The New Lawmen Of Ad Tech

simeon-simeonovData-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 Simeon Simeonov, founder and chief technology officer at Swoop.

While most ad tech companies busily rake in short-term revenues, a handful of major players are quietly taking the law into their own hands and reshaping the industry.

At a time when consumer engagement with digital advertising has long waned and few US consumers find online ads useful, it’s a miracle that fewer than 30% of consumers use ad blockers. The miracle won't last long now that Apple's war with Google has centered on ad tech and iOS 9 encourages the use of ad blockers.

The industry must come to terms with the fact that ad tech imposes a significant negative externality on consumers. Reduced consumer engagement and increased ad blocker usage are a direct result of everyday ad tech practices. Economics literature is full of examples where the presence of externalities in markets leads to market failure.

A canonical example is traffic congestion, where each additional driver joining rush-hour traffic slows down the commute of the drivers around and behind them. By the same token, each irrelevant or annoying ad that users see today reduces future user engagement with advertising and increases ad-blocker adoption.

This is a classic situation of short-term versus long-term optimization trade-offs, which is an area where the industry has a very mixed record. Search engine advertising manages that trade-off well. Billions of times per day Google and Bing choose not to show low-quality ads to consumers to maintain a high average rate of user engagement. They aim to minimize negative externalities on users out of self-interest because they are also publishers and would feel the effect of the externalities.

Display advertising's record in this area is poor. Short-term thinking is embedded in everything, ranging from the long ad-tech value chain that limits accountability, the incentive structures that focus on individual campaigns and the RTB APIs, which don't give publishers control over ad quality. An advertiser's bid is an indication of the value of an ad to a consumer just as much as a trader's willingness to buy a stock is an indication of the stock being a great investment. In other words, only occasionally.

The Problem With Externalities

Economists tell us that efficient, well-functioning markets require internalizing any externalities. Internalization in this context means that the parties causing negative externalities must account for them and, essentially, make less money or, in the case of advertisers, pay more. It’s very complex because it is difficult to even measure the extent of an externality, let alone think of ways to adjust pricing in the advertising ecosystem to account for it. However, ignoring the problem just because it's difficult doesn't make it go away.

In many markets, (self-)regulation is the tool for internalizing externalities. Good examples are legal systems, where people who hurt others are put in jail, and pollution credits that enable emissions trading, which is a major part of the Kyoto Protocol. Regulation is sometimes effective in the slow-moving markets of the real world.

In fast-changing technology markets, however, regulation tends to be a lot less effective. The pioneering AdChoices program, which launched in 2009 to provide consumers with controls over interest-based advertising, is the rare example of self regulation that proves the rule. Instead, the de facto situation in ad tech is regulation through the self-interest of powerful market participants.

The Giants’ Latest Moves

Google penalizes the search rankings of sites with too many ads above the fold. Just recently Google also announced it will start penalizing sites that show app download pop-ups, which users find just as annoying as ad pop-ups. Both moves are the result of Google wanting to ensure that it provides the best search experience for consumers. Google’s Accelerated Mobile Pages project, its latest attempt to steer the publishing and advertising ecosystem, speeds up browsing at the expense of advanced analytics and responsive advertising experiences.

Apple, which wants to ensure the iPhone provides the best mobile experience, promotes ad blockers in iOS 9 because no ads means faster browsing and longer battery life. Not so coincidentally, ad blocking also hurts Google's advertising empire.

In the Android ecosystem, expect growing friction between Google, which relies heavily on advertising, and large device makers, such as Samsung, that need to make the overall Android experience as good or better than what iOS offers.

In the Microsoft ecosystem, now that Microsoft EVP Qi Lu’s vision to rid the company of display advertising has been realized with its major partnership with Verizon-owned AOL, expect Windows and its new Edge browser to take a tougher stance in defense of consumer experience.

Mixed Effects On Consumers, Publishers And Advertisers

Some moves by industry heavyweights have very mixed effects. For example, Apple and Firefox are blocking third-party cookies, which reduce some types of annoying advertising, such as retargeting.

On the surface, this looks like a good thing for consumers. However, it also makes attribution tracking much more difficult and thus hides the signal about which ads are actually valuable for consumers and which are irrelevant or misleading. Poor attribution tracking also hurts the entire advertising ecosystem, including publishers. The decline in cookie effectiveness has also increased the use of fingerprinting, also known as device matching, which some argue has worse privacy implications.

The ad tech ecosystem is facing a Darwinian moment. Does it evolve by becoming smarter about optimizing for the long run or does it watch passively as ad blocker use grows and market giants reshape the ad tech environment in aggressive pursuit of their own strategic interests?

Personally, I believe we are all better off if the future is written by many and not by few.

Follow Simeon Simeonov (@simeons), Swoop (@Swoop123) and AdExchanger (@adexchanger) on Twitter.

2 Comments

  1. Facebook Partner

    This got me thinking... thank you. The last time I considered externalities was in Econ 101.

    You didn't mention Facebook in your post. How do you see the company using its market power?

    Reply
  2. Facebook has been very smart and strategic in its approach to ad tech. The company's first party status and Google-like end-to-end platform gives it a significant advantage as its targeting and overall volume as less affected by ad and cookie blocking.

    One of Facebook's key goals is to move more advertiser spend away from partner platforms (Nanigans, etc.) to its own for better visibility, planning and margin control. I expect to see increased heavy-handedness when it comes to that (there are some parallels to Google AdWords and DoubleClick for Search).

    In the long run, it will be interesting to see how Facebook leverages its existing network and relationships to get into the search advertising business. I cannot imagine a scenario where the company is comfortable ignoring 50% of the digital advertising spend...

    Reply

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