Do Targeted Digital Ads Work Better?

In a previous post, I predicted that Google's double digit growth will come to an end most likely before 2020. I argued that this was due to the fact that advertising spend has been pegged at about 1% of GDP for a century, and that this hard ceiling would make it challenging for Google to continue fast growth amidst increasing competition from Facebook and other social networks.

Recently it was reported that P&G slashed 140 million USD from its digital ad spending, but saw sales rise for 2017Q2. The article also mentions that

Over five years, P&G is aiming for $2 billion in marketing cuts, including media, with a heavy emphasis on cleaning up the digital supply chain.

Despite high double digit growth for the current quarter, it is clear that there are clouds in the horizon for Google.

The ceiling for ad spending

The Bloomberg article mentioned in my previous post presented the following chart showing just how constant ad spending has been as a percentage of GDP. The earliest data point in this chart goes back to 1926, which is very much the beginning of advertising as we know it today. This is when corporations started to take advantage of the government propaganda techniques that had been employed during World War I, in a massive effort to get young men to enlist in the military forces.

We can see that even as the advertising media shifted from street posters to radio to television and finally the mobile Internet, nothing has significantly grown the advertising market relative to GDP. The fact that ad spending has not significantly grown since the era when all we had were street posters is remarkable when you think about it. Ads used to only be on the streets but radio allowed private time with families to be targeted as well. Even then, ad spending remained constant. Importantly in the context of digital advertising, the advent of highly targeted digital ads which collect all sorts of private information about virtually person on the Internet have not detectably increased total ad spending.

The ceiling for ad spending is very robust indeed.

Sophisticated analytics in digital ads

A lot has been made about the highly sophisticated analytics that digital advertising makes possible (often at the expense of privacy, of course). By use of tracking across multiple websites, it is possible to see whether customers who saw banner ads actually came to an e-commence site to make the purchase. All sorts of techniques have been devised to even connect online behaviour to purchases at physical stores. All this should make it possible for the advertisers to see whether their online ads were useful or not. At the very least, there should be an improvement compared to the classical dilemma; "Half the money I spend on advertising is wasted; the trouble is I don't know which half."

The P&G example above suggests however that the improvement may have been illusional. Despite all the analytics that suggested otherwise, 140 million USD of their digital advertising budget apparently belonged to the wasted half. Maybe all the analytics that sacrifices user privacy does not provide any value after all.

The truth of targeting

Targeting means showing your ads to the people who are most likely to respond positively. Targeting is also purportedly beneficial to the end-user who will end up seeing more "useful" advertisements. Because of these benefits, argue the ad companies, collecting all your personal information is a reasonable compromise. However, despite their best efforts, P&G's CFO Jon Moeller did not have kind words to say.

Clearly we don't need to be spending money that is seen by a bot and not a person. Clearly we don't need to be spending money on ads that are placed in inappropriate places, and that's why you see a significant reduction.

The targeting capabilities that we have today apparently are not very good at distinguishing between a bot and a real human being with a profile that matches what P&G desired. From this, it is reasonable to assume that our current targeting algorithms are even worse at spotting the difference between two humans with different profiles.

Again, collecting all that personal information seems to have been in vain.

Future developments to watch

P&G is not the only company cutting back on digital advertising. Unilever is reportedly doing the same. As a result, in the next few quarters, we should get a better picture as to whether these companies will continue to see strong sales growth despite cutting back, or whether they will see negative impacts and eventually come re-invest in digital. We will also be able to discern whether or not there will be a ripple effect as other companies reconsider their ad portfolios.

If P&G and others do not observe a negative impact despite a continued cut-back on digital spending, then this will significantly blunt the growth of digital advertising. Although I expect this to slow down considerably within the next few years anyway, this may come earlier than I previously though. In the short term however, this will actually benefit Google because they are most likely to be able to maintain advertiser trust by implementing measures to counter the bot issues. In aggregate, I would expect a short term boost followed by an earlier slowdown for Google and Facebook , and an much more imminent downfall for other digital advertising companies.

One possible change that I would very much welcome, is a better understanding of how valuable our personal data really is. Television and magazine advertisements do not collect your personal information, but are nonetheless targeted to a certain degree based on the programme or genre that you are viewing. Targeting itself does not necessarily need personal information as long as the ad placement itself is intelligent, and targeting does not need to stalk your whole Internet browsing habits. Digital advertising might not necessarily need to stalk you. By understanding the true value of these privacy intrusions, our society should be in a much better position to discuss whether we have to make these concessions or not.

Can advertising grow beyond the 1% ceiling?

Given that a large number of Internet companies rely on advertising as their main revenue source, the presence of a hard ceiling should worry venture capitalists who are pouring ever increasing amounts of money into them. If tech is to continue to grow as a whole by high double digits, then tech needs to find a way to either break out of this, or to develop new business models with a more direct revenue.

However, as I have argued, I consider it unlikely that digital advertising is more revolutionary than radio or television advertising, and I strongly doubt that the 1% ceiling will be broken. As digital advertising saturates the ad market as a whole, this market will become a zero-sum game and will not contribute to the growth of overall tech.

Therefore, my belief is that tech needs to stop relying on advertising and that this is starting to be an urgent issue. As the tech advertising space saturates, the current incumbents will become stronger and stronger albeit with slower growth rates. On the flip side, it will be harder and harder for new entrants with an advertising business model to make it. Advertising will quickly cease to be a viable revenue strategy for start ups.