Deluded buyers stoke the online advertising money machine

There's so much money to be made in digital advertising these days that the online publishing giants are all investing in their own ad techology stacks. In the past few days we've learned that Amazon is preparing its own rival to Google Adwords while Facebook will soon relaunch the Atlas technology it bought from Microsoft.

But how much of that money eagerly gathered in by online publishers actually delivers any useful value to the businesses who pay for the ads?

Just a few days after my colleague Dennis Howlett discussed evidence of endemic Facebook click fraud, it seems a good time to explore some home truths about online advertising. I've mixed in some of my own experiences with links to several thought-provoking pieces, so be warned: this may turn into a long read.

Those who click are least likely to spend

Personally, I've always been skeptical of the value of online display ads. Way back in 1998, when I founded my first online publishing venture, I chose not to put banners on it (the business model of ASPnews.com was to sell our own research publications).

Why would B2B buyers click on ads, I reasoned, when the Web was opening up much better ways to research their purchases? It seemed self-evident that the only people who clicked on ads had nothing better to do with their time — and thus probably had no budget worth spending.

That's certainly the case with the Facebook click farm activity described by Veritasium's Derek Muller in the video that Dennis linked to in his piece:

In order to avoid detection by Facebook's fraud algorithms, [click farms] like pages other than the ones they've been paid for to seem more genuine ...

Workers at these click farms will literally click anything. I mean, where do you think Facebook's security page is most popular? Dhaka, Bangladesh.

Something else became clear after my partner and I sold the ASPnews.com site in early 2000 and its acquirer replaced our Atomz keyword search engine with an in-house Autonomy semantic search engine. Sales of our publications divebombed because the new search engine was no longer surfacing the content indexes in search results. This confirmed what Google would subsequently demonstrate with its AdWords program: what people buy online is stuff they're already looking for. Showing them random other stuff is a wasted effort.

Buying attention is a self-delusion

But I was not in tune with the received wisdom at the height of the dot-com boom, when everyone was chasing after 'eyeballs' they could 'monetize'. Exactly what those visitors would buy once you had their attention was a small but vital detail that few gave any thought to.

In a recent conference presentation on Internet privacy, Maciej Ceglowski noted that this still happens today, citing Pinterest and Quora as examples. He calls the phenomenon Investor Storytime:

Give us money now, and you won't believe how awesome our ads will be when we finally put them on the site ...

Recently, Quora raised $80 million in new funding at a $900 million valuation. Their stated reason for taking the money was to postpone having to think about revenue.

Quora walked in to an investor meeting, stated these facts as plainly as I have, and walked out with a check for eighty million dollars.

That's the power of investor storytime.

Back in 1999, I finally gave in to vendors who pleaded with me for the chance to advertise to the ASPnews.com readership. We signed up with Doubleclick's DART service to serve ads to our site (ASPnews.com ate its own dogfood and ran everything using SaaS). Eight months later, we had to pester Doubleclick to invoice us so we could close our books.

I realized then that Doubleclick felt so confident of its access to funding that it hadn't yet bothered to figure out how to invoice its DART customers. Given that many were dot-coms and would soon go bust, it was about to face a rude awakening.

Looking back in 2010, Paul Graham called the banner advertising of the dot-com days a "de facto Ponzi scheme:"

Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in.

Nobody's interested anyway

One other thing struck me from the ad traffic stats on ASPnews.com. The click through rate from our discussion pages was massively lower than from editorial. It was clear that when people were focused on an activity — in this case, following a discussion thread — they wanted to finish it before clicking away.

Online, there's really no point in trying to grab people's attention: they're already focused on doing something else. That's why search advertising has always been (with some caveats — see below) the most effective form of digital advertising: because it complements the activity the visitor is already engaged in. Likewise contextual ads, which aim to be relevant to the content on the page.

But so long as buyers are willing to pay, the publishers have no incentive whatsoever to make the ads any more effective. In fact, as Paul Graham pointed out in that 2010 post about Yahoo, reflecting on his failure to interest Jerry Yang in an algorithm that ranked search results:

The reason Yahoo didn't care about a technique that extracted the full value of traffic was that advertisers were already overpaying for it. If they merely extracted the actual value, they'd have made less.

Buyers are deluding themselves if they think online advertising is designed to deliver maximum returns for their ad spend. It's built so that online publishers can extract maximum profit.

Contextual ads are self-fulfilling

There are some good examples of how digital publishers ramp up their ad revenues in a June 2014 article from The Atlantic, in which senior editor Derek Thompson questions how Internet advertising works. It turns out even search ads have their flaws. Citing research, the author shows how:

• Many Google search ads are shown next to equivalent organic results that people would have found anyway.
• Facebook shows ads to people based on interests that they were going to act on anyway.

The problem goes back to the same instinctive conclusion I reached back in 1998. People use the Internet to find stuff. So why do they need ads? As Thompson concludes:

Think about how much you can learn about products today before seeing an ad. Comments, user reviews, friends' opinions, price-comparison tools: These things aren’t advertising (although they're just as ubiquitous). In fact, they’re much more powerful than advertising because we consider them information rather than marketing. The difference is enormous: We seek information, so we're more likely to trust it; marketing seeks us, so we're more likely to distrust it.

Online advertising is missing the point

People have been saying this for years, but it's an unpopular message in digital circles. In a 2009 article on Techcrunch, Professor Eric Clemons of The Wharton School set out his view Why Advertising Is Failing On The Internet:

Pushing a message at a potential customer when it has not been requested and when the consumer is in the midst of something else on the net, will fail as a major revenue source for most internet sites. ...

The net will find monetization models and these will be different from the advertising models used by mass media, just as the models used by mass media were different from the monetization models of theater and sporting events before them.

The response to his article was a virulent comment storm, almost as if he had said something blaphemous. In a sense he had, daring to attack the ad monetization strategies that underpin so many digital business models, while upsetting others with the suggestion that perhaps online content should not be free.

He was specially caustic in his description of Google's AdWords business model as "misdirection:"

Monetization of misdirection frequently takes the form of charging companies for keywords and threatening to divert their customers to a competitor if they fail to pay adequately for keywords that the customer is likely to use in searches for the companies' products.

Instead of these indirect models, he argued in favor of businesses using digital technology to make direct contact with their prospects and customers. This concept seems to me to much more in tune with the the way the Internet works — simply providing a mechanism that allows buyers to make purchases in the context of their digital activity.

It's a model that I wrote about last year, proposing the name in-digital purchasing, and quoting a definition I'd come up with in 2006:

Advertising is the creation of a disconnected era when businesses needed some way to get a message out to prospective customers that they couldn't reach directly. The purpose of an ad is to motivate the prospect to get in touch. The Web, as we all know, puts us all in direct, real-time contact with each other, wherever we are in the world. Instead of advertising a message and waiting haplessly for a response, businesses can proactively connect directly with their prospects, reaching out to them in contexts where they're ready to buy. What counts on the Web is product placement, merchandising and other forms of direct promotion.

The final irony

The final irony is that this is exactly what the online publishers aspire to achieve. All their efforts are targeted towards building an infrastructure that understands our context and intent sufficiently well to connect us to precisely what we want to buy at that moment.

But as Maciej Ceglowski reminds us, they're failing miserably at that, too:

These "targeted" ads just don't target very well. They work on the same principle as spam: throw enough of this shit at a user, and someone is going to click.

That comes at a terrible price, he points out:

[F]or ad sellers, the crappiness of targeted ads is a feature! It means there's vast room for improvement. So many stories to tell the investors.

This ghost of a business model propels us to ever greater extremes of surveillance. If the algorithms don't work, that's a sign we need more data. If the algorithms do work, then imagine how much better they'll work with more data. There's only one outcome allowed: collect more data.

That leads into a discussion of privacy that I'll leave for another day. Instead, let me leave you with this thought.

As we have seen, online advertising is largely ineffective. Much of the spend is wasted. But because it's so profitable for online publishers, they have little incentive to improve it. All they need to do is tweak it at the edges sufficiently to persuade buyers to continue spending.

This will carry on so long as those buyers continue to delude themselves that they're getting value for money from their digital ad spend.

Disclosure: diginomica was founded in the belief that the old world of advertising driven media models is dead. Our business model is based on content partnerships.

Image credit: © Gina Sanders - Fotolia.com