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KEY HIGHLIGHTS

🏦 While the pandemic is driven by exogenous non-economic forces, it likely does exacerbate structural weaknesses in the economy.

🌪 The pandemic is like Hurricane Katrina hitting every metro area in the world at the same time.

📅 What trends are visible from Silicon Valley layoff lists.

🤔 Will the app economy’s low-priced digital goods(IAPs) be impervious to recessionary forces?

📲 How the ad supported apps are impacted by the increased engagement – and the recessionary forces.

📑 Why it might become important to shift thinking from a ROAS standpoint to a profitability standpoint.

💡 Why the current crisis might see a migration of advertisers to Facebook and Google from other ad networks.

KEY QUOTES

All the signs of a disaster

What is the economic impact of this? What could you compare it to? For me, it’s like hurricane Katrina hitting every single metro area in the world all at the same time. Because if you look at what happened with Hurricane Katrina, retail was shut for three to six months, and a lot of parts of the city. The hospitals were overwhelmed or completely shut down. Everybody was basically unable to go to work. And so that’s exactly what’s happening now.

The cost of the pandemic

But what else is really problematic—if you’ve been following the sort of layoffs lists—Silicon Valley companies that are not in these verticals that are actually touched directly by the quarantine are laying people off. Why is that: because they were running unprofitably for so long and they understand that there’s probably very little access for the rest of the year to private equity financing, or VC financing. So they’re just laying people off – they’re shedding costs.

This is the time to be conservative

What I would say is just be conservative: within your assumptions, be conservative in terms of your models, be conservative in terms of your payback windows, be conservative in terms of your cash outlay, be conservative in terms of your budget distribution across channels.

The importance of being sensible about cashflow

Some of the smaller advertisers, they could be spending 500k, a million a month, but they’re running on a credit line that has a 2-3 month window, and then they’ve got to pay their expenses back in a shorter time window than that. And if that credit line gets called, they’re not in a good spot. So I think you’re going to have to be very conservative. And you need to know when your cash is coming back.

FULL TRANSCRIPT BELOW:

Shamanth: I’m very excited to welcome Eric Seufert on the Mobile User Acquisition Show. Eric is a repeat guest. We love him. We love a lot of his writing. I’ve learned so much every time I’ve read his stuff. Very excited to have you Eric today.

Eric: Thanks for having me again. It’s very nice to be back.

Shamanth: Indeed. So we’re going to talk about how the world has changed since we last spoke. The world is a dramatically different place. And we’re going to talk to you about something you’ve had a very informed opinion on, which is how the COVID-19 pandemic is affecting the mobile app ecosystem. As you’ve pointed out, and as you’ve written, Eric, a lot of apps have had their fortunes swing wildly over the last couple of weeks. Now, if you look at the macroeconomics, and this is something I find that you are very plugged into, do you get the sense that this is a temporary setback that the global economy could recover from as soon as the pandemic abates? Or is this something that could be much longer lasting? What are some of the macroeconomic signs that you’re seeing?

Eric: Yeah, that’s a good question. I’m really happy to discuss this stuff. So just a little bit of background on me because I think it’s been really interesting to see so many people become not only epidemiology experts throughout this pandemic, but also economists. I’m not huge on credentialism but I do think it’s helpful to kind of highlight one’s bona fides when they are about to espouse opinions on subjects which require some expertise in order to make interesting and insightful points about.

So, my background is that I have a master’s degree in economics, but I studied transition economies in my degree and so I studied mostly economies that were transitioning from command economy structures, you know, communist countries’ economies to free market structures and all the kind of economic liberalism that happened. But I was doing that during the global financial crisis, so I started my program in 2008 and I was really lucky to have time to study like that, because I think I probably wouldn’t have fared very well in the employment market, just like most people my age didn’t at the time.

So I think I have a relevant education on this. So then what do I see now? As part of that, I spent a lot of time studying the 2008 economic crisis of 2008-2010. And that was part of my academic work – I was looking at that and comparing it to what happened in these transition economies as they transition from command driven to free market economies. What was happening in real time as I was studying was that the US government was stepping in and they were orchestrating this sort of very unprecedented TARP program. And they were doing the auto industry bailout and these things that kind of almost any free market absolutist would be inimical to. These are not free market actions to take. And so that was part of what I was studying at the time. 

And so, what do you see now, like you see, well, okay, first of all, this is a lot different than the global financial crisis, which was an asset bubble because first of all, this is catalyzed by a pandemic, which first of all affects the entire world all at the same time, more or less. And it isn’t tied to the fundamental health of the economy. So this is purely driven by exogenous forces that are totally independent of any kind of structural weaknesses in the economy, but it does actually exacerbate a bunch of structural weaknesses in the economy. There is kind of a corporate credit bubble that has been forming since the 2008 global financial crisis because the interest rates were brought to such a low level that all these companies could just load up on tons of debt. And a lot of it was not a kind of investment grade debt. It was basically junk debt. They could load up because interest is so cheap, debt was so cheap. 

So these companies are not healthy. They’re actually really sick companies that were just basically surviving on debt. And they were using a lot of their cash to buy their own stock, which basically just enriches their executive layer. So anyway, you got a lot of companies. You’ve got a lot of consumer credit – a ton of it. So people focus on student loan debt, but actually, credit card debt is a serious problem, auto debt is a serious problem. 

You got a really indebted consumer class in the United States. And then the stat is thrown around, you know, people have less than $400, you know, in their savings on average. Yeah, that’s kind of been debunked. But the consumer class in the United States is in pretty rough shape. They don’t have a lot of spare cash. 

And so you’re going into a situation where I’ve compared this to – what is the kind of economic impact of this? What could you compare it to? Me, it’s like hurricane Katrina hitting every single metro area in the world all at the same time. Because if you look at what happened with Hurricane Katrina, retail was shut from like three to six months, and a lot of parts of the city. The hospitals were overwhelmed or completely shut down. Everybody was basically unable to go to work. And so that’s exactly what’s happening now.

So the consumer class is out of money, they’re loaded up with debt, they’re getting furloughed or laid off. Unemployment just hit 14% this week in the United States. It’s a bad time. And so I don’t think of this as a pandemic or quarantine, the quarantine is just one part of it, right? 

And so when you get all these ad tech execs writing these weird puff pieces about how this is the best time ever to be in user acquisition, and the ad tech is sort of like an ascendant vertical during this time – like okay, maybe for like some app verticals and maybe for right now, but I’m kind of foreseeing like a prolonged protracted depression level economic downturn and so I don’t think there’s any reason to celebrate. It’s like okay – what was impacted early – like what did the quarantine absolutely devastate – travel, it devastated dating, it devastated ride sharing. And, you know, that was just obvious. And then I posted about this, it was just obvious from the downloads charts.

But what else is really problematic and if you’ve been following the sort of layoffs lists. Silicon Valley companies that are not in these verticals that are actually touched directly by the quarantine are laying people off. Why is that: because they were running unprofitably for so long and they understand that there’s probably very little access for the rest of the year to private equity financing, or VC financing. So they’re just laying people off – they’re shedding costs.

Shamanth: Yeah. 

And even companies that do have access – so you know – Carta the other day laid off like 20% of staff or some huge chunk of their staff while also announcing a massive fundraise. So even though they do have access, or they’re able to stockpile cash, they’re letting go of people because they need to reduce your fixed costs. They’re running unprofitably. 

What does this mean for marketers? I think the advertising sector is going to face some real pain in the next six to however many months. In the medium term, they’re going to be facing real pain. I think Facebook is going to be facing real pain, Google just announced that they’re freezing hiring. This is not a party. There have been some verticals that have experienced a spike. HouseParty got 50 million installs, some games are spiking. A lot of games aren’t. And I think a lot of e-commerce apps aren’t. 

Shamanth: Yeah. 

Eric: And so I think you’ve got to really consider whether you think your app is recession proof or not. Because fundamentally, if it’s not, then it doesn’t matter if you’re seeing a short term spike in engagement, you’re facing sort of like a long term problematic period.

Shamanth: Right. So from what everything you’re saying and also have written about, it sounds to me like there’s a very systemic downturn that we are confronting over the next couple of months. And certainly one of the things you have written about is when the last recession happened about 10 years ago, it was followed by a huge drop in advertising spend. And this was, of course, precipitated by dropping consumer spending. Now, this was again before the app economy was anywhere on the horizon. If some would argue that, “Hey, the app economy is driven by microtransactions. Like in 2008, if you had to go buy video games that would cost you like hundreds of dollars, which is not the case anymore – you can buy lower ticket items in mobile games as IAPs.” So which, if they were to argue that this is likely to be more recession proof, how would you think about that perspective?

Eric: That’s actually a really great interesting topic to explore. The app store was launched in 2008. But you know, the app store was small at launch. There’s mostly paid apps. So we don’t really know how this impacts freemium games, mostly. But I think it’s also like it’s kind of a mistake to equate the app economy with just games now. And also,with just IAPs because if you know, ads revenue has become a huge part of the app economy system, as ads subscriptions. And those primarily exist outside of gaming. 

I saw an article the other day that said, okay, well, the recession is not going to impact mobile gaming as much because the IAPs, the digital products that people buy in games are luxury goods, and so luxury goods actually don’t get impacted as much by recessions. Because the disposable income or discretionary income doesn’t shrink as much with rich people who are sitting on a lot of assets. And I don’t agree with that. I haven’t fully formed my kind of thesis here yet, but my sense is that actually I believe IAPs and digital goods probably act more like inferior goods in a recession. And so that means that consumer spending could spike on those because in recession, people shift their thinking patterns to inferior goods because they’re cheaper. 

But, you know, at some point, you just run out of money. So like, when you might see like, you know, meat sales, for instance, might drop in recession, but for spam, the revenue increases because that’s just more people can afford that but only two. I don’t know that you see that happening here. Because I think these are just non essential purchases. 

And so like, the problem here is okay, even if you say, okay, this is an inferior good. So spending might increase. Yeah, but I don’t know how you classify that within a freemium context, I think you might actually say the freemium product itself is the inferior good. And the IAPs are the luxury products. And so you’ve got both classes of people existing within this product, but the luxury good, yeah, that’s gonna suffer and the inferior good is the app itself, you’re gonna increase consumption there. So what you might see is you might see a lot more engagement and a lot less revenue.

Shamanth: Right. Interesting. And I think that’s a good framework to think about: IAP being lower ticket items, but they’re still more expensive than free. And I think that’s certainly something I’m very curious about how it shapes up, how it plays out. The other dimension of all of this that I’m curious about is what you just briefly mentioned, which is that there are ad supported games which are a significant portion of the gaming economy now, that could be considered free. And you know, because the consumer isn’t paying anything for it: how do you see the ad supported economy being impacted by everything they’re going through?

Eric: Well, I think you might see a spike in engagement, but the thing is, CPMs bottom out and those companies do make a lot less money. And I think the other thing that is considered with those types of games, and then as we’re talking about hyper casual, and for the most part is, you know, these games just exist in this weird soup of internecine ad arbitrage. So it’s just like hyper casual games are mostly driven by other hyper casual games, like selling in other hyper casual games and buying from other hyper casual games. And so, that probably just kind of collapses. 

Because there’s got to be some element there that’s sparking the initial monetization, it’s probably from like a sector that’s just not going to be doing as well. If gaming companies start buying less inventory, which is the catalyst for these, then that cycle of hyper casual arbitrage, then it’s that recursive acquisition cycle, then that just immediately dries up. It feels like there’s a nonlinear impact on CPMs. And my sense is the CPMs are just completely bottomed out. And so we’ll download those games a lot. But the games are probably not viable because the ads just don’t make any money.

Shamanth: Yeah, I think a couple of anecdotal data points I’ve gotten, seem to say CPMs have bottomed out, engagement is going up. So far. It’s kind of steady. But these are a limited number of data points. And certainly all of this is going to play out in the next couple of weeks and months as we go ahead. How would you recommend an app or a game address some of these challenges in the short to medium term? How do you recommend they mitigate some of these financial risks that they may face as a result of the recession and a lot of the dynamics that are slowly starting to unfold?

Eric: So here’s where I think you see a big shakeout in the people that were doing true UA, performance marketing and the people that just had teams spending VC money without a sort of regard for the sort of profitability of it. I released a workshop that I released as a webinar on YouTube so people can go look at that.

Shamanth: Sure.

Eric: It’s called marketing during a recession. And then I did, I’ve done a couple of like, private webinars for like VC funds, or portfolio companies to think about this stuff.

So, what I would say is just be conservative, you know, be conservative and within your assumptions, be conservative in terms of your models, be conservative in terms of your payback windows, be conservative in terms of your cash outlay, be conservative in terms of your budget distribution across channels. 

Just make sure that you feel very, very certain that every dollar you spend comes back. And also you need to understand your cash flow timelines, because, you know, even if you’re being super conservative around your model – and you’re very, very certain around payback. You know, if you’re paying yourself back even in six months, three months, if you’re in a cash crunch, and you’ve got no access to credit, that’s going to be a problem. 

Some of the smaller advertisers, they could be spending 500k, a million a month, but they’re running on a credit line that has kind of like a two to three month window, and then they’ve got to pay their expenses back in a shorter time window than that. And if that credit line gets called, they’re not in a good spot. So I think you’re going to have to be very conservative. And you need to know when your cash is coming back.

And you’d be able to plan that you need to have a cash schedule. And I would start thinking about…. everyone thinks about the ROAS timeline. And a lot of people are good at thinking about the profitability from a ROAS standpoint, I think now is the time when people need to get really good at thinking about profitability from a monthly standpoint: how much cash is coming in this month, how much cash is going out this month, then what’s left over. 

And I’ve been beating that drum a little bit on the website, but also I mean, I’ve created some content around in the past, because I just think it’s something I rarely see people do. It’s like when times are good, who cares? Like we’re buying profitably on a ROAS basis – doesn’t matter. Like, you know, we can spend as much as we want. Well, times where lean cash balances isnt fat, you want to make sure that you’re conserving as much cash as possible to keep the runway long. You need to know how much is going out this month – and coming back this month, and then you start getting into like the payment terms from like Apple and Google. So Apple and Google, I’m getting paid two months in arrears. Yeah, like I’m getting my Apple money 2 months later, essentially, Google’s a little bit earlier. But so I’m thinking about, like what I did last month. Well, if I’ve gone on a big user acquisition binge in the last two months, you know that money is due before the Apple money comes in. 

Shamanth: Right.

Shamanth: So you gotta think about that stuff. You literally pull a spreadsheet out and say this much money is coming in this month for two months ago from Apple, from last month from Google. This much money is owed next month for this month’s spend. And I owe the last month’s spend this month. And then what’s my bank balance gonna look like at the end of the month? 

Shamanth: Yeah. And I think as you have expressed even before, a lot of this crisis happened, LTV modeling is more about cash flow management. And again, maybe I’m mangling your words but that was the broad sentiment you’ve expressed multiple times in a lot of your writings. And I think this merely emphasizes how important all of that is, how important it is to focus on financial sustainability in a lot of user acquisition activity.

Eric: I think another thing is, it is not pleasant to think about – but you know, if you see companies, there’s a fight to quality across the board right now and what does that mean for digital marketing? What does that mean for UA, it means Facebook and Google. I’m gonna go to the channels that drive the highest like volume with the most like reliable volume with the most transparency, with most tools. So what does that mean for my team? 

Because I run on Facebook and Google, like one person each, with millions of dollars in spend – to manage it all. And you don’t need a big team for that. So I think that means that a lot of the companies that were bloated in terms of their UA teams are probably going to be cutting back on their headcount, which is unfortunate, but yeah, it’s something you got to think about.

Anytime you’re in like an economic downturn, and the first thing you’ve got to do is cut fixed costs. And a lot of UA teams were thinking about this before anyway, because like this, especially gaming, it’s so feast or famine – it’s cyclical. 

How do I make sure that if I’m in a moment where my big game is at the kind of end of its lifecycle, and my next big game is maybe six months to a year away in terms of my launch, how do I make sure that I don’t have this massive UA team that’s just like fixed costs that I’m  supporting and is not spending any money. 

Shamanth: Right.

Eric: Because you see that happen. MZ laid off.

Shamanth: Yeah, hundreds.

Eric: Hundreds of people in the marketing team – that is a huge, huge org. 

Shamanth: Yeah

Eric: Wasn’t spending that much money. How do you avoid getting into that situation?

Shamanth: Yeah. Indeed not pleasant things to think about, but one can be prepared, one can be conservative, and one can ride out the storm. Eric, this was very insightful, very instructive, as always. Any closing thoughts as we wrap?

Eric: It just, it’s troubling time. It’s a scary time. 

Shamanth: Yeah

Eric: I just like to think about how nice it’s gonna be to be at the other end of this and it can be overwhelming. But one thing that’s going to bring some solace is just the idea that everybody’s going through this right. It’s been a trying time, but it’s also been a time of people being more vulnerable and being more emotionally honest and so, I think it’s nice to be able to have this conversation about what you went through with anybody. Anybody wants to have that kind of convo, The Mobile Dev Memo, Slack is a good place to do that. And yeah, a lot of a lot of people there can be sympathetic and offer good earnest advice.

Shamanth: Indeed. We will link to that, we have a link to your Twitter just as well. And we will link to the upcoming Mobile Dev Memo Academy just as well for folks who want to take advantage of this time to educate themselves to upskill themselves over the next couple of weeks. We will link to all of that in the show notes. And, Eric, as always, it’s been a pleasure having you. Thank you so much for being on the Mobile User Acquisition Show. 

Eric: Cheers. Be well, thank you. Thank you.

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