(Preview) Mailbag: AppLovin on a Tear, The Business of OnlyFans, Questions on OpenAI and Elon Musk

Returning from the holiday week with a look at the explosive growth of AppLovin, various takeaways from the towering success of OnlyFans, Bloomberg history, and questions on the future for Elon Musk and OpenAI.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Andrew Sharp?

  Hello and welcome to a free preview of Sharp Tech.

• 0:08Andrew Sharp?

  Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing?

• 0:19Ben Thompson?

  Doing great, Andrew. Coming off the best holiday weekend of the year. Bucks are surging and maybe the greatest athlete of all time, Max Verstappen, is just raining, raining over F1 right now.

• 0:33Andrew Sharp?

  Riding high, another great weekend for Max Verstappen. Also, on the sports front, I just watched a delightful Boston Celtics loss here on the East Coast Sunday night, so.

• 0:46Ben Thompson?

  It's all coming up to Strickery Plus right now. That's what I'm hearing.

• 0:49Andrew Sharp?

  Here we are, absolutely. And the commanders won today, my new favorite team, the Washington commanders. So a lot of things looking up here as we approach the holiday season. But for now, we are back and we have Monday Mailbag. We're going to bounce all over the place tonight, Ben, and we'll start with.

• 1:07Ben Thompson?

  Spicy one, it looks like.

• 1:09Andrew Sharp?

  There is a spicy one, a little curve ball coming out of Thanksgiving for you. Emil says, this isn't the curve ball. Ben and Andrew, Andrew once marveled at AppLovin and said that it's, quote, "a serious company that needs to be taken seriously." However, the company has been on a tear this year, surging past $100 billion in market cap this month. Do you have any thoughts on the forces driving all this? So I will just say, I have no recollection of the context for my comment.

• 1:42Ben Thompson?

  I was gonna say, I was gonna quiz you. Can you explain what AppLovin is and how it works and how you came to that statement? Because I was gonna be impressed.

• 1:48Andrew Sharp?

  Here's the thing, okay? We were talking about the name and I was just sarcastically commenting on the name. And on that point, I stand by the analysis. But AppLovin is a mobile gaming ad network and they are doing really well. They've come up in some of your conversations with Eric Sufer. So do you have any thoughts? And do you have any thoughts on a better name for AppLovin? Because they are too successful to be named AppLovin, in my view.

• 2:17Ben Thompson?

  I mean, when you're successful, you can call yourself whatever you want. And I think this has been both a this is a a small W for Stratechery. I've been very bullish on them, including from their sort of IPO on. But I would say it's not a big W because I haven't probably written about it and pushed it as much as I have. It is, to your point, a company that I bring up with Eric Suft every time we talk because it is super interesting. And but it's also, it's kind of hard to grok and get into. So first off, I would I would refer you to Eric. He actually did a podcast last week or a couple of weeks ago, going through why they're so dominant and so great. And so that is definitely a resource to to to reach to.

• 2:58Ben Thompson?

  But AppLovin is, along with Meta, the biggest winner of ATT. I think it is a way to think about it. So you go back to the pre ATT world and everything is triggered on this IDFA. Now, the ATT is multifaceted in all the things that it impacts. But the biggest one is that your phone used to have an identification number that an advertiser could say, I served an ad to this identification number, then another app could, a conversion could happen, could be tied to that identification number, and then you could attribute that ad worked and sort of it could be paid or whatever, or it could be targeted, right? So this this user downloaded this game, therefore they should get this other one. And this wasn't just, we talked about it mostly in the context of things like Meta and Snap and stuff like that,

• 3:43Ben Thompson?

  because they were having sort of the ad inventory, but this could be used for networks as well. That that's sort of like pulling ads and display them and all the sorts of things. So that goes away. And you could, we've talked a lot about why that was a problem for Meta, why that was a problem for Snap. I like how you're just sort of like settling into your chair as you're ready for this.

• 4:01Andrew Sharp?

  Yeah, I'm gonna let you cook here, yeah.

• 4:03Ben Thompson?

  This long model on here.

• 4:04Andrew Sharp?

  Anytime we're talking ad tech, you you take the wheel. So where are we going?

• 4:08Ben Thompson?

  Well, so so you would refer this as sort of like Wild Gardens, where they, in Facebook, they have the audience, they know who they are, and they show them an ad. The key thing is how can you capture that conversion, which usually happens on a third-party website or happens in another app or in an app store, whatever it might be. And the IDFA sort of made that easy.

• 4:27Ben Thompson?

  Goes away and Facebook we've talked about had to sort of marshal all this data. And so there's a vast of scale and marshal all this compute to start figuring out. We probably showed the ad or they knew who they showed the ads to like, cause it was on their property.

• 4:42Andrew Sharp?

  Right.

• 4:42Ben Thompson?

  But this person probably converted or some segment did. Right. And so it's never going to be as accurate as it once was. And so Facebook's business is never, there's a lot of revenue that's gone forever. Companies that are gone forever that were built on this and that's just sort of a reality. But in the long run, from a competitive standpoint, it's actually been super powerful for Facebook. Because they are the only ones with the infrastructure and data to make a pretty accurate guess. And an accurate guess that's, that's accurate enough for the sort of Facebook advertiser. Who basically they, they, they don't have a, the way digital advertising works for these direct response ads. You don't have a budget. You're not saying, I'm going to spend a hundred dollars on ads this month.

• 5:23Ben Thompson?

  What you say is a user is worth this much to me, so I will pay whatever it takes to acquire them. And I will earn that money back because that user is going to buy the app. They're going to do an app purchase or they're going to buy an e-commerce thing, whatever it might be. And so this is part of why it's such a powerful business model. Because the better you are, the more people spend because their budget is, is gated on how effective their ads are. And so they will spend to the moon if the ads sort of keep being effective. And so that's why these, these models are just, are just so incredible from a business perspective.

• 5:54Andrew Sharp?

  Right. And so Meta succeeding in this space makes a ton of sense. Because they had more resources than anyone else to throw at this problem. AppLovin is a company that I hadn't heard of until like 13 months ago. So how did they marshal their resources to excel in this new environment?

• 6:12Ben Thompson?

  So AppLovin, uh, so when it comes to.

• 6:14Andrew Sharp?

  And they've been around for a while. They're like, I believe started in 2012 or 2013.

• 6:19Ben Thompson?

  When it comes to ad networks or, so you have this situation with, let's say mobile games. Uh, cause that's where, where they're big. So we'll focus on mobile games. So what you have is you have a bunch of mobile games that want to monetize through ads, right? The, the sort of classic model for a mobile game is the game's free with ads and you can pay to get rid of ads. Or you, you know, and you can, and you can not just pay to get rid of ads. You also pay to like get more gems or get more levels or capabilities, whatever it might be. And then we've talked about a huge portion of Apple's. You know, app store revenue is downstream from games. So, so you can think about it, on one hand, they have inventory to show, but then there's also lots of games

• 7:03Ben Thompson?

  that want to capture customers and they know how to monetize them. They can monetize them through ads or they can monetize them through in-app purchases. And so you have this sort of like, uh, it's almost like the, an oboros where you have a, an ad-driven game, driving people to another ad-driven game, which monetizes through ads, which are ads for another ad-driven game. And it's just sort of a whole morass, but it's, it's a very powerful business model that, that has made a lot of money over the years. And, and so there's been a plethora of folks that have filled in these different pieces. Now, there's traditionally two sides of this equation, okay? There's the demand side, which sells, that's for advertisers. They have demand for, for ads. So they go in and they buy ads.

• 7:48Ben Thompson?

  Then there's the supply side, which is filling the ads into, into apps. So if you're a developer, you're on the supply side. You need to find an ad network that will put ads into your app. If you're an advertiser, you need to find a supply-side platform where you can buy ads and put them in. Traditionally, these were separate and they were sort of different pieces, but it was all tied together by the IDF eight. What App Levin has done very effectively, and they really supercharged this, uh, with the acquisition of Mopub, which was one of, that, this was actually one of the many Twitter screw-ups. This was a Twitter-owned supply-side platform that placed ads in apps. So they had a DSP side, I think they might've had a small supply side, but they buy Mopub, they get super big.

• 8:29Ben Thompson?

  What happened is they own both sides of the equation, both where you buy the ads and where you fill the ads. And by having massive inventory on both sides and being sort of an all-in-one solution, what they do is they don't know who the users are, but they can infer through price, prices, who's valuable and what's not. Because, so basically everyone's, they're, they're operating the market. And by people coming in, like you could imagine, if you're, if you had sort of like the, the layer for all transactions in a market, you can sort of figure out, I don't know who's buying stuff here, but they're spending a lot of money. They must be very valuable, right? Or I don't know who's doing XYZ, because there, there's basically, there's lots of-

• 9:11Andrew Sharp?

  Connecting some dots to piece together some of the data advantages that they used to have in the pre-ATT world.

• 9:19Ben Thompson?

  But like markets, markets are information discovery mechanisms. Because so like price in general is an information discovery mechanism. That's why you want to have a free market because that's how you get resources devoted appropriately. Price is a signal, right? And so if you operate the market with both sides and you have sort of good technology that can parse that to sort of get signal and figure out what works, what doesn't, what ads are effective, what aren't, what targets work and what don't. And you can do this sort of at scale, not just for like a single app, but across this entire long tail of apps. Then it's very powerful, like you have the potential to pull out signal that was destroyed by ATT.

• 10:00Ben Thompson?

  Again, the signal's not as good, but all these games still exist and they still need ads and people still have businesses to run and you get better and better at that. And, and once you have a little bit of an advantage, you're a little bit better. It's heavily in the interest of everyone in an ecosystem to jump on. Oh, this one performs better. And then you start getting this real sort of data advantage. It, it, it is an aggregator sort of story, but it's not, it's not sort of consumer facing. So I wouldn't, I wouldn't call them an, they're an advertising aggregator is maybe a way to put it. But they have both the demand side and the supply side. I think that demand side is really important and, and, uh, you know, which where the Mopub sort of bit comes in.

• 10:40Ben Thompson?

  And they, they, they have this virtuous cycle where they just perform a little bit better. They get more folks on, they get better data, they get better and better. And we're, you're seeing that virtuous cycle sort of really take off now. They did have a side business before, I wrote this more at the S1, where they actually had a stable of their own apps. And, and they would, I was, thought that was really cool. You get like very direct signal because you own the apps. That's actually not that important. I think that probably helped to get this virtuous cycle started. But now they're actually demotivated, they've, they've closed some of the apps. It's really, they're just this network that's operating amongst all these sort of apps. And it works and because it works, you get more customers. And now the really exciting thing and why this is a big deal.

• 11:24Ben Thompson?

  And I really, I really need to write about them again is they are rolling out and saying, Saying that it's working to not just do game advertising, but also e-commerce advertising. And you have this situation where Meta is super dominant. And we've talked about this, the problem with Meta being super dominant and Meta running out of inventories, prices start going up. And, and it's just like, and so you have this, this area where these ads are super cheap. But if they can show effective lift and they can get that feedback cycle going, not just with other games, but also with sort of e-commerce sites, it just opens up. E-commerce is the largest category for digital advertising, even larger than games. So it's a dramatic expansion of their addressable market, which is, you know, stock prices are about, are about future growth.

• 12:08Ben Thompson?

  So it's, so the, the initial run-up is they're taking over mobile games. Now it's like, whoa, this is like actually the only real alternative of the long run to like Meta. Yeah. So it's, um, it's a very impressive company. This is part of the reasons why Unity's really struggled. They, they like, they, they sort of took their market out from under them. They did that stuff about changing their terms, trying to force them to use their ad network, all these sorts of things. Um, but yeah, they're dominating and it's been very, very impressive.

• 12:36Andrew Sharp?

  So is there any reason they're dominating and a company like Snap just isn't? Is it essentially that AppLovin has been more proactive at developing these skills?

• 12:46Ben Thompson?

  You have this long tail. Yeah. So Snap is, is like Meta. Their ads are on Snap.

• 12:52Andrew Sharp?

  That's why I ask about it because Snap would be sort of the alternative to Meta at least four years ago.

• 12:57Ben Thompson?

  That's right. That's right. And so they just totally failed in the post-ACT world. They never really developed that targeting capability.

• 13:05Andrew Sharp?

  All right. And that is the end of the free preview. If you'd like to hear more from Ben and I, there are links to subscribe in the show notes, or you can also go to sharp tech.fm. Either option will get you access to a personalized feed that has all the shows we do every week, plus lots more great content from Strategery and the Strategery Plus bundle. Check it out. And if you've got feedback, please email us at email at sharp tech.fm.