Web Advertising and the Shark, revisited (and updated)

There's a lot to add to Has Web Advertising Jumped The Shark? (which is a violation of  Betteridge's Law). Follow me below the fold for some of it.

First, I should acknowledge that, as usual, Maciej Cegłowski was ahead of the game. He spotted this more than two years ago and described it in The Advertising Bubble, based on a talk he gave in Sydney. The short version is:

There's an ad bubble. It's gonna blow.

Money flows in ad ecosystem

The longer version is worth reading, but here is a taste:

Right now, all the ad profits flow into the pockets of a few companies like Facebook, Yahoo, and Google. ... You'll notice that the incoming and outgoing arrows in this diagram aren't equal. There's more money being made from advertising than consumers are putting in.

The balance comes out of the pockets of investors, who are all gambling that their pet company or technology will come out a winner. They provide a massive subsidy to the adtech sector. ... The only way to make the arrows balance at this point will be to divert more of each consumer dollar into advertising (raise the ad tax), or persuade people to buy more stuff. ... The problem is not that these companies will fail (may they all die in agony), but that the survivors will take desperate measures to stay alive as the failure spiral tightens. ... The only way I see to avert disaster is to reduce the number of entities in the swamp and find a way back to the status quo ante, preferably through onerous regulation. But nobody will consider this.

What Doc Searls Saw

What Ev Williams Saw

Cegłowski was right that things would get bad. Last December Doc Searls, in After Peak Marketing, reported about the ads he and Ev Williams saw on Facebook when they read this post from one Mark Zuckerberg:

“Of all the content on Facebook, more than 99% of what people see is authentic. Only a very small amount is fake news and hoaxes. The hoaxes that do exist are not limited to one partisan view, or even to politics. Overall, this makes it extremely unlikely hoaxes changed the outcome of this election in one direction or the other.”

Searls points out that, despite Zuckerberg's "99% authentic" claim:

All four ads are flat-out frauds, in up to four ways apiece:

1. All are lies (Tiger isn’t gone from Golf, Trump isn’t disqualified, Kaepernick is still with the Niners, Tom Brady is still playing), violating Truth in Advertising law.
2. They were surely not placed by ESPN and CNN. This is fraud.
3. All four of them violate copyright or trademark laws by using another company’s name or logo. (One falsely uses another’s logo. Three falsely use another company’s Web address.)
4. All four stories are bait-and-switch scams, which are also illegal. (Both of mine were actually ads for diet supplements.)

Mark Zuckerberg announced changes to Facebook's News Feed to de-prioritize paid content, but Roger McNamee is skeptical of the effect:

Zuckerberg’s announcement on Wednesday that he would be changing the Facebook News Feed to make it promote “meaningful interactions” does little to address the concerns I have with the platform.

So am I. Note that the changes:

will de-prioritize videos, photos, and posts shared by businesses and media outlets, which Zuckerberg dubbed “public content”, in favor of content produced by a user’s friends and family.

They don't address the ads that Searls and Williams saw. But they do have the effect of decreasing traffic to publisher's content:

Publishers, on the other hand, were generally freaked out. Many have spent the past 5 years or so desperately trying to "play the Facebook game." And, for many, it gave them a decent boost in traffic (if not much revenue). But, in the process, they proceeded to lose their direct connection to many readers. People coming to news sites from Facebook don't tend to be loyal readers. They're drive-bys.

And thus divert advertising dollars to Facebook from other sites. The other sites have been hit by another of the FAANGs:

advertising firms are losing hundreds of millions of dollars following the introduction of a new privacy feature from Apple that prevents users from being tracked around the web.

Advertising technology firm Criteo, one of the largest in the industry, says that the Intelligent Tracking Prevention (ITP) feature for Safari, which holds 15% of the global browser market, is likely to cut its 2018 revenue by more than a fifth compared to projections made before ITP was announced.

AdBlock trending

Apple is responding to its customers. Back in 2015 Doc Searls wrote Beyond ad blocking — the biggest boycott in human history:

Ad blocking didn’t happen in a vacuum. It had causes. We start to see those when we look at how interest hockey-sticked in 2012. That was when ad-supported commercial websites, en masse, declined to respect Do Not Track messages from users ... As we see, interest in Do Not Track fell, while interest in ad blocking rose. (As did ad blocking itself.)

As blissex wrote in this comment, we are living:

In an age in which every browser gifts a free-to-use, unlimited-usage, fast VM to every visited web site, and these VMs can boot and run quite responsive 3D games or Linux distributions

This means that, as Brannon Dorsey demonstrated, ad blockers have become an essential way to defend against cryptojacking and botnets:

Anyone can make an account, create an ad with god-knows-what Javascript in it, then pay to have the network serve that ad up to thousands of browser.

So that's what Dorsey did -- very successfully. Within about three hours, his code (experimental, not malicious, apart from surreptitiously chewing up processing resources) was running on 117,852 web browsers, on 30,234 unique IP addresses. Adtech, it turns out, is a superb vector for injecting malware around the planet.

Some other fun details: Dorsey found that when people loaded his ad, they left the tab open an average of 15 minutes. That gave him huge amounts of compute time -- 327 full days, in fact, for about $15 in ad purchase. To see what such a botnet could do, he created one to run a denial-of-service attack (against his own site, just to see if it worked: It did pretty well). He got another to mine the cryptocurrency Monero, at rates that will be profitable if Monero goes much higher.

The most interesting experiment was in writing an adtech-botnet to store and serve Bittorrent files, via Webtorrent. That worked pretty well too: He got 180,175 browsers to run his torrent file in 24 hours, with a 702 Mbps upload speed for the entire network.

What Google could steal

Brannon Dorsey's post describing his experiments is a must-read. He computes that, for example, Google could limit itself to 10% CPU utilization and still have about 3 million cores for free, continuously. He concludes:

please, please, please BLOCK ADS. If you’ve somehow made it all the way to 2018 without using an ad blocker, 1) wtf… and 2) start today. In all seriousness, I don’t mean to be patronizing. An ad blocker is a necessary tool to preserve your privacy and security on the web and there is no shame in using one. Advertising networks have overstepped their bounds and its time to show them that we won’t stand for it.

If that isn't shark-jumped, I don't know what is.

Update

The sub-head of this week's Schumpeter column in The Economist is Stockmarket investors are wrong to expect an enormous surge in advertising revenues. The stockmarket is predicting huge growth in the huge revenues of the huge firms that dominate Web advertising:

The total market value of a basket of a dozen American firms that depend on ad revenue, or are devising their strategies around it, has risen by 126% to $2.1trn over the past five years. The part of America’s economy that is ad-centric has become systemically important, with a market value that is larger than the banking industry.

The biggest firms are Facebook and Alphabet (Google’s parent), which rely on advertising for, respectively, 97% and 88% of their sales. But the chunky valuations of America’s giant TV broadcasters imply that their ad revenues will fall very slowly, or not at all. Startups that rely on advertising, such Snap, are floating their shares at prices that suggest huge growth. Large deals, too, are being justified by potential ad revenues. Microsoft’s $26bn acquisition of LinkedIn in 2016 was partly premised on “monetising” its user base through adverts. The main reason AT&T says it wants to buy Time Warner for $109bn is to create a digital ad platform linking AT&T’s data to Time Warner’s TV content.

... A back-of-the-envelope calculation by Schumpeter suggests that stock prices currently imply that American advertising revenues will rise from 1% of GDP today, to as much as 1.8% of GDP by 2027—a massive jump. Since 1980 the average has been 1.3%, according to Jonathan Barnard of Zenith, a media agency, and in the past few years the advertising market relative to GDP has been shrinking.

The column describes two factors that make an 80% rise in ad spending in the next decade unlikely. First, the victims wouldn't tolerate it:

More people are using ad-blocking software. Tech brands that eschew bombarding customers with ads, such as Apple and Netflix, are wildly popular. ... Time spent online by the typical American is growing at about 10% a year, less than the 15-20% ad-sales growth that many digital firms expect.

Second, the advertisers can't afford it:

Imagine if advertising spending really did rise to 1.8% of GDP in America by 2027. Most firms’ costs would have to rise, cutting total corporate profits (excluding those of ad platforms) from about 6.5% to 5.7% of GDP, the kind of drop normally associated with a recession. Alternatively, imagine if the firms in the S&P 500 index (excluding ad platforms) bore all the additional cost of the advertising boom. Their combined return on capital would drop from the present 10% to 8%, at or just below their cost of capital.

Update 12^th May 2018: Barry Ritholtz points to the graphs in Peter Kafka's These two charts tell you everything you need to know about Google’s and Facebook’s domination of the ad business. This shows ad revenues from 2013 to 2017. Simply because they already have so much of the market, Google and Facebook cannot continue to grow revenues at their historic rate without a massive and continuing increase in ad spending by companies.

This shows the percentage of the total ad revenue for each medium from 1996 to 2017. Online passed TV in 2016 to grab 44% of the total.

Even if they could afford it (see Schumpeter above), given companies increasing skepticism as to the effectiveness of spending on online advertising, a massive increase in ad spending is not going to happen. This seems like an instance of Stein's Law:  "If something cannot go on forever, it will stop".