Eric Seufert: OpenAI running ads is inevitable — and it will be the most important new ads platform in a decade

have you back on the show soon. We'll talk to you later. Amazing. Happy day. Thank you. And we have Eric Suffort from Mobile Dev Memo in the reream waiting room. We will bring him into the TBPN Ultra Dome. We are getting back on track. Eric, how are you doing? What's up? Sorry to keep you waiting. Sorry about that.

Absolutely chaotic day. I'm uh I'm great. Uh I've I've enjoyed your guest appearances on podcast, your writing, everything, especially some of your t more recent takes.

Um, but maybe for those who uh aren't super familiar, would you mind giving us like a highlevel just introduction on uh your day-to-day how you describe yourself to folks these days? Yeah, I call myself an independent analyst. I run the website mobile dev memo. It's got a blog uh podcast uh newsletter, Slack community.

Uh I wrote the book Fremium Economics and I spent kind of my operating career in the mobile space uh mostly in performance marketing roles and strategy roles. Um, and now I just kind of blog, podcast, uh, full-time and and invest out of a fund called Heracles Capital. Oh, cool.

Do you, uh, uh, it it seems like one of the main, uh, like I don't know, takes you that you're just waiting to cash in on is this idea that OpenAI will be doing advertising soon?

Um can you walk me through like how you perceive the messaging from OpenAI the firm and then how like what led you to believe that it is inevitable that we will see advertising. Yeah, that's my my motus Randi is strong uh strong opinions forcefully stated and uh I've said very forcefully open AI will monetize with ads.

I wrote a piece uh in May. Uh the title was obviously open AI will monetize with advertising. And and here's what here's where I think the um the sort of like most profound clue has been, right?

So uh Sam Alman in Ben's uh podcast uh last week, Ben Ben Thompson, he said uh he he he he pulled off like a rhetorical slight of hand, right? He said like, "Hey, look, you know, yeah, we're not really considering ads, but I really love what Instagram does. Yeah, those aren't ads. We wouldn't do ads. Ads are attacks.

But I love what Instagram does. Instagram has surfaced relevant products to me and I've bought products from those ads. Those aren't ads. Yep. That's a separate thing. Those are those are improving my life. That's discovery. That's that improves my life. Ads by definition uh you know deteriorate engagement.

But but these I I I extract value from right and that was a Spencer Noman moment. That was the Spencer Noman moment. It it so Spencer Norman uh Netflix CFO March 2022 Morgan Stanley TMT conference. He said, "Look, it's not like we have religion against advertising.

" It's not in our plans right now, but never say never, but it's it's not in our plan. It's not like we have religion against advertising. That was the Spencer Norman moment. That was March 2022. When did Netflix launch ads? November 2022. Eight months later. Obviously, they were already working on it. Yeah. Right.

And and by the way, I would I would I Yeah, I would dispute that statement that it's not like we we have religion against ads. They very much exhibited religion against ads for years and years and years up to that point. But that was a tipping point.

Yeah, that was a tipping point when they indicated to the market that ads are coming. They're inevitable. I've said ads are inevitable with OpenAI with Chat EBT. I said yesterday they're inelectable. I got made fun of for using that word. I've used it a lot, by the way. But they're inevitable. They're coming.

And I think they've been working on that for some time. Yeah. Here's uh What do you think about ads where you pay for something and still get ads? Because for me, I signed up for some HBO plan a while ago and I thought I was signing up to not have ads and now I I've been a little bit lazy.

I usually watch TV before I'm falling asleep. And uh if when I get like a series of like when I get like four minutes of ads before HBO and I'm paying for the product, that's to me a really bad user experience. Well, I mean, it's a choice. I mean, there's trade-offs, right?

I think um you know the here so with any sort of with any with any digital product that has the capability of becoming like having a humanity spanning TAM uh you you you the the sort of uh the imperative is to reduce consumer surplus to as close to zero as you can right because that gives everyone an accessible and to give everyone an accessible price point right some people the only accessible price point is zero right now for some people now now you have to weigh that against perception right and there's perception risk like Netflix I I I had sort of argued at one point that I want Netflix to go fast, a freeing ad uh freeing uh sorry, free ad supported tier.

Yeah. Uh and and just drop the price point to zero and have ads. I now I've changed my mind on that. I don't think they should do that. Um just because it would it would you know it would deteriorate the perception of the brand, right?

They have a they have a a perception of being like a high quality uh you know content studio, right? And so I think that would be a mistake for them to do. Um so it's just a trade-off, right? Do you want to maximize TAM or do you want to sort of uh preserve some other asset?

In Netflix's case, it's the the the perception of being like a high quality service. I don't think Chat GPT um has that risk, right? So, I think Chat GPT can introduce. So, first of all, when we talk about ads in CHPT, we're not talking about ads in the paid tier. Just want to be clear about that.

We're talking about ads in the free tier, right? And so, yeah, that's kind of what I was getting at. It's like if I if I'm on the 200 a month plan and I'm getting slammed with ads, like that's going to be people are going to be really mad about that. But for people that are on the free tier seems very fair.

Well, I mean that would create a lot of animosity on the $200 tier. But I think look, so yes, yesterday uh the Financial Times uh posted some data about OpenAI. So 800 million users, we knew that 5% are paying, right? So you got 40 million paying users. 13 billion ARR, but only 70% of that is from consumers.

So when I saw a lot of the anal analysis about these numbers, a lot of them sort of anchored ARPO numbers to the overall 13 billion, but you've got to reduce that to the 70% that are that's consumer. the rest of it is is enterprise API access. So really that backs up to $228 annual not ARPO, right?

It's not ARPO, it's ARPU, it's AR ARPU, average revenue per paying user, right? But if you so if you if you actually uh if you do the calculation for just ARPO, it's it's $11. 38 RPU, right? So how does that compare? That's that's less than Metas. Meta is 1365. This is global, right? It's it's much higher than Snap.

Snaps is 287. Pins is 164, right? But I mean the thing is like they're pretty close to Meta, right? on an RPO basis.

Now those 70% sorry the uh the 95% yeah of non-paying users are essentially freeloading right now the issue with uh openi for that and we saw that in the numbers as well is that inference does isn't free inference has you know marginal cost of of uh you know of of providing that good and so they have to find some way to close that gap and I think introducing ads to the free tier will not uh meaningfully impact engagement um I think it could be additive to engagement.

I think if you look at a chatp chat, it kind of feels like a feed. I think the real challenge with with chat and I've seen like a lot of conversations about well the difficulty is going to be like um the attribution or it's going to be the sort of middleware that uh connects things.

Um I don't think I think that's mostly a solved problem. I don't think attribution is going to be any different. Attribution meaning how do you credit oh chat for driving a sale or something. I don't think that's going to be any different than a traditional social media ad um for e-commerce or like an app.

Um, I think the challenge is really going to be coming up with a format that is that feels native uh for the experience without calling into question the uh unbiasedness of the response. And that's going to be the real issue with ads. And I think it's also kind of going to be an issue with instant commerce. Yeah.

Walk me through uh when do we get to the line of uh as we're rolling out ad products at OpenAI hypothetically? Uh when do we get to the okay, there's backlash, that's too far. It feels like if I see an an just an ad in the Sora feed, that's feels very native to Instagram.

If I see an ad in my Pulse uh news feed, that feels very native. That seems very reasonable. But if I ask it for what are the best paper towels and it shows me an ad and it feels like the ads team is actually influencing the editorial, if you could call it that.

It feels like the the right now you're getting the average product recommendation from Reddit, right? And then if they start to put their kind of uh they start to kind of tilt the scales. Yeah.

What are the landmines in terms of like just describing the nature of the firewall between the results when you ask CHP a a direct question and ads? It's a bright red line. You can't cross it because once you lose consumer trust, then it's gone forever, right?

If if a customer thinks that the answer is not objective, that's actually influenced by whoever is just paying the most to show the product to you, then you lose the consumer trust, right? And and actually that's like that's a very specific problem for chat bots. It doesn't exist for Google search, right?

Because Google uh wants you to click uh with any query, right? You you you query for something, they want you to click.

Now uh when like sort of everyone's interests are all aligned the advertisers, Google's and the users if that first link is the most relevant well you can kind of measure relevance uh through the price the the sort of modified price that the person pays for the ad right because uh the the sort of the end price that an advertiser pays is actually modified by the relevance.

So um with with chat GPT though so if you just see a stream of links if the top link is an ad or if it's not an ad if it's the most relevant either way everyone wins right um but those interests are not aligning that way with the chatbot right so I think once you start inserting ads into answers um you're going to call into question the unbiasedness of that answer and you're going to make users question whether they're actually getting the most relevant information they're just getting the information that was uh that was that was paid for that was paid to be shown but the the other thing is like I so So, a lot of people think that instant checkout uh is like kind of precursor for ads, right?

Because well, there are some partners now and and they kind of uh they all serve ecom, but like they might serve different categories, right? So, there's there's probably not too much overlap in the type of products that could be served in any given instance, but there will be at some point.

And once there is a lot of overlap, well, then how do you mediate that overlap? You run it through an auction. Well, then it's ads, right? Um I I actually don't think that's the case. I don't think that's what what they're what they're trying to do here.

Um, you know, so the issue with that is what we know about instant checkout. And there it's kind of light on details at this point, but it sounds like the way they monetize that is there's a flat percentage fee that gets applied to the product price, right?

And so that's actually economically suboptimal for OpenAI, right? Why? Because well, if the uh lowest price item is the the the sort of most relevant and that's what gets shown, then they're going to make less money on that, right?

And so the the issue with that is like what you'd rather do is you'd rather combine the relevance with the bid, right? And that takes into account the price of the product, right? That's what the advertiser is willing to pay.

And so if you modify that into like an expected value and you you rank the potential ads on that basis, then that's economically optimal, right?

So open AI would be leaving money on the table by just sort of saying, okay, well, let's do an auction and but like or sorry, like just just with the flat fee and and and and then we're just going to like decide what to show there, right?

And the other problem with that is from like a merchant perspective, you don't have any control there, right? So the thing is you can't change the price to sort of absorb that margin shock, right? With ads, you price that. You price that specifically.

You price the the bid that you're willing to pay that makes sense for you that that allows you to sort of like recover the the ad spend but also make money on on the checkout.

But you can't really do that with uh the instant checkout because you just sort of submit um like a JSON of your catalog, right, with the various price points.

So, I think I think instant checkout might and you know the the point I made in in in my blog post about this when it when it was announced is I think it's probably just a way to bootstrap conversion data for users to ultimately target ads against. But I don't think that's going to be the ad surface area.

I think the ad surface area and so first of all I think it's it's a mistake to think that ads need to be anchored to the the the content of the query, right? Like that's that's sort of like a contextual targeting way of thinking, but that's not what Facebook does. That's not what Instagram does.

When you see an ad on Instagram, it's not because the the previous piece of content you saw was related to the things being advertised to you. It's all based on what there is a history of of conversions uh for anchored to your account, right? So, these things don't need to be related.

They don't need to be they don't they don't there's no there's there's no there doesn't need to be like a direct uh relevance connection to the actual content of the chat, right?

It could be totally unrelated except for there's some uh you know some logic that came up with the idea that this ad should be targeted to you because based on previous purchase data you seem likely to buy that thing. Yeah. Yeah. Just it knows that you need paper towels. We're going to show you an ad for paper towels.

Doesn't matter if you went and searched for you know the history of the Roman Empire. Yeah. We haven't we haven't talked about uh pulse yet either which is another effectively feed that you can just slot in whatever you want in between the content and I don't think users would have any issue with that.

Well, no, but so so that I mean I think that could be a so so that's what I that's kind of what I meant when I talked about like the format's going to be the real challenge here. Like I mean and they've got you know uh exceptional people to tackle these problems.

And I think one thing about, you know, OpenAI that people sort of like uh discount is is the number of people that they've hired from Meta, right? So I mean like when people say, well, they don't have a team yet. Of course they have a team.

They've been hiring people from Meta for years and years who worked on ads ranking because, you know, they worked on machine learning, therefore they were working on ads ranking. Yeah. Right. So they they've they've they've tackled these problems exactly um in their in their career.

where I think ads um will uh be very well suited for is or what I think ads will be very well suited for is uh like the app store that they are that they've announced that they're building right so what they said was okay we've got these app integrations you know Zillow that's great it's actually pretty functional um but and you know a number of others uh Canva Figma but at some point we're going to have you know more app integrations than you can remember and so therefore therefore we'll have a directory well when you have a directory what do you uh what what sort of like natively follows ads, baby.

I love it. Uh the the road all the roads end in ads. What about uh on the sorus side? Do you think they can transition from a creative tool to a actual consumption? It's still number one in the plat in the app store by the way. It's fascinating. It's very sticky. No.

So, I think I worked in I've I've worked in mobile uh for too long to be like very optimistic about the staying power of an app that's been number one for like a week or even Yeah, we had we had this conversation earlier where I was like I still put it at like a I I I would say like a 10% chance that it becomes a content consumption platform that people are spending on the Snapchat or Pinterest or Tik Tok.

Yeah. Well, I so first of all, I don't know if it was a great idea to spin that out into its own app. It may have been, but the thing is, you know, OpenAI was not short of top downloaded apps, right? They've got Chat GPT and that was a top downloaded app.

Um, the thing is like you look at the staying power of these uh generative apps and it's it's you know they're they're pretty short-lived, right?

I mean like uh you know uh Lensa what's that Lensa you remember that was like the original that's right but like you remember DeepS right like you know I mean the thing is like you know and then whichever whichever company releases like the ne the sort of the latest nextG model that usually takes the number one spot but they sort of fall off after you know kind of a short amount of time a really novel idea do you think deepseek was was paying for downloads like it didn't seem organic at all.

Um, yeah, that's I I looked into that at the time. I don't actually remember what the conclusion was. I think they probably were. I mean, they were giving away the first reasoning model for free like a week earlier than OpenAI.

So, there was just like it's the but the general public was not like I need to try a reasoning model. I didn't see anybody outside of our bubble talking about deepseek and yet they were charting number one and it just felt totally manufactured to me. Yeah.

Well, one uh I don't know if you have a hard stop at two, but we will let you go. But I'd love to know your thoughts on Tik Tok. Uh there's a deal obviously in place. Uh it the the valuation always felt low, but at the same time like competition in that category is pretty aggressive.

YouTube has a very serious competitor. Instagram reel is a very serious competitor. Now you have Sora. How are you thinking about Tik Tok in the uh in the ecosystem right now? I mean Tik Tok not getting banned was a foregone conclusion.

I I wrote I write an annual predictions post and my post for 2025 was one of the predictions was that Tik Tok's not going anywhere. That was priced in. There was no movement basically in Snap stock price um you know or metas. Um I think uh so so Tik Tok is facing some challenges with it social shopping product. Yeah.

Right. And I think that well the challenge is that they're losing it a massive amount of money. Like it's not really it's like a a retail platform that is massively lossmaking. Yeah, and they they scaled they scaled back the team there.

I mean, just social commerce in general, I think, is um I don't want to say a dead end, but it it faces challenges in the west. But I I I so I I don't think there was like any news with it, you know, with this deal being reached.

I I think when people get worried about the algorithm being retrained, keep in mind that's the content algorithm, not the ads algorithm. So, I I really don't think we're going to see any meaningful change in the ecosystem as a result of this. I think though because you mentioned, you know, YouTube being a competitor.

I think the big news this week was the deal that got struck between Spotify and Netflix. That seems like a big deal, right? Because they're sort of frenemies given the risk that you YouTube uh poses to both their businesses. Yeah. And so I think it's really interesting that they're teaming up.

Spotify's bringing its video podcast onto the YouTube uh platform. Sorry. Sorry. The Netflix platform. Yeah. Not on YouTube. Um I think Ben Thompson called it the anti-youtube coalition. Right. Right.

Well, but a similar coalition used to exist uh between you know amongst and at various times with different affiliations between uh Apple, Google and Facebook. Right. So I think these battle lines are being drawn uh there. But you know YouTube is a CTV behemoth right?

They you know uh they announced that TV is the largest consumption platform for for the for you know the service. Um it's it's a behemoth and you're seeing Netflix trying to sort of poach YouTube talent onto its platform. It brought over Miss Rachel, right?

So I I think there is kind of like a war brewing if not sort of raging at the moment across you know YouTube and Netflix and it's interesting to see this alliance form between uh Netflix and Spotify. Yeah.

Did you have a reaction to Ben Thompson was kind of noodling on this take that uh essentially it's very hard for the second generation of YouTube creators who have built their entire business just on YouTube to then take a Netflix or Spotify deal and get off platform because they're so tied into the ecosystem versus someone who maybe has subscribers on their own website and then yes they use YouTube as a distribution platform but that's not if they turn off YouTube it's not that big of a deal and so uh the the the the loose pitch as I was interpreting it was that Netflix and Spotify would kind of run out of talent to poach from YouTube because the next generation was so locked in.

It could be, but it depends on the structure of the deal, right? So, when Miss Rachel went to Netflix, she wasn't forced to shut down her YouTube channel. She could continue to monetize that content. And actually, she didn't even make any new content for Netflix. That's why it was such a win for Netflix.

I mean, we don't know what we don't know what they paid her, but she just took this content that was extant and brought it over to Netflix. They packaged it up. Yep. into a short season. Um, and essentially just got paid for, you know, double dipping into existing content. Yeah, that's pretty remarkable.

Last question and then we'd love to have you back on because this was an awesome conversation. Uh, how uh how excited do you think the average app developer, business owner in general should be about uh OpenAI launching ads?

Because I know a number of businesses over the years that like we're basically be born because a new ads platform. Like I have friends company with hundreds of millions of dollars of revenue.

They've told me like we would not be a big company if we didn't if we didn't get to hypers scale on on on Facebook in the early days. And so I I assume OpenAI will want to make the ads pro product cheap and performant early on to just try you know drive this uh you know huge influx of of volume.

But I'm curious what you think the opportunity will be early. Everyone should be excited about OpenAI launching an ads platform. This is beneficial broadly for the economy. Ads are the driver of the internet economy. Look but for Facebook ads but for conversion optimized Facebook ads the DDC category wouldn't exist.

E-commerce would be much smaller than it was. There would be far fewer small businesses in this country. Ads is a growth engine not just for you know ecom or not just for like tech bros for everything. It is the beating heart of the economy. Everyone should be excited about this.

Look I remember there was Chimath was uh complaining at one point that like I don't remember the exact number but he's like you know I I I invest in these companies and 70% of the money goes to Facebook ads.

And I wrote a piece saying you should be thanking Facebook because if Facebook wasn't there to absorb this ad spend, those companies wouldn't exist for you to invest in. Right. This is this is Yeah. Also, the companies wouldn't spend the money if it wasn't driving results.

It's not like you just you don't you don't if if a camp if you spend 20, you know, 20 grand on a campaign and the CAC is too just high, it doesn't make sense. You just turn it off. Like that's the beautiful thing. Exact Exactly.

So I mean I think you know there there there's there's a reason to be very optimistic broadly about the uh new opportunity that will be engendered by um just just just by by uh LLM empowered uh content engagement right or AI empowered content engagement. It doesn't have to be just LLMs.

But but I think like where people get mixed up is they think well you know these ads need to be different. There's some different way to sort of integrate ads. Well no the formats need to be unique and they need to feel native but ads are ads right?

If you drive performance and you get conversion uh feedback and you get the feedback loop going and you deliver more value than you were paid, right? There's compounding there and it grows the economy. So I'm super excited.

I call this commerce at the limit because I think what all and and a lot of this technology is not being applied to the consumerf facing side of things. It's getting applied to the back end, right?

That's what annoyed me about Facebook's last earnings or Meta's last earnings because people are like, "Oh, look at all all these big projects. Gem, Andromeda, Lattis drove 3% improvement to clickthrough rate or 2%.

" You know how massive that is at that scale, how meaningful, but the other thing people ignore is that compounds. Every time I spend a dollar and I get more back, what do I invest the next time? Not a dollar, right? I invest what I got back. So, it's more and it compounds over time.

I'm going to make more money and it's going to grow over time. So that two or 3% this quarter will will also exist the next time that money's recycled, right? And also those products are not static. They're not they're not frozen uh you know in time. They will also continue to improve.

So the thing is like these these products and this is all in the back end. This is not seen by consumers but this is where a lot of the investment is going. And so people talk about the capex like the capex is delivering real returns. What are you complaining about?

And and the thing is like that is that's driving real returns but it's driving more spend. It's driving compounding spend. And that's where a lot of the investment's going. So I think there's there's reasons to be excited across a number of of of service areas here and it's not just the consumerf facing side.

This is amazing. Thank you so much. I feel like I just got let's let's get you back on the schedule next week. We have to have you back. This is incredible. Thank you so much for stopping by, taking the time out of your day. I learned a lot mostly. I just got fired up. This was incredible. Thank you, Eric. Thank you.

Uh take care, guys. And congrats on all the success. It's welld deserved. The New York Times profile. Mike Isaac, that's the big leagues. We survived. We survived. Thank you.