Woman: Your personal data, your birthday, the city you live in, your musical or television tastes-- these things and more are crave to buy online companies, ranging from Facebook to Google to Twitter and beyond. The ultimate prize for that information-- advertising dollars. And the kings when it comes to cashing in are Facebook and Google.
Now, our next guest has written a new book about the digital advertising world. It's called Frenemies-- The Epic Disruption of the Ad Business and Everything Else. Ken Auletta, welcome to Bloomberg Technology. A little Freudian slip, there-- destruction-- because the ad business has been completely transformed by Google and Facebook and beyond. They're far more enemies than friends, though, right?
Ken Auletta: No, they're both. I mean, it's hard to say. I mean, if you look at the growth of Facebook and Google's advertising, that's coming from ad agencies and clients, and now it exceeds the amount of money spent on television ads. So they're friends in that way. They're frenemies in the sense that they disintermediate them and go directly to the clients.
Woman: You make the point-- which I feel like we all know but don't understand the extent of-- how much advertisers know about us as a result of Facebook and Google. What did you find that was the most disturbing?
Ken Auletta: Well, I mean, for instance-- I mean, when they talk about the future, they know the public is a frenemy and that the public doesn't like your ads, particularly on their cell phones. They don't want to be interrupted.
So they say, instead of an ad, maybe we have to do it differently. Let's offer a service to people. So when you're in San Francisco and you're walking a block or two away from Barneys right now-- they know that from your GPS-- and if you bought a sport jacket two months ago, if you go into Barneys now, we'll give you 20% off your next sport jacket.
So how am I going to respond to that? Am I going to say, this is great! It's a service. It's not an ad. Or am I going to say, how the hell do you know so much about me? That's the question.
Woman: Well, and it seems like public opinion-- the tide is turning against that-- but I wonder if this privacy backlash is just a moment, or if it will actually result in us wanting to hold back information from these companies.
Ken Auletta: I don't know the answer to that. I know what it means in Western Europe, where 28 countries have joined together to impose privacy standards, but there's a history of privacy concerns in Europe. There isn't in the US. I mean, I was in my hotel yesterday in San Francisco, and I was talking to-- I was doing an interview on the phone with the reporter, and I said, well, when you have Alexa, for instance-- and suddenly, there's an Alexa in my hotel room. I didn't even know. And it said, yes? I said, how the hell are you-- what are you doing? So it spooks you.
Woman: Let's talk about Amazon, because if I add Amazon to the equation right now, Facebook and Google are really a duopoly in the digital ad business. But some say that Amazon is closing in on Facebook and that, in the next five years, could surpass Facebook. Would you agree?
Ken Auletta: I would. Amazon is aggressively getting into the ad business for the first time, A. B, if you think about the data that each company has, Google has your search results-- what you're interested in. Facebook has what you and your friends are talking about. What Amazon has, which is what the advertiser covets, is what you purchased.
Woman: What you're actually buying.
Ken Auletta: That is the holy grail. And if they convert that, they're a big player. For instance, if you do a search for a product on Amazon today, half the searches are not done on Google Search. They're done on Amazon. That's disrupting Google. So these guys are going at each other-- not just at changing the ad business, but at changing each other.
Woman: So how do you think the hierarchy will shift, let's say, in five years? How big a threat is this? Let's talk about Facebook in particular, because of all of the controversy surrounding Facebook right now and the public backlash. We haven't seen it at the stock. But do you think Facebook is really under threat?
Ken Auletta: Well, I mean, I covered the Microsoft trial in 2000, and Microsoft was accused of being a monopoly, was found guilty of being a monopoly, and it changed their behavior. They basically pulled back. They became tentative. And they lost a lot of momentum in the next decade.
Woman: They're only just now getting it back.
Ken Auletta: And they've really gotten it back-- their mojo. But this could happen to Facebook. Don't forget, Mark Zuckerberg-- we think of him as an automaton. He's an engineer. He could [inaudible].
He's a human being. He's got two kids. He's got a wife. He contributes to-- he's embarrassed. He's got to be shamed by the attacks on it. Will that alter his behavior and Facebook, and will the threat of regulation from government alter Facebook's behavior? We don't know the answer to that yet.
Woman: Let's take a listen to Mark Zuckerberg, the human being, testifying before Congress a couple of months ago. Listen to what he had to say about whether a subscription model would ever be possible.
Mark Zuckerberg: We think offering an ad-supported service is the most aligned with our mission of trying to help connect everyone in the world, because we want to offer a free service that everyone can afford.
Woman: So from there, it sounds like this will always be an ad-supported service, and yet the company is exploring a subscription service. Could that ever be a mainstream reality?
Ken Auletta: 2.2 billion consumers on Facebook. There's no way they're going to substitute free for subscription. You could, like Hulu does, like YouTube does. Some people, if they don't want ads, they pay a little extra.
The problem with subscriptions replacing advertising is if you go the 2016 campaign, the one thing Trump and Clinton agreed on was the American middle class and working class-- the bulk of the population-- was frozen in their income for 10 years. The thought that they can afford steeper subscriptions is a pipe dream.
Woman: Now, I want to talk about the fourth frenemy, which isn't so much in the ad business, but it's really positioning itself as an enemy of Facebook specifically, and that is Apple, which is adding more privacy controls, taking a stand very publicly, now notifying users about when apps want more of their information. Do you think Apple's going to be on the right side of history here?
Ken Auletta: I don't know, but I mean, they're on the right side of a business strategy, and the business-- they're not in the advertising business, nor is Microsoft to an appreciable extent, and both take a privacy position attacking Facebook and Google. So it's a nice positioning for a company. Do they mean it?
I mean, I can't climb inside Tim Cook's head. Let's assume he does mean it. Does that mean that-- Apple is doing fine. I don't think they need any help. And they sell a luxury good, and they sell it. But they're at war. Facebook, Google, Apple, and Amazon and Microsoft-- it's a galactic battle going on.