ILLUSTRATION: How Is That Robot Making So Much Money? • watercolor on paper • 5×7″
What’s that? THE problem, you say? Aren’t there lots of problems with ad tech?
If you work in ad tech, chances are right now you’re “fixing” data for the client while marveling at the number of jeans parties your sales team has thrown this quarter.
If you’re a media company or an advertiser, you’re scratching your head at the most recent pitch from a BD guy in taper jeans and a blazer who last week was pitching you on a different solution.
If you’re a consumer, maybe you’re wondering why that inappropriate purchase you considered at Amazon is following you to The New York Times when you bring up an article to show your team in a meeting? (It’s okay though. They missed the embarrassing retargeting ad because they’re ridiculing you behind your back for citing Thomas Friedman.)
If you’re an investor, you’re worrying that you’re the last one in—the sucker at the table—since the best returns come from private market acquisitions when markets are nascent (a fine vocabulary alternative to “early innings”).
The biggest problem with ad tech, though, is that it represents a taking from consumers without a fair value return. Unlike media companies who, in exchange for a word from their sponsors, give you something—content, entertainment, a brief diversion from your miserable existence—ad tech companies give consumers, in exchange for their personal data, close to nothing.
[Conflicts and bonafides, first: I’ve built a company in ad tech, specifically mobile video (although we were loath to call ourselves ad tech, since we tried not to do what I’m about to describe). I have lots of friends in ad tech. I helped take Google public back in the day for Mary Meeker. I’m short a bunch of high P/E digital media stocks. I also write a lot about digital media here on this blog and professionally in my consulting. My most recent consulting project on YouTube was done in conjunction with Jefferies & Co. and can be downloaded here.]
Here’s how normal, boring, traditional ad sales works: MediaCo sells ads on their site MediaCo.com directly to AdvertiseCo. You come to MediaCo.com, watch a video, and see one advertisement. AdvertiseCo pays MediaCo 1/1000th of a $20 CPM (or $0.02) for that ad impression. In aggregate, all of those pennies go to fund MediaCo, including the production of content which you enjoy as that diversion from your miserable existence. And over time, AdvertiseCo slowly brainwashes you down the buying funnel to the point that you’re raving to your friends about AdvertiseCo Toothpaste. If you’re like me, you might even feel a twinge of guilt when you choose not to buy Crest.
Everybody (kind of) wins.
Here’s how exciting, sexy, digital ad tech works: MediaCo can’t sell all of their ads on their site MediaCo.com directly, so they push it through to networks, exchanges, and other vendors via supply-side platforms that divvy inventory up. NetworkCo sells an ad for a $10 CPM to AdvertiseCo for men 18-34 who like sports. You come to MediaCo.com, watch a video, and see one advertisement. AdvertiseCo pays NetworkCo 1/1000th of a $10 CPM (or $0.01). NetworkCo might have to pay DataCo (who provided the audience demographic data) 10-15% of that penny, and then shares, say, 60% back to MediaCo. Maybe AdServingCo and FailingRichMediaVendorCo take a percentage too. MediaCo takes their <$0.005 and pays some fee to SupplySideCo which sent the inventory to NetworkCo in the first place. As they say in Office Space, “This sounds familiar. / Yeah, they did it in Superman III.”
So, what happens now? MediaCo tries to use this fraction of a penny to fund operations unsuccessfully, so they cut their content production costs. This leaves you less entertained and more depressed than you were before. AdvertiseCo was pretty happy with buying that ad for half as much until they realized they needed an entire DemandSideCo stack to interface with SupplySideCo and not get ripped off since 75% of NetworkCo’s ads are non-viewable. They’re selling less toothpaste than before, but have more SocialProfileCo “likes.” Meanwhile, NetworkCo, SupplySideCo, DataCo, and DemandSideCo have all filed their S-1s, and their executives are going to laugh to the bank as long as the stock maintains its value through the 180-day lock-up.
Everybody (kind of) loses. Except for the ad tech companies.
I’m sure you’ll tell me that I’m wrong: how those fractions provided by NetworkCo to MediaCo wouldn’t exist otherwise, that the $0.005 is supplementary to whatever MediaCo would sell, or that this is a radical new imagining of remnant inventory.
Without ridiculously defined sales rules in place, programmatic audience sales hinder a traditional sales team’s ability to sell. The CPM floor? That’s your new maximum CPM. The provision to sell blind? A whisper in the ear from a salesperson to a media buyer. The list goes on. Networks were built to turn remnant into “gold,” but often the alchemy goes in reverse.
Or you might tell me that ad tech is a legitimate investment for a media company’s internal, first-party, sales team—providing data and results that boost CPMs by showing advertisers better, more measurable ROI.
Also, kind of, bullshit.
Yes, the level of sophistication and measurement in digital advertising will always increase, and media companies have to keep up with the demands of advertisers. However, much of this measured reality is constructed and doesn’t confer as many benefits as people might imagine. Especially for brand advertising where many of the qualities advertisers are looking to improve can’t be measured in real-time anyway. (For more info and historical context on cash register data, I recommend the Harvard Business Review article: “If Brands Are Built Over Years, Why Are They Managed Over Quarters?”)
So why should we allow NetworkCo, DataCo, SupplyCo, and DemandCo access to our data when MediaCo, with whom we have an actual commercial relationship, gets so little in return? And we haven’t even considered what happens when SocialProfileCo uses all your data to sell ads on MediaCo.com, because everyone demanded a ****ing “most shared” widget. So now SocialProfileCo gets all the money.
Did I go too far? Probably. Sorry. I know I’m being overly broad here, but you used to trade your time for content. And now you trade your time and your data for fractions of it, and ad tech companies get rich off of owning that data in the aggregate. Perhaps that continues until investors realize that everyone has the same data, declare the gross margins unsustainable, decide to stop funding an arms race without cash flow visibility, and run away from these low-multiple businesses.
I believe deeply that our use of technology can help create better experiences for consumers, creators, and advertisers. Technology has helped the human race progress in so many instances historically that we think “better” is a given. Better isn’t an inherent quality of technology, and better doesn’t necessarily result from the market either. As I’ve noted, the relationship between society and technology runs back and forth. We have to want to create something better, not just lay in the cut.
I’ve also talked briefly about the economics of data aggregation in my ongoing series on the right to privacy, namely that our personal data is only valuable economically in the aggregate (and within context: synthesized, analyzed, measured). It’s near impossible for companies to negotiate with each of us individually. There’s even a widely held economic theory by Ronald Coase that suggests our data will end up in these companies’ hands regardless, unless we throw up what they call in the biz as transaction costs.
Here’s a transaction cost you can throw their way: Block third-party cookies. Moreover, block Facebook cookies, and use Facebook in a different browser from your regular one. At least make these companies work for it by forcing them to track your IP or your location or something else. Because they are.
And then let’s do better.