We’ve Seen It Before, We’ll See It Again: How Closed Systems Fall

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In an age of burgeoning skyscrapers and factories, U.S. Steel commanded a global reach and scale that allowed it – for a certain time – to set the pace of the entire steel industry. The first company in America valued at over one billion dollars (the modern-day equivalent of over $40 billion), the company commanded roughly 66 percent of the world’s total steel output in its earliest years of operation.

When U.S. Steel’s first President, Elbert Gary, called on other steel magnates to adopt the same high prices for steel that his company asked for, they fell into line. Through “administered pricing,” where the prices of goods and services are determined by backroom deals rather than free-market forces, a closed ecosystem was created. Prices were fixed, competition was forbidden and technological innovation was discouraged.

Digital publishers of 2017, take note.

Today, our own digital advertising economy is at a similar crossroads. Two Silicon Valley giants, namely Google and Facebook, have essentially grown into a duopoly that, much like U.S. Steel at the turn of the last century, threatens digital publishing’s ability to sustain itself over the long-term future.

The crisis is real. According to analysis from Pivotal Research, the two companies accounted for a whopping 77 percent “of all gross spending in 2016” in the U.S. digital ad market. Moreover, according to CNBC, the two companies are set to take in 46.4 percent of digital ad-spend worldwide this year, with Google netting $72.69 billion and Facebook receiving $33.76 billion.

With numbers like those, even Elbert Gary would be impressed.

Digital publishers have never felt more beholden to two companies. Many long-established publications have voiced concerns that the bulk of their content would be inaccessible to consumers without being promoted on Google and Facebook. As a study from the Tow Center of Journalism at Columbia University reports, Google and Facebook are now publishers in their own right. Due to their sheer global reach and scale, they’re able to control how much content a given publisher can show to its audience on their platforms. As a result, they’re also able to restrict how much publishers get paid for content.

The Tow Center report goes even further in demonstrating the raw power that Google and Facebook wield over digital publishers: “By offering incentives to news organizations for particular types of content, such as live video, or by dictating publisher activity through design standards, the platforms are explicitly editorial.” In other words, if publishers want to innovate and publish content in formats that don’t match Silicon Valley’s idea of what content should resemble, then that content won’t be shown. The net effect is that publishers grow discouraged from developing innovative content – and the publisher ecosystem begins to stagnate quickly.

While a lack of competition or innovation might be the lazy route to monetization today, it isn’t the way to stay in business over the long run. A monolithic, closed-system company – whether steel or digital – can’t withstand open-market competition forever. Google and Facebook might have the global reach and scale that U.S. Steel once did, but their legacy ad-serving technology doesn’t have the transparency, openness or superior monetization of other ad-serving tools like AppNexus’ own Publisher Adserver.

In a recent panel discussion hosted by Tom Shields during our 2017 London Summit, representatives from some of Europe’s largest publishers, including Schibsted and Axel Springer, spoke of how AppNexus’ ad-serving technology gave them greater opportunities than ever before to expand their ad revenue. Time and again, they emphasized how the transparency of the AppNexus Adserver enabled them to plug in their own first-party data and tools, gave them a fuller sense of their own technological capabilities, and helped them wrest control of their own business interests from the administered pricing of Silicon Valley tech giants.

Goliath, meet David.

Today’s American steel industry is famously wracked by challenges, most of them stemming from the consequences of keeping itself insular to outside competition for so long. U.S. Steel now accounts for only a small fraction of the total steel used in the United States, let alone the world. Today’s top steel companies are predominantly Indian, Chinese or Japanese.

Digital publishers can’t afford to make the same mistakes that others have. No matter how all-powerful a closed system may seem from up close, it would be a mistake to bet sure money on its future. History shows us otherwise.

Filed under AppNexus Updates, Industry Perspectives.

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