The End of the (Advertising) World As We Know It?

The following is written by Dipayan Ghosh and Bryan Jones.

It is understood that the internet economy has been built on the concept of “free”.  Consumers have come to expect that access to social media, news and entertainment sites, and most apps will come without any exchange of cash. Because so many internet services are free, traditional media businesses that aren’t have lost ground.  But now, in an important recent development for the digital advertising industry, recently leading executives of Unilever and Proctor & Gamble – the world’s two largest CPG brands – threatened to severely limit their advertising on social media platforms like Facebook and Twitter.  This is may signal the beginning of the end of the internet economy as we know it.

Unilever and Proctor & Gamble’s leaders have cast their recent decisions as commitments to the broader public interest.  At least externally, the companies have postured that they wish to make sure the internet is clean, and that as such they cannot continue to sponsor digital advertising unless Facebook and others clean up their act and eliminate egregious, societally harmful content such as fake news and hate speech from their platforms. The underlying rationale behind these proclamations deserves closer examination.  Could these statements indeed be motivated only by a heartfelt desire to protect the public?  Or could there in fact be some commercial driver for this pivot?

We argue it is almost certainly the latter – which may indicate an impending end of the “free” internet economy the world has grown accustomed to using and enjoying.

Advertisers – including well-known brands like Mercedes or Chanel –suffered before the digital age from an inability to measure the effectiveness of the ads they place.  This has resulted in a difficult reality for marketers: they typically have had to pay for ad placements and cross their fingers that consumers would be persuaded by the message. This resulted in the old adage that “fifty percent of all spend is wasted – you just don’t know which 50%”.  However, today’s digital advertising has evolved to the point where the entire marketing funnel can now be tracked and a return on investment can quickly be calculated. The key in digital advertising is that the advertiser – namely the brand that is trying to reach the consumer – wants to establish the positive impact of its digital ad-spend so that it can substantiate continued and future digital marketing outlays. And as the digital ecosystem grew more dependent on advertising dollars, an array of web technologies and tools were developed to help advertisers like Unilever track the purchasing behavior of the end consumer.

Perhaps no other industry has embraced the use of big data and continuous testing and modification like the digital ad tech ecosystem.  Persistent in the hunt for faster growth and higher margins, internet companies like Facebook have pioneered a compelling and dominating business model that provides “free” content and experiences to consumers in exchange for an ever-growing trove of behavioral data. That model is premised on cultivating platforms like Instagram, YouTube and Twitter to make them as engaging as possible; ranking and recommending the content that is likely to be most relevant to the individual user; and finally monetizing those users by targeting them with specially chosen personalized ads (ads picked based on the attributes of a specific individuals) that are injected into the social feed with the intent to influence the user’s purchasing and decisional behavior.  This simple, sequenced chain is fueled by combining mass-scale collection of user behavioral data from on-platform sources (e.g., your engagement with content in your Twitter Feed) and off-platform vectors (e.g., cookies like the Facebook Pixel to monitor behavior across the web) with offline and historical data sets from data brokers.  And, every ad that is served further refines the data set, gathering even more information on the user’s interests, preferences, likes, dislikes, beliefs, and behaviors.

Success begets success, and as a larger percentage of ad spend flows online, platforms like Facebook are under continual pressure from advertisers to justify the value of advertising on the platform. The industry refers to this practice as ‘ad measurement.’  For public companies, spending millions of dollars on digital advertising is no small affair; they must represent to shareholders through digital ad measurement tools that the investment is indeed selling products and driving a positive return on investment.

It is in fact here, in the execution of accurate ad measurement, that the platforms’ commercial relationships with Unilever and P&G – and likely many other traditional brand marketers like them – may have gone awry. Marketers, constantly looking to improve sales and decrease costs, continue to push for more accountability, with nirvana being able to know which ads, on which device, drove which product sales at which location.  In order to illustratively prove that closed loop conversion, however, internet platforms must resort to readily accessing available troves of data or creating entirely new data sets.

The implications are profound. Customers still prefer to purchase consumer products physically, at brick and mortar establishments. While companies such as Nielsen Catalina and Polk broker offline data, it is typically done in an aggregated manner.  But as hyper-personalized ads become more targeted at the individual and indeed personalized in nature as well as prevalent across the digital advertising universe, brands like Unilever will want to know which specific ad for the new flavor of Ben & Jerry’s encouraged a specific user to visit the local grocery and make the purchase. Online data sets like this exist today, and can even tell when a customer has abandoned a shopping cart, triggering ads that follow the customer on across the internet.  Offline, data sets like this could be created by linking credit card data (either by the issuer, the bank or apps that mine the data such as Dosh); by linking to rewards cards such as the Randall’s loyalty program; or by geo-tracking in-store behaviors using GPS tracking, Wi-Fi connections, location beacons, or finger printing on the device.

Leading internet companies recognize advertisers are becoming more sophisticated and are aggressively trying to either engage retailers to work on collecting more data about how shoppers behave in their physical establishments, partnering or creating reward programs or banking platforms.  These data sets would establish when and where consumers are completing their purchase, allowing the digital advertising industry to target more ads and create look-alike models.

But these moves also come at a time when the modus operandi of the industry itself is directly under attack. Consumers – and, to Unilever’s point, the broader business community – are steadily growing wary of Silicon Valley.  Combine growing awareness of harmful digital content- including hate speech, foreign political disinformation, falsehoods parlayed as news, hoaxes that discredit good actors, and algorithmic discrimination- with the increasingly problematic collection of personal data (as highlighted this year by Cambridge Analytica’s harvesting of Facebook data) and it is easy to understand why consumers and experts are becoming wary of the internet economy.  Consumer have started to realize that if they aren’t paying for the goods, they are, in fact, the product.

Digital advertisers should, of course, take a stand and demand cleaner digital platforms.  No firm wishes for its ad to appear alongside content and messaging that is meant to encourage the reader into spreading hate against ethnic groups or believing conspiracy theories about the survivors of school shootings. Yet, this claim underplays the economic factors that are driving advertisers’ decisions. If advertisers do not see a consistently increasing ROI on their ad spend, do they remain on the platforms? Or, do advertisers once again move their ad spend to another format, channel or medium to find the conversions needed to justify the investment?

This, of course, leads to the bigger discussion of if, and how, the platforms evolve. Even while being pushed by marketers to increase ROI, Platforms must be careful before wading further into the privacy morass of ad-targeting and data collection.  And, with recent regulatory developments like the European General Data Protection Regulation and the California Consumer Protection Act, the platforms may be limited in what they are able to do regardless. Perhaps the platforms will elect to focus on the terrific margins they already earn on their social media and internet search products.  If so, earnings may slow, resulting in adverse impacts to the valuations of those companies.  If they continue pushing forward with data collection, do consumers wise up and leave, or force additional regulation?  Earnings may also slow in that case. Or, if the platforms move from a free model to a pay model, do billions of people immediately lose access to what some now believe to be an inherent right in the information age?

There are no easy answers, but one thing is clear: it is time to rethink the information asymmetry that has germinated and perpetuated so many societal tensions around the world.

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