Curation is about maintaining a baseline of quality in the vast sea of products or services offered. This is about making sure the library only has good books. Get rid of the low quality or inappropriate ones. If you have a ecommerce site with a bunch of fake products, people aren’t going to come back. If people are staying in hotels and having bad experiences, they will stop booking through your site. If half the guys on a dating site are behaving like pigs, the women will all leave immediately.

Curation of supply is required to make sure the user experience is good. And curation becomes harder and harder as the supply increases. Facebook and YouTube simply have no way of checking what their 2-3B users are putting on their sites every day. These companies have amazing scalability is terms of content creation and sharing. But their curation process doesn’t scale nearly as well.

So how do you curate supply at scale?

For YouTube and Facebook, hiring lots of editors isn’t feasible. AI and users reviews are the standard solution. But this means the curation process is often mindless and stupid (which annoys people). So they combine that with human review (usually out of India). The trust is there simply aren’t any good solution to this curation at scale problem (right now). Which is why Mark Zuckerberg gets yelled at about censorship every week (among other reasons).

Customization is different than curation. This is about making the supply personalized to each user. Customization began with tailoring the products or videos presented on Alibaba and YouTube. But it has now moved far beyond this. Companies are tailoring their entire user experience to each individual. What Taobao looks like on your screen depends on who you are. Taobao on fourth-tier Chinese cities looks more like Taobao of 2012 than what we see in Beijing and Shanghai. Customization is the deep well of value add for your customers. And it is critical to keeping user attention and engagement.

However…

Why Data is the New Oil

You might have noticed a contradiction in the previous paragraph. You have to win on the demand-side, which means an arms race in attention, engagement and spending. Within this fight, curation and customization are some of the most important tools. But filtering, matching, curation and customization all require data. You literally can’t do any of those without data, mostly from consumers.

So to acquire and retain consumers, you need data. But you can’t get data without already having customers.

This is why the arms race for attention and engagement is so painful. Not only is it becoming harder to attract and keep users. But the tools you need to do this well depend on data from consumers. When you start to lose customers, you also lose the data. And that decreases you ability to get customers back. It’s a vicious or virtuous cycle for a business.

A Quick Summary

That was a bit of theory. But my argument is pretty simple:

• The supply of services, products, and digital goods keeps rising. It’s ridiculous. We live in an age of abundance.
• Therefore, the fight for limited consumer attention, engagement and spending is getting harder and harder. It’s a never-ending arms race.
• This means achieving demand-side scale is the key advantage a business can have.
• Effective curation, customization and innovation requires consumer data – which requires having customers. So the winners on the demand-side tend to do better and better versus other companies.

That’s it for today.

Cheers – Jeff