BRB Bottomline: Amazon wants to sell you more shoes; and, the longer you stay on Amazon, the more shoes you’ll buy. In a world where competition is no longer limited by shelf space or supplier connections, executives are making radical, structural changes to their businesses to keep you engaged on their platforms longer and more frequently. Success in this new paradigm means retaining customers better than everyone else, which means every business is competing with every other business for your attention. These observations help to explain why it seems like every company on the internet is producing original content, delivering food, and diversifying into more and more disparate businesses. All to win your attention.
We get asked a lot, “What’s the difference between Economics and Investing?” After all, BRB separates the two into their own columns, so we should have a good reason. This is how I delineate between the two closely-related subjects: Economics is the study of allocating scarce resources; Investing is the practice of owning and controlling scarce resources.
During the industrial age, Andrew Carnegie owned railroads, which became the scarce resource for a society that started spreading across the nation. Before the internet, store shelf space was the scarce resource that prevented smaller consumer packaged good brands from competing with P&G and Unilever. Today, while Google doesn’t control the data that users generate or the data centers that stores that data, it does control the only way most consumers know how to access that data.
Owning and controlling scarce resources has created enormous wealth for these companies, which is why executives are constantly thinking of what the next scarce resource (read: next big thing) is going to be.
Abundance Replaces Scarcity
Today, the market is awash with coding and computer science knowledge. What once was scarce and abstruse information is now general education for middle schoolers.
Entrepreneurs who have caught the tail-end of this melee have become mobilized by billions of dollars of venture capital funding and an agenda to woo consumers. New internet startups have sprung like weeds in the peripheries, leeching consumers’ attention away from incumbents.
This is all to say that, without physical dislocations or store shelf constraints, the attention of consumers has become the new scarcest resource to control. Unpacking the unique ways through which companies are trying to secure your attention can help to explain some of the wonky behavior we see in the business world today; moreover, this mental model can help us already predict which companies might lose their current position at the center of scarcity.
Attention is the New Center of Scarcity
The barriers to do business online are practically frictionless, which has unleashed an onslaught of venture-backed startups who have flooded traditional marketing channels like Facebook and Google, making it both more expensive and less effective for current players to reach customers. Because of this, these companies have begun to test new ways to acquire customers.
According to Vanity Fair, “American[s] are willing to spend roughly $38 each month across all of their streaming subscriptions.” This is significant because the average adult spends 6 hours per day watching content—a number that appears to increase 10 minutes a day per quarter (Nielsen July 2018).
For just $38 a month, the average person, who spends 16 hours a day between sleeping, eating, and working, can access an activity that consumes three-quarters of their free time. The consumer surplus is incredible!
But, companies aren’t doing this out of altruism. Content represents a huge opportunity for companies to acquire a large swath of their customers’ attention spans while leaving plenty of pocket change for them to spend on other services that these companies offer. This explains why Amazon, Alibaba, Google, etc. are pouring billions into producing their own original content.
Today, the clear leader in original content is Netflix. The company used to spend all of its content spend on licensing popular movies and TV shows; today, its Chief Content Officer, Ted Sarandos, estimates that 85% of its 2018 budget was put towards producing original content. Netflix outspent every other company in producing non-sports broadcasting content, shelling out over $13 billion in the twelve months ending December 2018 (Netflix 2018 Annual Report). This spending appears to be achieving what it has set out to do. According to Netflix, over 90% of its subscribers regularly watch Netflix Original content (Vanity Fair). BMO Capital Markets projects that Netflix’s content spending will reach $17.8 billion per annum in 2020.
Amazon Prime Video spent $5 billion on content in 2018. Tencent’s Tencent Video and Alibaba’s Youku boasted similar multi-billion dollar budgets.
Subsidizing Customer Acquisition Costs
The nuance and potential problem with Netflix is that the company’s streaming business is its only business, which means spending on content is a means to selling more subscriptions and nothing further. On the other hand, Amazon, Google, and Alibaba view spending on content as a means to cross-sell other, higher-margin services. These companies invest in content because they view it as a more-effective and differentiated way of acquiring customers.
Traditionally, companies spent the majority of their advertising dollars on broadcasting and mobile ads. Today, those companies are realizing that the cost of acquiring a customer through original content produces a stickier moat. Amazon’s costs of acquiring a customer through Prime Video are subsidized by the incremental increase in spending that consumers exhibit after getting Amazon Prime. Consumer Intelligence Research Partners estimates that Prime customers spent $600 more per year on Amazon than non-Prime customers in 2018.
Moreover, the wallet space for content is only $38 per month, which makes it difficult for smaller companies to acquire customers in this fashion, which reduces the competition for customers.
Another example that has begun to produce more original content is China-based Alibaba, which controls Alibaba Pictures. It too has a multiplier effect when those consumers spend incrementally more money on leisure activities like watching movies and TV shows. For a country that has a savings rate of almost 50%, encouraging consumers to spend a little more produces enormous benefits for Alibaba, which is positioned to capture the benefit of that retail spending.
Frogs in Boiling Water
Producing original content is one differentiated strategy for corralling consumers onto a company’s ecosystem of connected products and services. Another approach to the “share of mind” problem, which is currently being implemented by the likes of Uber, Alphabet, and Amazon, is to build a distorted reality within which the company sits at the center of the consumer’s life.
Take Uber for example. The company started as a simple and practical marketplace for drivers and riders to connect. While connecting drivers and riders is still its core business, the company today also wants to deliver your coffee, bring you lunch through Uber Eats, and even coordinate rides between you and the doctor’s office.
Ultimately, Uber wants you to take more rides. But, instead of staying in its lane—pun intended—it has decided to enter all sorts of new businesses with the goal of being at every touchpoint related to the transportation and logistics of moving “things” in its consumers’ lives. The company knows that, if it can attract consumers onto its platform by entering higher-volume lines of business, such as food delivery, the company will be top of its consumers’ minds and will likely connect more rides.
Alphabet, the holding company that owns Google and “Other Bets,” is also trying to place itself at the center of consumers’ lives. Google wants you to depend on it to search for everything you don’t know, collaborate on school and work projects through its G-Suite of productivity apps, doze off for a few hours while watching YouTube at lunch, commute to the grocery store in your autonomous Waymo powered by Google Maps or Waze, and chill at home while quizzing your Google Home about tomorrow’s weather.
Alphabet wants to be with you every second of the day because the more time you invest in Google products, the more dependent you become on its integrated suite of apps. Naturally, this allows Google to insert itself into everything the consumer does related to the gathering, processing, and sharing of information.
Share of Mind, Not Market Share
Notice that the mission of these companies isn’t simply to provide good products and services but also to create an experience that their customers cannot live without.
Amazon wants “To be Earth’s most customer-centric company.” Uber wants “To make transportation as reliable as running water, everywhere for everyone.” Google wants “To organize the world’s information and make it universally accessible and useful.” Meituan-Dianping, one of China’s youngest and largest e-commerce platforms, wants “To help people eat better, live better.” These are inspired, omnipresent mission statements with a focus on creating an experience for consumers. Immediately, we can start to delineate legacy businesses from new businesses.
Kroger’s, the largest supermarket chain in the U.S., says that it seeks “To be a leader in the distribution and merchandising of food, pharmacy, health and personal care items, seasonal merchandise, and related products and services.”
Notice the hollow-sounding promises. It’s transactional. These are the businesses that will fall to the wayside as market share moves to the players with share of mind.
Take Home Points
In a world without physical constraints to reaching customers, attention has become the market’s scarcest resource. Two ways through which companies are approaching the “Share of Mind” problem include producing original content and creating distorted realities around which the company lies at the center. Traditional marketing channels like Facebook and Google have become inundated with startups backed by venture capital dollars, making it harder and important for companies to find new ways of capturing the attention of consumers. In this new paradigm, share of mind is the most important catalyst for value creation. The rest follows.