The One-Model Market: Why Every Consumer App Eventually Becomes an Ad Company
Meta’s advertising revenue hit $63.06 billion last quarter, meaning a staggering 97.6% of its $64.60 billion in revenue came from showing consumers a buttload of ads.
Alphabet is less reliant, with ads at 72.5% of revenue a year ago and 64.3% now - but it’s still a huge // critical part of their business. Their Google Cloud business (the eternal Enterprise Pivot) grew 2x year on year to $30.7 billion from $15.2 billion, but Google’s ad revenue is still up 10.6% to $82.01 billion.
I’m going to argue something that sounds like an exaggeration, but I promise you, it's 100% true: if you’re building software, video, or a feed that can be distributed at near-zero marginal cost to consumers, ads are the only way to monetize at scale. Yes, there are other models: some that work at small scale; others that work for physical goods with a real marginal cost of production; others that pivot to “teams” and “enterprise” - and still others that end up being monetized via ads anyway.
But if you’re selling to consumers, eventually your model will converge on ads and clicks. There’s no way out.
Why the price falls to zero
Software, video, and a feed have near-zero marginal cost. If you have a bunch of competing firms and platforms, they’ll drive the price down to the marginal cost of production. Economists have understood this since the nineteenth century. Add a second revenue stream, and a company can go further: it can offer its product for free to drive competition out of business.
In this case, that other source of revenue is ads.
This goes back a long time. For most of the twentieth century, newspapers were monetized by ads, and readers paid a little. In the US, radio and broadcast television work the same way. Google and Meta didn’t invent the ad model; they just scaled it up to billions of people.
For a subscription model to work, users need to find a credit card, go through a decision-making process to decide if it’s worth it, and then repeat that process every month. With a free product, there are no transaction costs, so you get customers who would never subscribe to a paid competitor. Paid companies lose customers at every renewal decision; the free company never asks its users to make one.
In the 1990s, many people proposed micropayments to fix this problem. Instead of charging a subscription, you’d pay a few cents per article. The problem is that you have to decide whether to pay. If you’re a consumer, it costs you more cognitive bandwidth to make that decision than the penny of value is worth. Consumers chose free, ad-supported articles over paid, ad-free articles, and publishers followed.
Advertisers pay more than users ever would
Meta has 3.64 billion daily active users, and it got $63.06 billion in revenue for the quarter. That’s an average of about $17 per user per quarter, or roughly $69 a year. Many of those users wouldn’t choose to actively pay $69/year; some wouldn’t even consider themselves able to afford it.
If you charge a subscription for a product, you either lose the student or you undercharge the hedge fund manager. If you monetize by ads, the advertiser will pay more to reach the hedge fund manager, and the student will get the product for free. In economics, this is called price discrimination, and it means you can monetize products that you can’t charge flat prices for.
Ad monetization is unstable; I don’t want to hide that. Because they work off an advertising budget as a percent of expected sales, they shrink when the economy isn’t good.
What I’m arguing is that ads are the only sustainable model, not that they are stable.
Subscription companies always converge on ads
Advertising has always been a convergent point for subscription businesses. Look at Netflix. It used to be a purely subscription product. Now, its ad tier reaches 250 million+ monthly active viewers, a household-based metric rather than a count of accounts.
In the 12 countries where it’s available, over 60% of its new sign-ups in Q1 were on the ad tier. They’re projecting ad revenue to double to $3 billion this year, with a guided revenue range of $50.7 to $51.7 billion total, or about 6%. By 2030, they’re targeting roughly $9 billion in ad revenue.
Amazon started turning on ads by default for Prime Video in 2024. Across all its businesses, from sponsored listings in its store to Prime Video, Amazon reported $19.64 billion in ad revenue last quarter, or 9.7% of its net sales. Andy Jassy told investors that Prime Video is now profitable and has a revenue run rate in the tens of billions of dollars. Exact figures on Prime Video’s ad revenue are not known.
I can’t think of any major consumer-facing, primarily ad-based company that has successfully shifted to a subscription model. Twitter // X tried it,
but I think we can all safely say that didn’t work.
Unfortunately for the actual end users, when your business is advertising, your product team is incentivized to make advertising more effective. When your advertising is based on time-on-device, your product team will try to get you to spend more time on the device. Last quarter, Meta reported double-digit growth in time spent on Reels across Instagram and Facebook - a product I don’t think anyone is going to argue is improving the existence or the outlook of the human race. It doesn’t require malice in this example - just incentives.
Predictions
If this thesis is correct, then we will see:
- New free–to–reproduce consumer products will be launched as a free product with a premium tier, not as a single–tier product with a free tier added on later.
- Slowly growing paid tiers will have ads added to them before price cuts.
- Companies losing ad revenue will search for business customers like Alphabet did with Cloud before asking consumers for money. Why? Consumers simply don’t want to pay.
The consumer Internet is, and has always been, a one-model market.
That new consumer product released today that just has one paid tier is actually running a physics experiment, one that has been run thousands of times before, and the outcome is always the same.
The question is not whether ads are good.
The question is: can anyone name another source of funding for a product that is available for free to more than 3.6 billion people? Until that question is answered, the trendline will continue.
Claiming it doesn’t will just be another form of subscribing to an impossible business model.
🍕 I’m JA Westenberg. I write essays about technology, philosophy, productivity, and what it means to be human. If you’re an optimist, you’re in the right place. You can read my AI disclosure here
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