Marc Andreessen has described adtech as a “race to the bottom.” Is the business model about to be replaced by something else?
Worldwide, $600 billion will be spent on advertising in 2015. Of this, 33.5% will be digital, meaning advertisers can track who is clicking on their ads as well as target potential customers based on their Internet history. That’s a lot of cash, but lately adtech has come under fire from critics who think it is not a sustainable industry. Meanwhile, venture capitalists are investing less in adtech compared to last year.
Are these the signs of a bubble about to implode?
The evolution of adtech
Advertising has changed a lot in the last 20 years. As Internet theorist Jaron Lanier has said, the role of advertising used to be to romanticize products and was a necessary component of capitalism. But today, advertising is often the manipulation by algorithms of the options directly in front of a person. Certainly many people are aware that the days of Mad Men, where creative people sat around brainstorming how to romanticize a product are over for large swathes of the ad industry, replaced by real-time bidding and demand-side networks where big data is used to target a customer with the ads they are most likely to click on.
Here at Geektime, we review dozens of new startups a week. If they are consumer Internet startups with a freemium business model, the hopeful entrepreneurs will often cite advertising as their business model, which leads us to wonder: Can the Internet economy sustain itself through advertising revenue? Once a company exhausts its venture capital, can any but the largest players (Google, Facebook, etc.) survive on advertising?
Geektime spoke with four industry insiders and put this question to them.
The case against advertising
In an extraordinary article in the Atlantic Monthly in August, adtech pioneer Ethan Zuckerman writes, “I have come to believe advertising is the original sin of the Web. The fallen state of our Internet is a direct, if unintentional, consequence of choosing advertising as the default model to support online content and services.”
Zuckerman should know, as he invented the pop-up ad in the 1990s, but now regrets it.
Zuckerman says that the vast majority of ad-based startups don’t actually earn money from advertising. Instead, their funding comes from investors whom they manage to persuade that their advertising is going to be much more effective (“targeted”) than any advertising to date. They will do this by increasing surveillance of Internet users and targeting them with offers they can’t refuse.
“Once we’ve assumed that advertising is the default model to support the Internet, the next step is obvious: We need more data so we can make our targeted ads appear to be more effective. So we build businesses that promise investors that advertising will be more invasive, ubiquitous, and targeted and that we will collect more data about our users and their behavior.”
This leads to absurd situations where trash cans on the streets of London speak to your cell phone as you walk by, all in the interest of collecting more data.
Furthermore, says Zuckerman, ad targeting doesn’t work that well.
For instance, Facebook earns a little under $0.60 per user per quarter. That means it earns a penny a day per user, despite the fact that Facebook reports that users spend 40 minutes a day on the site.
In other words, 40 minutes of a person’s time on Facebook is only worth a penny to advertisers, despite the ability to target them with all the data at Facebook’s disposal. If those are the numbers for Facebook, what hope is there for other businesses?
The case for advertising
But if adtech is a flawed model, digital advertisers don’t seem to have gotten the memo. A recent report by Technology Business Research Inc. sees adtech revenue increasing by 300 percent over the next five years as advertising shifts to digital formats. By 2016, Forrester predicts that U.S. advertisers will spend more on digital advertising than TV ads and according to the TBR report, adtech revenue in the United States will grow from $30 billion in 2015 to $100 billion by 2020.
Eli Novershtern, a Principal with Pitango Venture Capital, sat down with Geektime at Tel Aviv’s recent Adtech Summit. Pitango has invested in six adtech startups including Taboola, Carambola, Appsflyer, and Revizer.
Novershtern describes advertising as nothing less than the “breath of democracy. It enables media to survive. In fact,” he says, “We are living in the golden age of journalism because media outlets no longer have monopolies in given markets.
“For media, the world is completely flat and they’re able to compete on the quality of their content and the ability to monetize off of it. It’s an open playing field and there can be new media such as Buzzfeed that compete successfully.”
According to Novershtern, “Advertising is the engine of our economy because manufacturers need a way to get to consumers.”
When asked whether adtech is a bubble that can sustain so many startups, Novershtern replied, “It’s a real business. It drives real results for advertisers and for very many content related businesses. It’s their main if not only way to make revenue. It creates real value and it constantly improves itself. People would not invest money in it if there was no significant ROI. Online advertising is directly measurable.”
According to Novershtern, with digital advertising, every dollar an advertiser spends is worth more to them or they wouldn’t spend it.
“Something that is measurable and clearly linked to performance cannot be a bubble.”
Brand advertising vs. programmatic
According to Levi Shapiro, who teaches marketing and advertising at the Interdisciplinary Center in Herzliya, the programmatic approach, whose end goal is getting consumers to take an action, is not necessarily scalable.
“Really good advertising is a way for a brand to tell their story. A lot of advertising is about interruption – it’s about forcing people to take actions, which is different from having a conversation between a brand and consumer.”
He says it’s easy to target a consumer with an ad, “But if the consumer takes the next step and shares those brand values with their consumers, then the brand has been successful. If you coerce action, then what people share might be negative.”
Don’t be evil
According to Anderson McCutcheon, the practice of data collection and targeting has caused the advertising industry to evolve in a way that is evil, even if it was unintentional.
McCutcheon, one of the co-founders of the decentralized social network Synereo, says this is best illustrated with an example from the online gambling industry. In the past, explains McCutcheon, people could outrun their vices.
“Let’s say I am a gambler. In the past, if I tried to refrain from gambling, no one would knock on my door, and say, hey how about you play for 20 bucks today?
“I wouldn’t see more gambling ads than any other person. I would be able to quietly gamble my once a year and that’s it. Today, there is no way for me in the world to escape it. I’m telling you this because I work in the gambling industry and we target those people.”
According to McCutcheon, today a gambler is chased everywhere online with come-ons from online gambling sites. These companies will send the susceptible person a push notification “on the exact day and time you are most likely to gamble.”
Similarly, if you have a shopping addiction, advertisers will target you with more ads on the day you get your salary.
“I feel that the evil part of programmatic advertising is that we are now monetizing the weak.”
What is the solution?
If an advertising-based business model has so many problems, first that it is potentially unsustainable, and second that it is arguably evil, what is the solution? What is the alternative?
According to McCutcheon, the answer is to create a more decentralized Internet without central servers exercising massive surveillance over users of a service.
“If you look at Instagram and WhatsApp and a lot of those centralized services, actually no one needs this central entity anymore and you can provide the same kind of service in a distributed manner because everyone has enough bandwidth and storage and enough computational power these days.”
Indeed, there is a nascent movement to decentralize the Internet based on Blockchain technology, of which Synereo is one example.
As the Wall Street Journal describes it, “A mega-trend is brewing that could make bureaucratic hierarchies, middlemen and gatekeepers everywhere obsolete including social networks, banks, stock exchanges, electronic voting systems and even governments. It’s called decentralized computing.”
Not so fast!
Geektime contacted Ethan Zuckerman himself to ask whether he still thinks adtech is a bubble and, if so, what he proposes as a solution.
Zuckerman said he is enthusiastic in general about decentralized projects, but that they’re very tricky to build.
“And I don’t think decentralization solves the core revenue problems – you still need to support a team that’s developing your software.”
Nevertheless, says Zuckerman, we are in a bubble of sorts.
“As more people provide advertising inventory online, the cost of advertising tends to trend down. To make advertising more valuable, companies either try to make advertising more obtrusive (the dreaded pop-up, now the pre-roll that occupies the screen before you watch a video or read a story) or more personalized.”
Personalization, he says, is mostly a way of persuading investors, not a way to persuade people to click on ads.
“The single biggest thing that would make the internet more sustainable is subscription services. There’s a small but growing movement to ask key internet services like Gmail and Facebook to put an annual subscription price on their services as an alternative to targeted advertising. That combined with micropayments for content, or a model in which users pay a fixed monthly content fee that’s distributed to providers based on usage, could start moving us towards a less surveilled Internet.”
But is this realistic? Once we have let the “free” genie out of the bottle, is there any way to get people to go back to paying for things?
It’s hard to say. There is a small nascent movement to replace ads with micropayments as a way to pay for content and services online. In part, this is because so many consumers are resorting to ad blockers. There is evidence that in emerging markets, where mobile money is the preferred form of payment, micropayments may pick up steam.
Subscription services like Netflix are also popular because people value TV content so much. However, subscriptions for places like the New York Times have had mixed success, and who knows whether large platforms like Facebook would pursue monthly or annual payments as a revenue model.
People will pay for content and services that they value, are convenient, or have no other free alternative. Minus that, adtech will likely reign supreme in the near future and make few people rich in the process. But once micropayments become more widespread and easier to use, particularly with the use of Bitcoin, the adtech bubble will pop – and sooner than we might expect.