There Is No Subprime Crisis Coming To Ad Tech

joelsadler"Data-Driven Thinking" is written by members of the media community and contains fresh ideas on the digital revolution in media.

Today’s column is written by Joel Sadler, vice president of product at Adacus.

Every so often over the last few years, well-written, thoughtful articles have popped up that identify parallels between digital advertising and the mortgage crisis of 2008, which was so vividly depicted in Michael Lewis' “The Big Short.”

It is a tempting comparison. The mortgage crisis was brought on in part by worthless loans being bundled up with good loans in collateralized debt obligations (CDOs). CDO buyers were not aware of the low quality of some of these assets. Similarly, the comparison goes, worthless digital ad impressions are bundled up with good impressions and hidden in large programmatic media plans.

The financial industry was also entrusted to police itself but, not surprisingly, failed to do so effectively. As a result, the lack of external regulation helped to create the mortgage crisis. A lack of oversight can also be found in the digital advertising industry, which has been largely left to regulate itself. Given the continued ubiquity of fraud, it has also clearly failed to do so effectively.

Finally, and perhaps most importantly, the financial industry was structured in such a way that nearly everyone within the industry benefited greatly from the proliferation of subprime mortgages. Likewise, since almost every ad tech company is paid on a CPM basis to one degree or another, nearly everyone in digital advertising benefits from the proliferation of impressions, whether they are of quality or not.

Seems like an open-and-shut case. Yet, many of the comparisons equate "impressions" in digital advertising with "loans" in the financial industry. Impressions, however, are not like loans at all. Impressions cannot default. Any single impression exists for but a brief moment. Impressions are not purchased by consumers. Impressions have no permanent record on a balance sheet. Impressions are ephemeral entities.

Loans, on the other hand, are real and legally binding agreements in which a company counts on the borrower's ability to make payments over time. Subprime loans didn’t cause the mortgage industry to collapse. The financial industry only went from business as usual to collapse when borrowers began defaulting. There is no ad tech equivalent of the adjustable rate mortgage. Without such an equivalent, the majority of impressions will continue to be subprime indefinitely. Fraud will remain ubiquitous so long as the benefits are high and the risks are low.

There is no ticking time bomb in ad tech that will set off a subprime-like crisis.

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7 Comments

  1. Well articulated contrast between AD Tech Programmatic and CDOs!

    The association with the potential garbage-delivery of impressions to questionable sites, click fraud and AD block programs would however, create a knock-on effect that could ultimately make this distribution mode "commercially unsustainable"; brands would revolt with de facto 'devaluation' tactics that might lead to a CRASH, when too little value remains to feed all mouths in the ecosystem!

    Not too far fetched an analogy.

    PM

    Reply
  2. "...no ticking time bomb in ad tech..."? You must be kidding. Perhaps 30% of all digital advertising is being stolen. It seems that ever day we hear of ingenious new ways for advertiser dollars to be stolen by criminals (Methbot, anybody?).

    Yet there's no ticking time bomb, says the writer with his head deep in the sand.

    Reply
    • Hey Mark,

      I really appreciate your perspective. I would love to be proven wrong. In thinking through the issue while I was writing the piece I realized that the mere presence of fraud does not trigger a crisis - not in finance, not in adtech, not anywhere - only sufficiently negative consequences to the perpetrators of fraud can. While Methbot is a great example of the damage fraud can do in the industry, unless it is sufficiently punished there will continue to be more and worse examples.

      If you can point to how the adtech industry will, like the financial industry, implode on itself I would love to hear it. I can't see a way myself.

      Reply
  3. Joel is exactly right. While it's emotionally satisfying to think that something, somehow, will trigger a structural correction that exposes fraud and saves us from ourselves, what exactly will that trigger be?

    At the end of the day, in digital advertising, no exogenous structural correction will save us from ourselves. Only by doing our jobs better - by focusing on long-term value over short-term incentives, which means being honest with clients, demanding better answers from agencies and paying them accordingly so they can attract the talent that can answer tough questions, ditching last touch attribution forever, and so on - will we leverage the potential of programmatic advertising and squeeze out fraud.

    No one will save us from ourselves.

    Reply
  4. Um, you kind of just helped explain the parallels between Mortgage Fraud and Ad Fraud. Give it time and big-time advertisers will realize the snake oil being perpetuated by programmatic advertising:

    1) SSP-Side: Publishers are committing ad fraud at massive scale (Dr. Augustine Fao says close to 80% of web traffic is actually bot traffic). Google "ad fraud" News and you will see plenty of relevant articles on the subject.

    2) DMP-Side: How do we know that what's being targeted through 3rd party data is actually valid? When I target an audience how do we have assurance that that audience is indeed part of that audience? How do we know it's not a bot?

    3) Cookie Stuffing (because RTB folks don't like to use the term "cookie bombing"): I've seen this done to drive up Impressions. And don't tell me "Viewable Impressions" mean anything because you don't know if a user really interacted with the ad or the ad was served behind other ads/showed up as a 1x1 pixel. Also, viewable ads just means more ad inventory that publishers are throwing on their crap webpage to get more vCPM.

    4) View-Thru Conversions: Probably the biggest joke KPI in RTB. Very few (if any) users are viewing an ad and finding it so engaging that they won't click on the ad, but will later do a branded Google search for that product and then convert in the future.

    The only difference between this industry and "The Big Short" is that companies were able to make money off of shorting mortgage fraud. There's no way to short (or bet against) ad fraud. Publishers, SSPs, DSPs, DMPs, and ad agencies will continue to polish up the turd that is programmatic because there's lots of money to be made and lots of jobs that would be lost once big advertisers realize what's going on with their Display Ad Budget.

    Reply
    • Hey Justin,

      I couldn't agree more about the pervasiveness of fraud throughout the digital advertising industry. You've done an even better job than me of outlining several of the more pernicious examples.

      My point is that the digital advertising industry today DOES resemble the financial industry pre-2008 in terms of fraud, but the digital advertising industry does NOT have a trigger to cause a crisis like the financial industry did.

      The mere presence of fraud does cause a crisis. Unfortunately.

      Joel

      Reply
      • Hi Joel,

        I gotcha. Yes, there's no "catalyst" like there was in the mortgage crisis. Thanks for your response!

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