Under the Radar

249: The Nature of Advertising


00:00:00   Welcome to Under the Radar, a show about independent iOS app development. I'm Marc Orment.

00:00:05   And I'm David Smith. Under the Radar is usually not longer than 30 minutes, so let's get started.

00:00:10   So today I kind of wanted to have—it's one of those, I feel like some weeks we sit

00:00:14   down to record, and I feel like in the back of my mind I have this little rant that's

00:00:18   just sitting there on my shoulder, just wanting to get out. And this is a good opportunity

00:00:24   because I have a podcast. I can get this rant, I can talk about it, I can talk it through,

00:00:29   and yeah. It's like hopefully you as the audience enjoys the ride, and Marco, hopefully

00:00:33   you can put up with this. I mean, isn't this what podcasts are for? I guess so. And

00:00:39   specifically, the rant I kind of wanted to go on was about, I guess, the nature of advertising.

00:00:46   And it's kind of what it is, what it isn't, the kind of impossible tensions that it creates

00:00:53   inside of someone who develops products, who works on things. Like, there are things about

00:00:58   advertising that I feel like are just so complicated and nuanced that in some ways a podcast is

00:01:04   the best way to talk about it, because there's an imprecision that you kind of need to be

00:01:09   able to reason it through and to talk about it and be able to go back and forth, and that

00:01:14   sometimes is harder in writing. And specifically, this is coming from in my mind, there was an

00:01:20   article that Mark Germin just published talking about how Apple is expecting—or at least

00:01:27   someone within Apple is reported to be seeking ways for Apple to make more advertising income

00:01:33   from its products, to increase the advertising proportion of its services revenue, which

00:01:39   is an overall company goal. And seeing that, it's like, A, it's one of those things

00:01:46   like, "I'm sure, of course there is someone whose job it is to explore that." Whether

00:01:50   or not it happens is probably the more germane thing, but the reality is it is certainly

00:01:55   an interesting thing to think about. And specifically in the examples Mark was giving were things

00:01:59   like putting advertising into Apple Maps or something more along those lines. They could

00:02:06   potentially also go back to introducing something like iAd, like they used to in the '04,

00:02:10   where someone like me or you could incorporate Apple ads into their products. But in general,

00:02:15   I feel like any time this gets brought up, it creates—there's these big feelings

00:02:19   people sometimes have about Apple and their advertising in their products. That you have

00:02:24   this like, "Oh, Apple is supposed to have a premium experience. This is supposed to

00:02:27   be a premium thing. I'm paying all this money for this phone. Why are there ads on

00:02:31   it?" And it's like, that is true. That is fair. That's a completely reasonable

00:02:35   way to feel. But on the other side of that, it's like advertising is this kind of magical

00:02:40   thing that is almost this weird way of creating money out of nothing in one way of thinking

00:02:47   about it. And I think the most important thing to kind of just, as a disclaimer before I

00:02:52   dive into where my mind is on this, is understand that as with so many things in life, understanding

00:02:59   and sort of reasoning through something like advertising requires that you kind of hold

00:03:04   two somewhat contradictory things that are both true in your hand at the same time. There

00:03:11   are things that are contradictory, but both true. And not everything in life, you know,

00:03:16   sometimes there is a clear yes or no. Sometimes there are these weird middle grounds where

00:03:20   it's both a good thing and a bad thing. And both of those statements are true, even

00:03:24   though they're kind of opposite to each other. And I think advertising is the perfect

00:03:26   place where you're in this middle of like, you just have to have a somewhat flexible

00:03:30   mind to really have an honest evaluation. So first, it's probably good to just start

00:03:37   with like, what am I saying when I think of advertising? And I think advertising, fundamentally,

00:03:42   is about utilizing the attraction of your product to then sell the attention it gets

00:03:50   to someone else, or for some other purpose. So you create something that attracts people

00:03:57   to it, that brings people to look at it, to pay attention to it on a regular basis, hopefully.

00:04:03   And that attention is there for some reason. And then you turn around and take that attention

00:04:09   and you are selling it to someone else. Fundamentally, that's what advertising is. Other than the

00:04:15   I guess the only example I could think of was like, people say, "Oh, I only watch

00:04:18   the Super Bowl to watch the ads." In general, people don't come to your product for the

00:04:22   purpose of viewing your ads. Your ads are secondary, your ads are a distraction. And

00:04:28   I use a distraction as sort of a careful word there, because fundamentally what we're

00:04:32   doing when we're making a product is we're saying, "I want to make this awesome. I

00:04:36   want this to be attractive. I want people to want to come and, in our case, open this

00:04:40   app and do something in it. And then I'm going to put an ad in there that says, basically,

00:04:45   'Hey, why don't you stop doing that thing that I wanted you to come here into my app

00:04:51   and do in the first place, and look at this other thing instead?'" And that's a distraction.

00:04:55   That is fundamentally what advertising is. It's I make something attractive, and then

00:05:00   by doing that, I create this sort of surplus of user attention, and I can sell some of

00:05:07   that to someone else, use it for another purpose, and that's what advertising is. And what's

00:05:13   tricky about that is that it actually does work, that advertising is effective and in

00:05:17   some ways beneficial. By doing that, we create an opportunity for people to use that excess

00:05:24   attention that our product contains for other purposes. In your case of Overcast, you allow

00:05:31   people to discover shows that they may not otherwise have found. In my case, I just do

00:05:36   sort of general banner advertising, which I think is largely done with people who have

00:05:41   products to sell or apps to download, and I give those people an opportunity to put

00:05:48   that in front of someone and potentially download it or buy it or whatever the case may be.

00:05:53   And the thing that's funny is I think in some ways it's so easy to be like, "Oh,

00:05:56   ads are bad." It's like, "Well, they're sort of, but also they work." There wouldn't

00:06:00   be any money in advertising if people didn't click on the ads, buy the products, and then

00:06:06   be happy with them. If it was all just this big sort of zero-sum scam, then it wouldn't

00:06:11   work. The fact is, the advertising works because finding the right people to show the right

00:06:17   thing to gives that person an opportunity and benefits them just as much as it benefits

00:06:23   the merchant who's buying the ad in the first place. And that's the interesting

00:06:28   part that I feel like sometimes when I'm working on my apps, I think, "Oh, I don't

00:06:33   like ads." I'm not a huge fan of them, but also they make a reasonable amount of

00:06:37   money and a substantial amount of my living comes from advertising. And for me, the tension

00:06:41   I feel is obviously I spend so much time and effort and energy on the creation side on

00:06:47   focusing on making a product experience, making something that is attractive, is interesting,

00:06:55   is compelling, does the job well, does it quickly. Those are all the things that I tend

00:07:00   to value strongly. And to then add to that experience something that is specifically

00:07:06   and intentionally distracting from that and is sort of, by definition, reducing the user

00:07:12   experience. Not that the ads don't have value, like I just said, but it's reducing

00:07:16   it in a way that if the reason people are coming to my app is not to view the ad, they're

00:07:23   coming to count their steps, to check on their sleep status, to create widgets. All of those

00:07:27   are the actual reasons, and I'm just having this sort of ability to create extra income

00:07:33   by selling the excess of that. And I say it's an excess because it's not limited, it's

00:07:39   not limitless. There's this weird line you have to find when you're building a product

00:07:45   between how much attention you can divert away from the product before it's sort of

00:07:52   … you end up in a vicious spiral where if you put too many ads into something, it becomes

00:07:59   too heavily distracting, then people forget why they're there in the first place. The

00:08:05   core user experience that brings them there in the first place starts to get affected

00:08:09   and hurt and damaged. And when that happens, it's like now you've lost the ability

00:08:15   to attract people to your product, and then there's no excess of attention to use. And

00:08:21   so there's this strange tension you find when you're making a product. If it's

00:08:24   like I want just enough advertising that it is in that excess, in that place where people

00:08:33   aren't using my app less, or at least not using it less to a sufficient degree that

00:08:38   it's problematic or isn't offset by the sort of commensurate income that you can get.

00:08:44   Like if you're just from a purely profit and loss perspective, you imagine, "Okay,

00:08:48   if I put an ad in my app, it's going to say it generates a dollar, and it loses me

00:08:54   25 cents in terms of effective retention or user activity or subscription or whatever

00:09:01   that is." It's like, "Great, I've come out ahead." And in some ways you can

00:09:05   find this line between, "Well, my ad's generated a dollar, and now I'm losing 50

00:09:10   cents, and now I'm losing 75 cents." At a certain point, you don't want to cross

00:09:13   over. And it's like bringing this back to where I started. I feel like in Apple's

00:09:19   case, that tension is exactly the same as the tension I feel. It is the same issue and

00:09:25   the same sort of impulse that you have to manage and think through. And especially,

00:09:30   I have a lot of sympathy for the people at Apple because of the scale of the income that

00:09:35   they are talking about. And while the impact is similar, like in terms of if I introduced

00:09:41   a new ad to my product and it increased my revenue by 5 percent—that 5 percent is still

00:09:46   5 percent—but if it increases Apple's revenue by 5 percent, it's billions and

00:09:51   billions of dollars, saying no to it has got to be a lot more complicated and a lot more

00:09:56   challenging to say, "Actually, no, we don't. We want to leave that as an opportunity cost,

00:10:03   as something that we could do but are choosing not to." That is the tension that I'm

00:10:08   sure internally they feel because they have the same problem. There is some amount of

00:10:13   free attention that they can use and spend, and if they use that correctly, then they're

00:10:18   better off. If they go too far, if they reach beyond that, now suddenly they're in that

00:10:23   negative that they're hurting their bottom line perspective. And the consequence for

00:10:29   doing that in their case would be much more profound from a dollar's perspective than

00:10:32   it would be for me for the same reason. If it gets to a point that Apple products have

00:10:38   too much advertising and people feel, "Oh, I don't want to use that. It's not nice

00:10:44   anymore. It's not great. I'm going to go use Android," or whatever the equivalent

00:10:49   sort of transition would be, then the cost of people en masse leaving the iPhone would

00:10:56   be profound. It's probably unlikely, but that's the same tension that they're feeling.

00:11:00   I'm sure it's interesting. As an Apple user, I don't really like that they have

00:11:04   advertising in there because in general it doesn't benefit me to the degree that it

00:11:11   benefits Apple. So obviously from my selfish perspective, it's like, "I want all-Dave

00:11:15   benefit, no Apple benefit to some degree." That's the purely selfish version of myself.

00:11:21   But I understand that that's not the reality, and we're just going to be in this dance

00:11:25   and navigate this tension. It's complicated is the reality. It's just a fascinating

00:11:31   thing that as I think about my knee-jerk thing with Apple, it's like, "Oh, don't do

00:11:35   ads." Then I'm like, "But you have ads in your product, Dave, so you're a hypocrite."

00:11:39   It's like, "Well, maybe I'm not a hypocrite. Maybe I can want the things that I use to

00:11:43   not have ads but use them myself." It's like, "Well, that's a little contradictory."

00:11:48   You end up with this kind of weird place of, "It's a bit of both, and advertising is

00:11:52   complicated." As someone who uses it a lot, I think I've largely made my peace with

00:11:57   the fact that advertising is beneficial in some ways to customers, is beneficial to the

00:12:02   merchants who are buying it. It is also harmful to the user experience because fundamentally

00:12:07   it's a distraction. That tension is just the reality we find ourselves in.

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00:13:46   Yeah, I think the tension with advertising, I mean, you're right. It is a cost to the

00:13:52   user experience most of the time. Occasionally, you can get away with it being even perfectly

00:13:58   symbiotic and it doesn't make anything even a little bit worse. But in most cases, there's

00:14:02   a small trade-off there. But usually, in the case of advertising, the alternative, if you

00:14:09   didn't have advertising, would be some other form of funding the thing that you are watching

00:14:14   or using or consuming or whatever. That would be less desirable to more people. Usually,

00:14:20   the alternative is direct payment of some sort.

00:14:22   The idea is, here we are on a podcast and this podcast is ad-funded. If we didn't

00:14:28   have the ad there, the ad does make it a slightly worse listening experience in the sense that

00:14:32   we are in the middle of a conversation and we have to interrupt it for an ad briefly.

00:14:36   But if that ad wasn't there, the alternative is not everything is free without anything.

00:14:41   The alternative is you pay for every podcast that you listen to. Most people don't want

00:14:45   to do that. Most people choose the advertising-supported model because it's a better deal for them

00:14:51   in their mind. They are willing to make that trade-off.

00:14:55   For Apple getting into ads, it's not that ads themselves are necessarily always the

00:15:01   worst option or always a bad option. Again, it's a trade-off and most people choose to

00:15:06   make that trade-off when the alternative is paying for 100% of the cost to fund everything.

00:15:12   But what's different about Apple doing it is that they are taking experiences that we

00:15:19   already know that we are already being paid for in other ways like hardware sales and

00:15:25   they are making that experience. They are adding ads after the fact. They are making

00:15:29   that experience worse in some way.

00:15:33   As you mentioned, there are certain ways in which ads are good. Sometimes you do discover

00:15:37   great things with them. Sometimes they do help people who see them or hear them. But

00:15:43   the way people view ads in general is if you take something that was paid for in some other

00:15:48   way and all of a sudden ads get added to it and it's still being paid for in another

00:15:52   way, they see that as making it worse for the sake of making more money, which depending

00:15:58   on your philosophy, that actually might not be a bad thing. But a lot of people view that

00:16:02   as a bad thing.

00:16:03   So in the case of something like the App Store, which is what affects most of us the most,

00:16:09   the App Store pays for itself tremendously with the 30% in-app purchase cut. Not to mention

00:16:16   the fact that it doesn't even need to be financially profitable itself because it is

00:16:21   a critical supporting piece of the iPhone hardware business. So the iPhone hardware

00:16:26   business is really all that the App Store needs to fund itself, which is fabulously

00:16:30   profitable. But with the App Store, Apple found, "Hey, here's even more money we

00:16:34   could make if we just take this cut of everyone's purchases. Great." Then later on, they

00:16:40   add search ads. And the reason why we all were kind of irritated by that for the most

00:16:44   part is that two ways. First of all, as users, we now have ads on our search results screens

00:16:49   and other places increasingly so in the App Store. And as developers, we saw that as,

00:16:56   "Oh, now we have to pay even more money to Apple to just have our apps be visible even

00:17:01   when people search for them by name." And that's not a great feeling either.

00:17:06   And so these are complicated judgments and situations because it isn't just like, "Hey,

00:17:12   can we make a product that's ad-funded and therefore everyone wins because everybody

00:17:17   wants this thing to be free, so we'll make it ad-funded?" That's not necessarily

00:17:21   the issue here. The issue here is this product that was already funded enough to be a great

00:17:27   business in other means that didn't have ads before is now adding ads to the experience.

00:17:34   And that, I think, is a trickier judgment to make.

00:17:37   Yeah, and I think it comes down to something that is so impossible to actually define or

00:17:45   work out, and that is the concept of what is enough revenue to have? What is a successful

00:17:54   enough business? That's the same challenge that I run into sometimes as a small indie

00:18:01   shop that I'm sure that Apple runs into the same way. On the one side, you would have

00:18:06   the maximalist view. This feels like something that would be like there'd be some graph

00:18:11   in an MBA textbook that would show this, that essentially there is a way to structure your

00:18:17   business such that you hit this inflection point where you make the maximum amount of

00:18:24   revenue possible, that you've sort of dialed all your variables that go into your business

00:18:29   to just right so that you kind of hit that maximum point of revenue. That is one version

00:18:35   of that. On the other extreme, it could be just enough that it's possible to continue

00:18:42   doing it. Whatever the bare minimum basic requirements for the business to exist, for

00:18:51   the product to exist, if it hits that amount, then that's enough. And then the spectrum

00:18:57   between that the minimalist and the maximalist view of that is massive and is very much oriented

00:19:04   based on other factors that are like, for you and I, when we talked about this, I think

00:19:10   it was on the last episode about some of the limitations of being an independent business.

00:19:13   It's like I am making conscious choices that limit the amount of revenue that I can

00:19:19   make because I'm choosing to do this myself rather than hiring someone who's an expert

00:19:26   in marketing, in monetization, in all of these things. That there isn't someone in my business

00:19:31   who is just shaking down every tree possible to find new leads to get new customers or

00:19:36   to find people who want to acquire the products or whatever that might be. The maximalist

00:19:42   version in some ways would be pursuing that. I'm sure you're saying, "No, actually,

00:19:46   enough is less than that." And where it is in the amount less is entirely subjective

00:19:53   and entirely based on other desires. For me, it's like I want to make a nice comfortable

00:20:01   living doing the thing that I enjoy. If I had to summarize what enough means, but even

00:20:06   there, monetarily, what that's meant has been a different thing in my life. It means

00:20:10   a different thing when I was younger and didn't have any kids and was living that lifestyle

00:20:17   versus a lifestyle I have now where I have many more things that I'm responsible for

00:20:22   and people who depend on me. As that increases, enough changes. That's where I feel like

00:20:30   it's this weird tension because enough for someone like Apple is even more complicated.

00:20:35   There are weird things like, "Oh, I must maximize shareholder value," which is half

00:20:39   true but isn't totally true because that statement doesn't really mean anything.

00:20:47   With all these things, there are trade-offs. It isn't just like, "Do this, lots of money,

00:20:50   do this, not so much money," without any trade-off. There are lots of trade-offs. Apple

00:20:56   has to decide where is enough revenue for them to get because if they go too far and

00:21:01   make too much money in the short term, you hurt yourself in the long term. That's this

00:21:08   funny thing where I got to imagine it's this really tricky question of where is enough

00:21:11   revenue for Apple to make from the iPhone because if they have a way that they could

00:21:16   make more money, then they choose not to do it. Then they've said, "This much right

00:21:22   here, that's enough. This is good enough for us to make." Then they can essentially

00:21:27   take the surplus that they're creating by saying, "We're not going to go any far

00:21:33   beyond here," and returning that into user experience, returning that into customer

00:21:37   sat, I guess you could say. To some degree, you can exchange money for customer satisfaction

00:21:44   within a product. Because their customer satisfaction is so high, they have much more surplus there

00:21:50   to play with than a company who is much closer on the edge there of user abandonment or issues

00:21:57   like that. That's a really complicated place to find yourself. In this ultimate, I guess

00:22:03   it's Tim Cook's main job, is defining what is enough for Apple. I don't envy having

00:22:09   to make that decision.

00:22:10   Tim Cook It's very, very tricky when you are a giant

00:22:15   company that has a lot of shareholders and a lot of attention on you. It's a very,

00:22:20   very different situation than when you're an independent developer. If it's one person,

00:22:26   you answer to no one. It's very, very different. I can say, I have the ads set up in my app

00:22:33   the way I like the ads set up in my app. It works out really well for everybody. I could

00:22:39   try to shove more ads in more places, or I could try to, if I wanted to boost the premium

00:22:45   subscriptions, I could try to add more limitations to the app if you weren't a premium subscriber.

00:22:50   There are ways that I could tighten down the screws a little bit, whatever the expression

00:22:55   is, and try to force more money out of what I already have. But I can choose very easily

00:23:02   not to do that because I'm just one person and only I need to make that decision. I don't

00:23:07   need to convince anyone else whether that's a good idea or not.

00:23:10   When you get into large companies, or really any kind of group, it becomes much harder

00:23:17   to defend decisions that have some kind of money or "data" behind them. Once you're

00:23:26   in a conference room at Apple, if you can say, "Look, we can make billions of dollars

00:23:31   more per year if we do X, Y, and Z," that slightly harms the experience, but not too

00:23:41   bad, that's really hard for anyone to say no to, especially if you are facing some kind

00:23:46   of challenging conditions.

00:23:48   In Apple's case, they have done a really good job of boosting services revenue, which

00:23:55   mostly means App Store revenue so far, but they're trying to broaden that. Boosting

00:23:59   App Store and ad revenue in a time when iPhone sales don't grow very much anymore, because

00:24:07   they had this crazy growth period for a long time, their finances were through the roof,

00:24:10   everything was amazing, but the market matured and iPhone sales slowed down. They had this

00:24:17   kind of crunch that they were in the financial markets and areas that they had to find new

00:24:23   growth areas to try to make up for that slowdown in this massive thing. If you're in a public

00:24:31   company like that, you don't have a lot of options for that. If the CEO refuses to

00:24:36   do things that are obvious like low-hanging fruit to make more money that wouldn't have

00:24:41   too many downsides, they would probably be replaced. It's very, very different when

00:24:47   you're in that kind of situation versus what you and I can say is, "Yeah, you know

00:24:50   what? I'm doing well enough. I don't want to make this change that could make me more

00:24:54   money because I don't agree with what it would do to the app." That's much easier

00:24:58   for us to say because we have no one else to answer to.

00:25:00   Yeah, exactly. I think that reality is where I end up on a lot of the stuff. I feel thankful

00:25:09   that I am in a position that I can make those choices. In a weird way, it reminds me a lot

00:25:14   of some of the things that I've been thinking through recently about paywalls and my premium

00:25:20   subscriptions inside of Widgetsmith. The more I read up about it and talk about best practices

00:25:29   and these kinds of—you get into case studies and the typical way that people introduce

00:25:36   their paywall to their customer, which is a form of advertising—it's the advertising

00:25:40   that I'm doing for myself—is relatively aggressive. The paywall will pop up randomly

00:25:46   during use of the app, or will show up on first launch or on second launch. There's

00:25:52   lots of different ways, and there's whole tools and systems that exist to optimize that

00:25:57   and to squeeze it such that you maximize the MRR, which is the monthly recurring revenue.

00:26:06   You find every little dial you can turn to maximize that. So I learned about that, and

00:26:12   I went down that road. For me, in the end, that's a kind of advertising that I don't

00:26:17   like too much. I don't like the feeling of interrupting my users for purely the benefit

00:26:25   of a financial benefit to me. That doesn't sit well. That doesn't feel great. I'd

00:26:31   rather, generally speaking, put my paywall behind things that the user is discovering

00:26:37   themselves, where they see something, a capability, some way in which the app can benefit them.

00:26:46   They see it, they can be intrigued by it, and then say, "Hey, in order to use this,

00:26:52   that hopefully I'm able to show and explain and make compelling, you're going to have

00:26:56   to be a subscriber." That form of advertising feels much better and feels much more natural

00:27:02   and native, rather than the more intrusive version of that. That's a choice that I

00:27:08   can make, and I know that, at least in the short term, if I increase the show rate of

00:27:15   my paywall, I would have a commensurate increase in the recurring revenue that I would generate.

00:27:20   I am pretty confident that there is a connection between those two things. But there's also

00:27:26   a connection between my show rate and my retention rate. If I show the ads too much or I start

00:27:31   interrupting users, they will abandon the app, and I'd rather have them around. That's,

00:27:37   for me, the thing that benefits me and that kind of advertising. It's so fascinating

00:27:43   for me to think through how it's the same things, just at a different scale for these

00:27:47   big companies. I don't envy having to make those kind of choices, because it's hard

00:27:51   enough for me to make that decision for me, which is a relatively small number of users

00:27:56   that impacts me and my family for the most part exclusively, rather than a choice that's

00:28:00   impacting at least hundreds of thousands, if not millions of people's livelihoods,

00:28:07   and impacting on the other end billions of users. That's a whole other level.

00:28:13   Yeah, exactly. Ultimately, though, ads remain this slightly sour-tasting reality of the

00:28:24   world. Most of the time, people don't love them, but it's not that bad in most cases.

00:28:31   And again, most of the time, it is a tradeoff that people choose. I could fund my app entirely

00:28:37   with premium subscriptions and have no ads in it at all, but then I would have to put

00:28:41   up more restrictions and annoy people more to get premium. So this is a nicer model for

00:28:46   everyone, I think, and people choose this. I think overall, they're very happy with

00:28:50   it. I should also disclose that my opinion on Apple here could be biased, because if

00:28:55   they implement podcast ads in their podcast app, that will compete with my ads. And that's

00:29:01   certainly something that I should be looking at. But for the most part, I think, again,

00:29:06   I think this balance is generally warranted, but it is hard in Apple's case when you have

00:29:11   something that didn't have ads before and then gets them.

00:29:14   Yeah, I think that's exactly right. And I think it's the weird thing with ads. It's

00:29:18   like they are beneficial for the people who see them. They can be beneficial to the people

00:29:22   who put them in their products, but they're also not entirely beneficial. They also have

00:29:26   this cost. And you've just got to find that line and find that balance and know that,

00:29:31   yeah, if you introduce them later to something that already feels like it's paid for, then

00:29:35   there's a PR cost to that. But as with all of this, it feels like there's just all

00:29:40   these little dials that you can change, and some of them increase happiness, some of them

00:29:44   increase sadness, some of them increase money, some of them decrease money, and you've

00:29:47   just got to find the line that works enough, find where enough is for you.

00:29:52   Thanks for listening, everybody. And we'll talk to you in two weeks. Bye.

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