Facebook and Alphabet (Google’s parent), which rely on advertising for, respectively, 97% and 88% of their sales.depend on the idea that targeted advertising, exploiting as much personal information about users as possible, results in enough increased sales to justify its cost.This is despite the fact the both experimental research and the experience of major publishers and advertisers show the opposite. Now, The new dot com bubble is here: it’s called online advertising by Jesse Frederik and Maurits Martijn provides an explanation for this disconnect. Follow me below the fold to find out about it and enjoy some wonderful quotes from them.
EvidenceThere are three kinds of problem that mean dollars spent on Web advertising are wasted. First, the Web advertising ecosystem is rife with fraud. Much of it is click fraud, which means the ads are seen by bots not people. Second, ad targeting just doesn't work well to put ads in front of potential buyers. Third, because of the way ad targeting works, most of the potential buyers who see ads are people who would buy the product without seeing the ad.
FraudFor example, at The Register Thomas Claburn writes:
'It's about 60 to 100 per cent fraud, with an average of 90 per cent, but it is not evenly distributed,' said Augustine Fou, an independent ad fraud researcher, in a report published this month.The Association of National Advertisers report on ad fraud for 2017 was optimistic:
Among quality publishers, Fou reckons $1 spent buys $0.68 in ads actually viewed by real people. But on ad networks and open exchanges, fraud is rampant.
With ad networks, after fees and bots – which account for 30 per cent of traffic – are taken into account, $1 buys $0.07 worth of ad impressions viewed by real people. With open ad exchanges – where bots make up 70 per cent of traffic – that figure is more like $0.01. In other words, web adverts displayed via these networks just aren't being seen by actual people, just automated software scamming advertisers.
The third annual Bot Baseline Report reveals that the economic losses due to bot fraud are estimated to reach $6.5 billion globally in 2017. This is down 10 percent from the $7.2 billion reported in last year's study.This year's report is similarly optimistic:
Today, fraud attempts amount to 20 to 35 percent of all ad impressions throughout the year, but the fraud that gets through and gets paid for now is now much smaller. We project losses to fraud to reach $5.8 billion globally in 2019. In our prior study, we projected losses of $6.5 billion for 2017. That 11 percent decline in two years is particularly impressive considering that digital ad spending increased by 25.4 percent between 2017 and 2019. ... Absent those measures, losses to fraud would have grown to at least $14 billion annually.The bad guys, for very little investment, are reaping income of $5.8B/yr. Their ROI is vastly better than the advertisers, or the platforms. No-one cares.
TargetingSapna Maheshwari reported for the New York Times on a JP Morgan study:
Of the 400,000 web addresses JPMorgan’s ads showed up on in a recent 30-day period, said Ms. Lemkau, only 12,000, or 3 percent, led to activity beyond an impression. An intern then manually clicked on each of those addresses to ensure that the websites were ones the company wanted to advertise on. About 7,000 of them were not, winnowing the group to 5,000. The shift has been easier to execute than expected, Ms. Lemkau said, even as some in the industry warned the company that it risked missing out on audience “reach” and efficiency.The cull apparently had no effect on the traffic to JPMorgan's website.
In After GDPR, The New York Times cut off ad exchanges in Europe — and kept growing ad revenue, Jessica Davies reported that:
When the General Data Protection Regulation arrived last year, The New York Times didn’t take any chances.Natasha Lomas' The case against behavioral advertising is stacking up reported on research by Carnegie-Mellon professor Alessandro Acquisti working with a large U.S. publisher that provided the researchers with millions of transactions to study:
The publisher blocked all open-exchange ad buying on its European pages, followed swiftly by behavioral targeting. Instead, NYT International focused on contextual and geographical targeting for programmatic guaranteed and private marketplace deals and has not seen ad revenues drop as a result, according to Jean-Christophe Demarta, svp for global advertising at New York Times International.
Currently, all the ads running on European pages are direct-sold. Although the publisher doesn’t break out exact revenues for Europe, Demarta said that digital advertising revenue has increased significantly since last May and that has continued into early 2019.
Acquisti said the research showed that behaviourally targeted advertising had increased the publisher’s revenue but only marginally. At the same time they found that marketers were having to pay orders of magnitude more to buy these targeted ads, despite the minuscule additional revenue they generated for the publisher.Procter & Gamble has the world's biggest ad budget. They also tried cutting back on Web ads:
“What we found was that, yes, advertising with cookies — so targeted advertising — did increase revenues — but by a tiny amount. Four per cent. In absolute terms the increase in revenues was $0.000008 per advertisment,” Acquisti told the hearing. “Simultaneously we were running a study, as merchants, buying ads with a different degree of targeting. And we found that for the merchants sometimes buying targeted ads over untargeted ads can be 500% times as expensive.
Importantly, as we made those decisions and put our money where our mouth has been in terms of the need to increase the efficiency of that supply chain, ensure solid and strong placement of individual ads, we didn’t see a reduction in the growth rate. So as you know, we’ve delivered over 2% organic sales growth on 2% volume growth in the quarter. And that — what that tells me is that, that spending that we cut was largely ineffective.The fact that targeting doesn't work shouldn't be a surprise to any Web user. Two universal experiences:
- I buy something on Amazon. For days afterwards, many of the ads that make it past my ad blockers are for the thing I just bought.
- For weeks now, about half the videos I watch on YouTube start by showing me exactly the same ad for Shen Yun. Every time I see it I click "skip ad", so YouTube should have been able after all this time to figure out that I'm not interested and show me a different ad.
Selection BiasFrederik and Martijn focus on yet another problem with the numbers used to justify spending on Web ads, selection bias:
Economists refer to this as a "selection effect." It is crucial for advertisers to distinguish such a selection effect (people see your ad, but were already going to click, buy, register, or download) from the advertising effect (people see your ad, and that’s why they start clicking, buying, registering, downloading).They talked with Berkeley economics Professor Steve Tadelis, who worked with eBay's marketing team:
People really do click on the paid-link to eBay.com an awful lot. But if that link weren’t there, presumably they would click on the link just below it: the free link to eBay.com. The data consultants were basing their profit calculations on clicks they would be getting anyway.
There was a clash going on between the marketing department at eBay and the MSN network (Bing and Yahoo!). Ebay wanted to negotiate lower prices, and to get leverage decided to stop ads for the keyword ‘eBay’.eBay wasn't the only company discovering this:
Tadelis got right down to business. Together with his team, he carefully analysed the effects of the ad stop. Three months later, the results were clear: all the traffic that had previously come from paid links was now coming in through ordinary links. Tadelis had been right all along. Annually, eBay was burning a good $20m on ads targeting the keyword ‘eBay’.
Economists at Facebook conducted 15 experiments that showed the enormous impact of selection effects. A large retailer launched a Facebook campaign. Initially it was assumed that the retailer’s ad would only have to be shown 1,490 times before one person actually bought something.Many publishers and platforms have done experiments showing that spending on Web advertising is wasted. But they don't care.
But the experiment revealed that many of those people would have shopped there anyway; only one in 14,300 found the webshop because of the ad. In other words, the selection effects were almost 10 times stronger than the advertising effect alone!
And this was no exception. Selection effects substantially outweighed advertising effects in most of these Facebook experiments. At its strongest, the selection bias was even 50 (!) times more influential.
ExplanationWhy doesn't anyone bar a few researchers care that the Web advertising system is broken and wastes gigantic amounts of money?
Frederik and Martijn have an explanation:
It might sound crazy, but companies are not equipped to assess whether their ad spending actually makes money. It is in the best interest of a firm like eBay to know whether its campaigns are profitable, but not so for eBay’s marketing department.The marketeer's effective marketing works for everyone:
Its own interest is in securing the largest possible budget, which is much easier if you can demonstrate that what you do actually works. Within the marketing department, TV, print and digital compete with each other to show who’s more important, a dynamic that hardly promotes honest reporting.
Marketers are often most successful at marketing their own marketing.
"Bad methodology makes everyone happy,” said David Reiley, who used to head Yahoo’s economics team and is now working for streaming service Pandora. "It will make the publisher happy. It will make the person who bought the media happy. It will make the boss of the person who bought the media happy. It will make the ad agency happy. Everybody can brag that they had a very successful campaign."Key to the effectiveness of the marketing is that uses numbers, so appears "scientific":
We want certainty. We used to find it in the Don Drapers of the world, the ones with the best one-liners up their sleeves. Today we look for certainty from data analysts who are supposed to just show us the numbers.So scientific that management needs to rely on "experts"
The fact that management often has no idea how to interpret the numbers is not helpful either. The highest numbers win.Prof. Tadelis summed it up at a conference:
"What Randall is trying to say," the former eBay economist interjected, "is that marketeers actually believe that their marketing works, even if it doesn’t. Just like we believe our research is important, even if it isn’t."