A song to read by: "The Adults Are Talking," by The Strokes
What I'm reading: "The Wretched of the Earth," by Frantz Fanon
When was the last time you clicked on a digital advertisement?
Assuming you are not part of the vast swath of netizens who avoid ads entirely using ad-blocking technology, the odds are that you have accidentally clicked on them — a phenomenon known in industry parlance as a “fat thumb” click, by the way — more than you have done so intentionally.
In fact, one data set drawn from Google’s ad network suggests that the average click-through rate for a display ad in 2018 was 0.46%. For some industries, that number plummets to 0.39% — about one in every 200 people.
So digital advertising is ineffective, big deal. As the 19th century marketing pioneer John Wanamaker once said, “Half the money I spend on advertising is wasted; the trouble is, I don't know which half.”
Except, as author Tim Hwang points out in his October book “Subprime Attention Crisis: Advertising and the Time Bomb at the Heart of the Internet,” digital advertising acts as the financial engine that keeps the internet humming. This was not always the case, nor does it have to be the case going forward, but it is an undeniable truth at the moment: The modern internet relies on digital advertising.
What would happen, then, if that advertising disappeared?
The internet as we know it would radically shift; the paywalls you likely bemoan on news publishers’ sites would spring up everywhere. The open web would turn into a series of walled gardens that users would have to pay to access. Access to vital information would be contingent on users’ level of disposable income, and the basic services we have come to rely on would now charge us per use, if they survived at all.
Such a dystopian premise might sound dramatic, except that Hwang has come bearing receipts. In his book, he draws a number of irrefutable parallels between the digital advertising industry of today and the financial ecosystem just prior to the 2008 financial crisis.
His argument hinges on three distinct premises.
First, that the opacity of the programmatic advertising industry has created a smoke screen, obscuring outsiders from accurately assessing the true value of attention. Second, that the attention advertisers bid against each other for is “sub-prime,” or low quality. And third, that the ringleaders in charge of the industry have every incentive to protect it.
As Charles Prince, the former CEO of Citigroup said in 2007 about banks’ behavior before the crash, “As long as the music is playing, you’ve got to get up and dance,” he said. “We’re still dancing.”
The book comes at a critical juncture in the world of digital advertising, a reality I have been made freshly aware of through my work at Adweek. Massive, sweeping changes are coming soon for the industry, leaving everyone from Facebook to The New York Times, Google to BuzzFeed, and Apple to your local newspaper scrambling to predict what the next 12 months might hold.
If there were ever a time for you to familiarize yourself with the state of play of the precarious advertising ecosystem undergirding the modern internet, it would be now.
Opacity, opacity, wherefore art thou opacity?
Hwang argues that modern online advertising remains deeply opaque on three fronts.
First is the ever-increasing automation of the marketplace. Second is the creation of “dark pools” of liquidity, where advertising inventory is bought and sold outside the public eye. And third is the dominance of platforms, especially Facebook and Google, that have introduced new layers of opacity into the marketplace.
On the first front, Hwang argues that the programmatic advertising system that constitutes as much as 78% of all digital advertising is largely inscrutable.
“The highly automated arrangement has allowed online advertising exchanges to deliver mind-bogglingly large quantities of inventory night and day, unceasingly,” he writes.
Although cloaked in the guise of efficiency, the process often has the exact opposite effect: ads end up in unexpected places constantly. For evidence, he points to the proliferation of “brand safety” concerns.
How many times have you heard of a major brand apologizing for its advertisements showing up alongside Nazi pedophile videos on YouTube? How could brands paying for advertising not be able to control where it shows up?
As for his “dark pools” argument, Hwang points to the rise of private marketplaces, exclusive ad exchanges for ad inventory, where selected advertisers receive the opportunity to negotiate special deals with publishers. In 2018, 45% of all the money spent in real-time bidding auctions took place within the confines of a private marketplace.
Why are these problematic? The publicly available price no longer reflects the supply and demand across all the players in the marketplace, making it harder to ascertain the true value of an ad.
Finally, the consolidation of the digital advertising industry into the hands of two platforms, Facebook and Google, compounds the problem further. Thanks to their dominance over the marketplace, the two exert huge sway over the rules of buying and selling ads, which further increases opacity.
The infamous “pivot to video” episode illustrates the perils of this problem perfectly. When Facebook, citing its own data, suggested that publishers overhaul their content to produce more video because they performed better on the platform, publishers complied, laying off scores of journalists and hiring video editors.
Later, Facebook admitted it had lied. In a lawsuit against the platform, plaintiffs argued that in some cases Facebook had inflated its numbers as much as 900%.
The point is: When a small number of players control the marketplace, they can manipulate it much more easily, eliding unflattering information, exaggerating positive insights, and coercing the market in whatever direction best suits their interests.
Opacity is bad, but what makes it dangerous is its capacity to conceal greater ills.
“Opacity in a marketplace creates a smoke screen behind which an economic situation can deteriorate significantly without the broader market’s becoming aware of it,” Hwang writes.
The parallel to the 2008 financial crisis holds particularly well in this section. When criminal bankers packaged sub-prime mortgages into tranches of collateralized debt obligations, they committed two sins: they sold a garbage product, and they made its inferior quality almost impossible to detect.
In digital advertising, the opacity I described before masks the reality of attention: that no one is giving it to advertisements. Older generations pay more attention to advertisements than younger ones, studies show, meaning that their efficacy fades more with every passing day.
On top of that, a 2017 study from Deloitte suggests that fully 75% of North Americans engage in “at least one form of regular ad-blocking.” This fact, combined with the abysmal click-through rates I cited at the beginning of this piece, combine to make one fact glaringly obvious: no one is paying any mind to digital advertising.
But, because advertising often has nebulous goals like “brand awareness,” many advertisers consider it a win simply when a user glances at their campaign. Over time, the thinking goes, this creates a subliminal brand association that encourages purchase behavior.
Unless, of course, that ad never shows up in the first place.
Hwang goes to great lengths to describe the manifold and myriad forms of ad fraud plaguing the digital advertising world.
“The scale of this problem is enormous,” he writes.
“One study predicted that that advertising industry would lose $19 billion to click fraud in 2018 — a loss of about $51 million per day. Some place this loss even higher. One estimate claims that $1 of every $3 spent on digital advertising is lost to click fraud.”
It hardly stops there. Research in 2016 concluded that as much as 56% of all ad dollars spent on display advertising were lost to fraudulent or otherwise unviewable inventory. This accounted for $7.4 billion of waste, which was estimated to grow to $10.9 billion by 2021.
Here’s the real irony: Fake traffic driven by click farms and botnets makes ads look better and more effective than they actually are, juicing demand for online advertising and pumping up the marketplace.
After laying out these arguments, Hwang poses a pretty obvious question: Why aren’t advertisers wary of all of this?
Again, the author draws parallels to the financial crisis, this time citing the “savings glut” theory. In essence, countries invested in the U.S. housing market because it was considered one of the safest investments possible, incentivizing mortgage originators to make riskier and riskier subprime loans. When those mortgages went bust en masse, the event triggered the financial crisis.
The key takeaway: large flows of money seeking safe harbor can produce the conditions for a bubble to form.
Hwang says the same thing has happened in the digital advertising ecosystem. Thanks to the duopoly, ad-buyers with even the best of intentions simply have far fewer places to spend their advertising budget than ever before.
Perversely, as I have written about before, this process creates a vicious cycle: the more advertising money the duopoly receives, the more of their competitors die out, further concentrating the available options.
“Under these circumstances,” Hwang writes, “it would be difficult for the online advertising ecosystem to correct itself even if it had the will to do so. Ad buyers are unlikely to cut their budgets significantly even as the number of options for placing those budgets declines.”
This reality, combined with the fact that the agents within the digital advertising ecosystem have every reason to prop it up to continue benefiting from it, create the conditions for a bubble. And sooner or later, all bubbles burst.
I have greatly simplified the above sections and left out many of Hwang’s other arguments, so I would encourage you to read the book yourself if this synopsis has piqued your interest.
As Hwang alludes to, despite the parallels between the 2008 financial crisis and the modern digital advertising ecosystem, it is unlikely that the internet will collapse in the same way the housing market did. The two industries share much in common, but advertising and housing are in far different places on Maslow’s hierarchy of needs.
Still, if you are anything like me, you have likely never devoted much thought to the incredibly complex system of digital advertising upon which the modern internet rests. It is technical but quite intelligible, and you can come to a pretty good grasp of its basic components after a day of reading.
The book captured my interest because my reading of it coincides with larger, more existential questions about the future of digital advertising. Cookies are disappearing, Apple is letting customers opt out of tracking, and the public has begun to sour on the notion that everything is better at scale.
In what could be a stroke of good fortune for some publishers, these changes have led to an increased focus on “contextual advertising,” or good old fashioned “Your brand is cool, we want people to think we’re cool, so we want to put our logo on your site” advertising.
Platforms, as a concept, are increasingly brand “unsafe,” with their absence of editing or oversight, another trend that bodes well for publishers.
I have spoken with more than half a dozen chief revenue officers in the last week for an Adweek story, and the phrase “crystal ball” has surfaced more than a few times. Everyone is trying to predict what the digital advertising ecosystem will look like in 12 months, but no one has any definitive idea.
Whatever happens, 2021 will likely go down in the historical record as a major inflection point for digital advertising and, by extension, how the internet is financed.
Some good readin'
— I would be remiss if I did not pass along the latest document in the ongoing Tech vs. Journalism discourse. (New York Magazine)
— Peter Thiel ... 2024 Republican hope? (New Yorker)
— Rebecca Jennings at Vox gets at something about TikTok that I have always felt but lacked the words for. (Vox)
— This insightful Nieman Lab piece that makes the case for why Darnella Frazier, who filmed George Floyd’s murder by police, should win a Pulitzer Prize. (Nieman Lab)
— This beautiful piece from Ali Montag, who runs the Newsletter Crew I help advise. Bonus: It features "Friday Night Lights" comparisons. (Letters from Home and Away)
— This really deeply reported piece about the dangers and irresponsibility of Amazon's breakneck push to build its shipping empire. (The Information)
Cover image: "Target," by Jasper Johns