Does online advertising work?

As someone who spends far more time on my computer than is probably healthy, I know about online ads because they bombard me all the time. We know that online advertising has been a huge wealth generator for companies such as Google and Facebook that sell and place advertising space and is indeed the source of revenue for all ‘free’ content on the internet. (This blog is the exception. It really is free!)

The promise that media platforms offer ad buyers is that they can target the product to the individual shopper who may be looking for that particular item, thus avoiding unnecessary general advertisements. The way platforms do this is by sucking up all the information they can glean about us from our online activity to create a detailed profile of each of us which they can then sell to retailers, a known process. under the name of “microtargeting”. This promise of ultra-efficiency is what has led to the migration of advertisements from print media to online media. It has also raised fears that we are now living in a Big Brother world because our lives have become transparent to these big corporations like Google and Facebook who are looking for every way to interfere in our lives.

But while we’ve all received multiple advertisements for products related to an internet search query we made or something we purchased, is the return to advertisers worth the cost? It’s not easy to get an objective answer because measuring efficiency was never easy even in the old analog world, but it’s become even more difficult in the digital world because there are so many additional layers involved. This is also a hot potato of a question because there are a large number of people involved who need all of us to believe in the effectiveness of the system and there seems to be a worried fear that it will act out a “the emperor has no clothes” situation where this could all be an illusion that could fall apart if we look too closely.

We are in a situation where sellers of products and services feel they have to advertise because their competitors are doing it and they fear losing out if they don’t. It’s FOMO in retail. When people do something because others are doing the same thing, it has all the characteristics of a bubble. We can therefore understand why the advertising platforms and the empire of advertisers and consultants do not even want to know the answer, fearing that it will burst the bubble.

And some are sounding the alarm that it just might be. Gilad Edelman has a very informative article which reveals what happens behind the scenes.

According to Tim Hwang, a former Google employee, the real problem with digital advertising, and the most immediate danger to our way of life, is that it doesn’t work.

Hwang’s new book, Subprime attention crisis, lays out the case that the new advertising industry is built on a fiction. Microtargeting is far less precise and far less persuasive than claimed, he says, and yet it remains the bedrock of the modern internet: the source of wealth for some of the world’s largest and most important corporations, and the mechanism by which almost all “free” websites or apps make money. If this fragile foundation were to crumble, it is unclear to what extent the broader economy would collapse.

Hwang points to disturbing similarities to the subprime mortgage bubble of 2007.

Just as housing played an outsized role in financial markets before the crash, so has advertising in the digital economy. Google derives more than 80% of its revenue from advertising; Facebook, about 99%. Advertising is also a rapidly growing share of Amazon’s revenue.

If the financial market of the 2000s was dangerously opaque, modern Internet advertising is too. In the early days of online advertisements, a brand entered into an agreement with a website owner to host a paid banner. The screen space for that image, known as ad inventory, would be sold directly by the publisher.

Today the process has become much more complicated and humans are barely involved. “As they do in modern financial markets, machines dominate the modern web advertising ecosystem,” Hwang writes. Now, every time you load a website, scroll through social media, or hit enter on a Google search, hundreds or thousands of businesses will participate in an auction cascade to show you their ad. The process, known as “programmatic” advertising, happens in milliseconds, tens of billions of times every day. Only automated software can handle it.

Hwang says what’s causing the bubble is that most ad buyers don’t realize the pointlessness of what they’re buying.

There are stacks of research supporting this idea, showing that returns on business investment in digital marketing are generally anemic and often negative. A recent study found that ad tech intermediaries take up to 50% of all online ad spend. Brands pay this premium for the promise of automated micro-targeting, but a study by Nico Neumann, Catherine E. Tucker and Timothy Whitfield found that the accuracy of such targeting is often extremely low. In one experiment, they used six different advertising platforms with the aim of reaching Australian men aged 25-44. Their targeting performed slightly worse than random guessing. Such research indicates that, despite the extent of surveillance technologies, much of the data that powers ad targeting is garbage.

That explains a lot because so many of the ads I see on the pages I visit obviously seem irrelevant to me. The online bridge game site I visit has two ad sideboards and for a very long time they have been advertising long flowing dresses for formal evenings and casual summer wear. Of course, maybe it’s because I’m just the kind of person they don’t care about and therefore get random ads. They’re looking for young people with disposable income who can be persuaded to buy things on a whim, not a set old man who absolutely hates shopping.

There is also a lot of waste and fraud.

Then there’s the astonishing level of digital ad fraud, including “click farms” that serve no purpose other than paid bots or humans to constantly refresh and click on ads, and “spoofing”. domain”, in which a footer site participates in advertising auctions. while being disguised as a more prestigious one. Hwang cites a 2017 study which found that between poor ad placement and outright fraud, “up to 56% of all ad dollars were lost to fraudulent or non-visible inventory in 2016”.

So that raises the obvious question.

It’s fair to wonder why, if programmatic advertising is such a bad business, so many brands continue to invest money in it. The reasons are multiple and overlapping. For starters, most people responsible for ad spend have no idea where their ads are actually showing, let alone how they’re performing, and certainly haven’t checked out the latest research articles. This is especially true for small and medium-sized businesses that make up the bulk of Google and Facebook’s advertising customers. I recently spoke with the owner of a successful online audio equipment store who had recently learned, through a chance encounter with an expert, that 90% of his programmatic advertising budget was wasted on fraudulent clicks. Most other marketers simply never know what happens after they send an announcement out into the world.

How could this end?

So if Hwang is correct that digital advertising is a bubble, then the pop should come from advertisers abandoning the platforms en masse, leading to a loss of investor confidence and a panic sell-off in stocks. After months of watching Google and Facebook stock prices soar, even amid a pandemic-induced economic downturn and a high-profile Facebook advertiser boycott, it’s hard to imagine such a thing. But then, that’s probably what they said about the tulips.

It’s not something to applaud. However much targeted advertising may have skewed the Internet – prioritizing attention over quality, as Hwang suggests – that doesn’t mean we should let the system collapse on its own- same. Instead, we might expect what Hwang calls a “controlled demolition” of the business model, in which it unravels gradually enough for us to deal with the consequences.

Either way, the collapse of the bubble is not going to be pretty.