Is The Modern Internet A Low Interest Rate Phenomenon?

In his newsletter Money Stuff Bloomberg columnist and everything financial guru Matt Levine recently outlined a pithy summary of just how impactful recent interest rate increases have been on financial markets. Basically, interest rates have risen so much in such a short period of time that many firms and the individuals that comprise them have operated under the assumption that interst rates would not spike to the levels they are currently at and thus the way the calibrated their businesses now in retrospect looks rather dumb. Levine points to the recent run on Silicon Valley Bank and the general US regional banking crisis as well as investor concerns over recent profits from private credit funds as examples of some of the fallout over rising interest rates.

While there are countless other recent phenomemon in the business world being downstream from the relatively sudden end of the low interest-rate environment one that has stuck out to me has been just how much of the modern internet publishing infrastructure was built in an economy with rates at effectively zero.

Remember 2009? Taylor Swift was on a trimphant world tour after releasing a chart-topping album and James Cameron’s recent special-effects laden movie about aliens with blue skin was inexplicably breaking records at the box office. Well not everything that was old is new again as 2009 was also the year that the broader impacts of what at the time was deemed the worst financial crisis in decades were coming into clearer view. Although the ‘great recession’ technically ended in June 2009, the unemployment rate peaked at 10% in October 2009 and an entire generation of particularly younger workers were un or underemployed for the better part of the next decade. By the start of 2009 the U.S. Federal Reserved finally lowered its interest rate target to between 0 and 0.25 percent and began a series of large-scale asset purchases — also known as quantitative easing — in an attempt to spur hiring and stimulate business growth in order to alleviate a sluggish economy.

It was this economic era that the modern internet began to take shape. Although it was over twenty years after the invention of the world-wide web it’s easy now to forget just how different experiencing the internet was during this time period. Survey data from the Pew Research center showed that in 2009 approximately three out of every four U.S. adults reported using the internet. However, survey data from Edison Research reported that only about 10% of the U.S. population even owned a smartphone. Pew themselves didn’t start surveying the number until 2011 when they asserted that the smartphone ownership proportion had already more than tripled to about 35%.

The year 2009 still a time when print and TV made up a larger share advertising market than digital did. This would change quickly and the shift to digital advertising was spearheaded by mobile ads. The proliferation of smartphones as the dominate medium used to access the internet for the majority of people in the U.S. helped grow the mobile digital ad market from effectively nothing in 2009 to $154B in 2022, over 73% of the total digital advertising market. In today’s economy, advertising — an industry built to capture your eyeballs for as many fleeting moments as possible — has made the shift to serving its content on smartphones.

It’s not too difficult to trace how we got here. The internet was built with an intention of open access and there was an early norm established on the web, long before trillion dollar businesses were built on top of it, that content should be as free as possible. The tech-optimism of late aughts and early 2010s reinforced that the burgeoning modern internet, from the Arab Spring to your aunt’s cooking blog to the literal news and everything in between, was inherently made possible because it was free.

Thus, in order to capitalize on this medium what needed to be sold was not only advertisements but increasingly the technology to track and identify people you are advertising to in order to serve them “better” ads. When money was cheaper fourteen years ago — and the labor market for writers in particular was much looser — it was easier to build a business like Buzzfeed or Huffington Post on mainly on the back of digital advertising revenue stream.

However both the political and economic winds have shifted. Tech-optimism has given way to an unrest over just how much information and power these companies have over our everyday lives. Concurrently, with interest rates now well over 5% and no sign of declining in the short-term future, justifying running a business mostly digital ads is a more difficult proposition than previously anticipated.

You’ve already begun to see the cracks in the industry begin to widen. I’ve already written about how the tech and media industries were really the only ones to see major layoffs in 2022 and 2023. While the overall economy is still doing pretty well at the current moment, one of the first markets to feel tightening when economic uncertainty begins to rise is advertising.

Buzzfeed, which according to its 10-K financial document filed with regulators had about 46% of its revenue come from advertising, laid off 15% of its staff in April 2023 and completely closed its newsroom. Vice Media reportedly missed revenue last year by over $100M dollars and cancelled its flagship show after layoffs in April. Hearst, Red Ventures laid off about 10% of the workers at CNET just weeks after news that it reportedly was using AI to produce content. Dotdash Meredith laid off 7% of its staff in January 2023 and saw Q2 2023 revenue growth decline 15%. Digital advertising at the Washington Post have reportely fallen 15% and and their CEO has apparently floated the idea of staffing cuts with newsroom leaders.

It remains to be seen how much the industry will be shaken up by the contraction of advertising revenue. The internet will of course continue to exist and the majority of U.S. residents will use their phones at least 4 hours every day. That said, recent attitudes towards tech companies in general and the methods they have used to collect all types of information on individuals to market to them along with the relative priciness of money that would prospectively be used toward said marketing have the chance to fundamentally alter how companies that publish content on the internet do business.