Does online advertising work?

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

The promise that the media platforms offer to ad buyers is that they can target the product to the individual buyer who may be looking for that particular item, thus preventing wasteful blanket ads. The way the platforms do that is by vacuuming up all the information they can glean from us from our online activity to create a detailed profile of each one of us that they can then sell to retailers, a process known as ‘microtargeting’. This promise of ultra-efficiency is what has led the migration of ads from print media to online media. It has also led to fears that we are now living in a Big Brother world because our lives have become transparent to these big companies like Google and Facebook who seek every way of prying into our lives.

But while all of us have received multiple ads for products related to any internet search query we made or something we bought, is the return for advertisers worth the cost? It is not easy to get an objective answer because measuring effectiveness was never easy even in the former analog world but it has become even more difficult in the digital world because there are so many extra layers involved. This is also a hot potato of a question because there are a vast number of people involved who need us all to believe in the efficacy seems of the system and there to be an uneasy fear that this is an ‘Emperor has no clothes’ situation where it might all be an illusion that could come crashing down if we look too closely.

We are in a situation where sellers of products and services feel they must advertise because their competition is doing so and they fear that they will lose out if they don’t. It is FOMO in the retail sphere. When people do something because others are doing the same thing, that has all the hallmarks of a bubble. So one can understand why the advertising platforms and the empire of ad makers and consultants may not even want to know the answer, fearing that it might prick the bubble.

And some are raising alarms that this might indeed be the case. Gilad Edelman has a highly informative article that reveals what is going on behind the scenes.

The real trouble with digital advertising, argues former Google employee Tim Hwang—and the more 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 ad business is built on a fiction. Microtargeting is far less accurate, and far less persuasive, than it’s made out to be, he says, and yet it remains the foundation of the modern internet: the source of wealth for some of the world’s biggest, most important companies, and the mechanism by which almost every “free” website or app makes money. If that shaky foundation ever were to crumble, there’s no telling how much of the wider economy would go down with it.

Hwang points to disturbing similarities with the subprime mortgages bubble of 2007.

Just as housing played an outsized role in pre-crash financial markets, so does advertising in the digital economy. Google earns more than 80 percent of its revenue from advertising; Facebook, around 99 percent. Advertising also makes up a fast-growing share of Amazon’s revenue.

If the financial market of the aughts was dangerously advertising opaque, so, too, is modern internet. In the early days of online ads, a brand would strike a deal with a website owner to host a paid banner. The onscreen space for that image, known as the ad inventory, would be sold by the publisher directly.

Today, the process has grown far more complicated, and humans are barely involved. “As they do in modern-day capital markets, machines dominate the modern-day ecosystem of advertising on the web,” Hwang writes. Now, whenever you load a website, scroll on social media, or hit Enter on a Google search auction, hundreds or thousands of companies compete in a cascade of to show you their ad. The process, known as “programmatic” advertising, occurs in milliseconds, tens of billions of times each day. Only automated software can manage it.

Hwang says that what is driving the bubble is that most ad buyers do not realize the worthlessness of what they are buying.

There are piles of research papers in support of this idea, showing that companies’ returns on investment in digital marketing are generally anemic and often negative. One recent study found that ad tech middlemen take as much as a 50 percent cut of all online ad spending. Brands pay that premium for the promise of automated microtargeting, but a study by Nico Neumann, Catherine E. Tucker, and Timothy Whitfield found that the accuracy of that targeting is often extremely poor. In one experiment, they used six different advertising platforms in an effort to reach Australian men between the ages of 25 and 44. Their targeting performed slightly worse than random guessing. Such research indicates that, despite the extent of surveillance tech, a lot of the data that fuels ad targeting is garbage.

That explains a lot because so many of the ads I see on the pages I visit seem obviously irrelevant to me. The online bridge game site I visit has two side panels of ads and for the longest time, they have been advertising long, flowing dresses for both formal parties and summer casual wear. Of course, this may be because I am just the kind of person they do not care about and so I get random ads. They seek younger people with disposable income who can be persuaded to purchase things on a whim, not an old guy set in his ways 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 for bots or paid humans to constantly refresh and click ads, and “domain spoofing,” in which a bottom-dweller sites participate in ad auctions while disguised as a more prestigious one. Hwang cites a 2017 study finding that, between lousy ad placement and outright fraud, “as much as 56 percent of all display ad dollars were lost to fraudulent or unviewable inventory in 2016.”

So this raises the obvious question.

It’s fair to wonder why, if programmatic advertising is such a bum deal, so many brands continue to pour money into it. The reasons are manifold and overlapping. To begin, most of the people responsible for ad spending have no idea where their ads are actually running, let alone how they’re performing, and certainly have not brushed up on the latest research papers. That’s especially true for the small and medium-size businesses that make up the bulk of Google and Facebook advertising customers. I spoke recently with the owner of a successful online audio equipment store who had recently learned, thanks to a chance encounter with an expert, that 90 percent of his programmatic ad budget was being wasted on fraudulent clicks. Most other merchants simply never find out what happens after they send an ad out into the world.

How might this end?

So if Hwang is right that digital advertising is a bubble, then the pop would have to come from advertisers abandoning the platforms en masse, leading to a loss of investor confidence and a panicked stock sell-off. 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 tulips.

This is not something to be cheered. However much targeted advertising may have skewed the internet—prioritizing attention-grabbiness over quality, as Hwang suggests—that doesn’t mean we ought to let the system collapse on its own. We might hope instead for what Hwang calls a “controlled demolition” of the business model, in which it unravels gradually enough for us to manage the consequences.

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

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