by Tim Hwang
Begin Reading
Table of Contents
A Note About the Author
Copyright Page
Thank you for buying this
Farrar, Straus and Giroux ebook.
To receive special offers, bonus content,
and info on new releases and other great reads,
sign up for our newsletters.
Or visit us online at
us.macmillan.com/newslettersignup
For email updates on the author, click here.
The author and publisher have provided this e-book to you for your personal use only. You may not make this e-book publicly available in any way. Copyright infringement is against the law. If you believe the copy of this e-book you are reading infringes on the author’s copyright, please notify the publisher at: us.macmillanusa.com/piracy.
Prologue
It’s the first day of Programmatic I/O, which bills itself as “the world’s largest semi-annual gathering of the data-driven marketing ecosystem.” Attendees pack into the basement of the San Francisco Marriott Marquis to hear talks about the finer points of online advertising. Sessions promise to explore topics like “best practices for advanced TV measurement” and “the future of video ad serving.” Vendor booths fill the event, hawking everything from marketplaces for the buying and selling of ad-targeting data to elaborate platforms for automating the creation of ad content. My complimentary tote bag will fill with brochures promising “data monetization with bulletproof tech” and products that make “ideation, production and approvals of your branded content … streamlined with unprecedented efficiency.”
This is the dark beating heart of the internet. Digital advertising—the highly automated, data-driven ecosystem represented by conferences like Programmatic I/O—is the money machine that has fueled the meteoric rise of the most prominent tech giants and content creators of the modern era. In 2020 the business of the internet is, by and large, an advertising business. Advertising in digital media generated an estimated $273.3 billion in global revenue in 2018.1 And this amount is poised to increase: industry analysts estimate that the online advertising market will grow to $427.3 billion by the year 2022.2
This dazzling growth makes one of the opening talks of the day all the more puzzling. I’m sitting in the front row at a speech being given by Nico Neumann, an affable assistant professor at the Centre for Business Analytics at Melbourne Business School. His talk is titled “How Wrong Audience Targeting and AI-Driven Campaigns Undermine Brand Growth.”
Nico is distinctly unlike the other speakers who fill the schedule for the rest of the day. For one, he’s an academic researcher, not a marketer or a representative from a company selling products to marketers. For another, he seems intent on dismantling the entire premise of the conference in the twenty minutes allotted to his talk.
Nico focuses on a central assumption of Programmatic I/O: that algorithmically targeted advertising enhanced with scads of data about consumers works. Not only that it works, but that it is markedly better than the old “spray and pray” approach, where advertisers would make intuitive, seat-of-the-pants judgments about what messages would work best with consumers. This belief is sacrosanct among digital advertisers: at the most fundamental level, it is necessary to accept that a data-driven approach to creating and distributing ads works in order to justify the colossal amounts of funding that go into it.
Nico begins by showing an analysis done by him and his collaborators auditing a sample of the third-party consumer data—also known as a record of everything you and I supposedly do online—that form the basis of online ad targeting. When compared with verified data about those same consumers, the accuracy was often extremely poor. The most accurate data sets still featured inaccuracies about 10 percent of consumers, with the worst having nearly 85 percent of the data about consumers wrong.3
This gets worse. Targeted advertising is significantly more expensive than nontargeted advertising. Nico shows evidence that—even in the best possible case—the cost of these ads may make their overall return negative because they rely on a foundation of shoddy and inaccurate data that fail to have any significant influence on sales.
Nico moves on to talk about the algorithms that are used in targeting and optimizing ads. Like many industries, advertising has been caught up in the hype around artificial intelligence and machine learning because these technologies hold out the promise of targeting customers even better than before. But the technologies are correlation machines, says Nico; they blindly attribute success to online ads without accounting for the fact that in many cases the people advertised to would have bought the product or service anyway. One experiment he presents shows that, under proper experimental conditions, the impact of an ad for auto insurance actually had a negative effect on sales, rather than the massively positive one suggested by popular statistical models used in the industry.
So why does Nico think these technologies are so popular in the online advertising space? Marketers, he says, “love machine-learning/AI campaigns because they always look so great in … analytics dashboards and attribution models.” This cutting-edge technology is favored—in other words—because it makes for great theater.
Nico is being very friendly and polite about all this as he goes on. But the core of his talk remains: the data used in targeting ads are garbage. The algorithms being used to deliver advertising are garbage. Nico concludes that old-school mass marketing, without targeting and audience data, will “create better ROIs in many situations.”4 The whole edifice of online advertising is, in short, bunk.
This was a wild way to kick off a conference like Programmatic I/O, which is grounded in the notion that data and algorithms work and that technology is revolutionizing advertising. I start looking around to try to gauge audience reactions, expecting to see headshakes of disapproval or at least some skeptical eyebrows. Nothing. The session wraps up, and Nico asks if there are any questions. In a conference hall of hundreds of marketers, not one hand goes up.
An awkward silence pervades for a beat. Nico is led off the stage by a conference staffer and is soon replaced by a speaker excitedly explaining the benefits of advertising on Instagram. Back to your regularly scheduled programming.
It was a stark transition. Throughout the day, I kept thinking about Nico’s talk. How could an industry so steadfastly ignore such significant problems in the plumbing of online advertising? Was this mere indifference, a lack of understanding, or a sign of something deeper and more pervasive within the industry? What are the implications for the rest of the internet, which depends so much on functioning advertising infrastructure to continue its past few decades of explosive growth?
Understanding these structural weaknesses requires a dive deep into the financial underpinnings of the web, a journey into the vast global plumbing that we infrequently think about but that is at the very core of why the internet is the way it is. What we discover, when we get there, is less a picture of modern, data-driven wizards of consumer persuasion, and more a murky story of perverse incentives, outright fraud, and a web economy on the brink.
Introduction
Though we frequently forget about it nowadays, the idea that the internet would give rise to some of the largest and most profitable businesses in the world was not at all obvious at the outset. In 1996, Viacom’s CEO, Ed Horowitz, was able to remark dismissively that “the Internet has yet to fulfill its promise of commercial success. Why? Because there is no business model.”1
The answer to the question of how to make boatloads of money on the internet has been, resoundingly, advertising. From the biggest technology giants to the smallest startups, advertising remains the critical economic engine underwriting many of
the core services that we depend on every day. In 2017, advertising constituted 87 percent of Google’s total revenue and 98 percent of Facebook’s total revenue. Advertising funds the production of online content. From long-standing publications like The New York Times to more recent outlets like BuzzFeed, advertising remains the core business model for online media despite massive technological changes over the decades.
Digital advertising is highly consolidated. It is dominated by a few major types of advertising and a few major companies. Search advertising, in which ads are placed alongside search engine results, accounts for about 46 percent of overall digital ad revenue.2 Google, not surprisingly, dominates this segment, accounting for 78 percent of the overall revenue from online searches.3 Display advertising—where the ads are delivered through image “banners” or similar media on a website—accounts for another 32 percent of overall digital ad revenue.4 Facebook is the biggest player in this segment, capturing about 39 percent of ad dollars spent in this format.5 Advertising delivered through formats other than search and display (such as video, audio, or other media) makes up a far smaller part of the revenue pie.6 Google controls around 37.2 percent of the overall U.S. digital ad spend, accounting for around $40 billion.7 Facebook controls another $21 billion of this market, accounting for another 19.6 percent of the U.S. market.8
This path for funding the web has had major implications on the development of the technology itself. Core services like online search and social media are available free of charge in large part because advertisers underwrite the costs of developing them. The basic building blocks of our present-day experience of the web—from the “user profile” to the “like”—allow advertisers to more effectively target messages to users.
While advertising has made services online more accessible, numerous voices have long pointed out that advertising has generated its own fair share of negative impacts as well. In The Attention Merchants, the law professor Tim Wu argues that the ever-expanding reach of advertising is responsible for the “widespread sense of attentional crisis” produced by the modern technological environment.9 The researcher Zeynep Tufekci has noted that the “deep surveillance-based profiling” and “bias toward inflammatory content” that are endemic online are natural outcomes of an advertising-based business model.10 Investigations into Russian meddling in the 2016 U.S. presidential election have underscored the degree to which advertising channels can be leveraged to enable state-sponsored campaigns of propaganda and disinformation.11
These concerns are even shared by the creators of the services that have come to dominate the web. Infamously, Google’s cofounders, Larry Page and Sergey Brin, worried about the perverse incentives of advertising in their seminal 1998 paper laying out the rudiments of the core algorithm behind web search. “The goals of the advertising business model do not always correspond to providing quality search to users,” they wrote. “We expect that advertising funded search engines will be inherently biased towards the advertisers and away from the needs of the consumers.”12
In the midst of all this criticism, it’s worth taking a moment to think about what precisely advertising is. Media buyers—whether they are a global company, a mom-and-pop shop, or a nefarious band of trolls seeking to influence an election—are all looking to get their message in front of people. Online platforms—whether they are a billion-user social media platform or a small neighborhood newsletter—offer ways to get that message to those people. The platforms sell access to their users, and the buyers pay to acquire that access to distribute their message.
Buyers and sellers. At its core, advertising is a marketplace for attention. When your eyes breeze over an advertisement as you scroll through your news feeds or read an article, a transaction has occurred. Your attention has been sold by the platform and bought by the advertiser.
Even though all markets involve some kind of buying and selling, not all markets are made equal. The kinds of buying and selling that take place in a rural farmers market, for instance, are vastly different from what takes place every day on the New York Stock Exchange. We can distinguish between different types of markets in lots of different ways. Are people trading for their own livelihoods, or are they speculators looking for opportunities for profit? Are there a lot of buyers and a small number of sellers in the market? The opposite? What is being sold? How much of it is there? How easy is it to close a transaction?
Markets come in many shapes and sizes. They also are entwined with society in different ways. Changes in the marketplace for oil have wide-ranging impacts that can shape the entire course of the global economy. The failure of a local coffee shop may cause an appreciable impact only on the surrounding neighborhood. In other words, it is not enough just to think of the internet as an attention marketplace. To fully understand the implications for society at large, we must ask precisely what kind of marketplace online advertising is.
This book explores exactly this question. Advertising as a marketplace for attention has undergone major structural changes in the past decades, largely driven by the rise of the internet. As a result, the practice of buying and selling billboards in the Mad Men era of the 1960s bears little resemblance to the modern-day marketplace of online advertising.
Today, online advertising is more Wall Street than local bookfair. The exchange of attention is facilitated through a massive global system of digital marketplaces. Attention is not just for sale online: it has been automated and streamlined in ways that we often fail to appreciate.
As they do in modern-day capital markets, machines dominate the modern-day ecosystem of advertising on the web. This method, known in the industry as programmatic advertising, leverages software to automate the buying and selling of advertising inventory.
This is how Facebook and Google—the dominant duopoly—sell the attention they capture on their platforms. But, even beyond these leading companies, advertising both online and offline is increasingly bought and sold by machines. Search advertising, which was the first form to fully adopt this approach, is almost entirely transacted in a programmatic way. Programmatic advertising is dominating the other segments of the digital advertising market as well. As of 2017, programmatic advertising claimed fully 78 percent of the total digital display ad spending in the United States, representing more than $32 billion of activity.13 This trend is set to grow, with projections showing this amount to increase to 86 percent in 2021 as automation continues to replace human buyers and sellers in this marketplace.14
New channels of advertising have also become integrated into the programmatic ecosystem. Advertising distributed alongside online video is now mostly facilitated through this method, accounting for 76.5 percent of the total U.S. digital video ad spend.15 It accounted for some 74.1 percent of U.S. ad spending on mobile advertising in 2017.16 The share of dollars going into programmatic advertising in each of these domains is also projected to rise in the coming years.17 The global infrastructure of programmatic advertising makes it possible to access a seemingly limitless well of opportunities to place ads.
These markets have also radically expanded the scope of who can participate. Programmatic advertising tools are increasingly streamlined for easy use by nonexperts, enabling everyone from the marketing department of Coca-Cola to a local hobbyist blogger to buy and sell attention online. Sophisticated tools for targeting ads and analyzing audiences are more and more available, giving even private individuals the ability to deliver advertisements with a precision that would have been considered unthinkable to the biggest multinationals just a few decades ago.
This was not a foregone conclusion. In an alternative universe, advertising might still have ended up the dominant business model for the web, but the marketplace might have been structured in a very different way depending on how certain choices were made in the history of its development. Markets are designed and implemented by people. Those people make decisions around these economies that subsequently have wide-ranging impact.
In this
respect, the resemblance of the online advertising marketplace to the financial markets is no accident. This book investigates the fascinating connections between the finance industry and the evolution of the modern programmatic advertising ecosystem. Financial markets have served as a major source of inspiration in the design of the online ad economy throughout its history, and many of the founding leaders who built these marketplaces hailed from previous careers as brokers and traders in finance.
Why does this matter? Telling this history and exploring these nuances are more than just academic exercises. Because advertising is responsible for such a colossal portion of the money that drives the internet, it is impossible to think about the future of the web without thinking about the future of advertising. Shifts in how attention is bought and sold will have major consequences not only for our everyday experience of the web but also for how the internet affects broad questions of expression, identity, and democracy.
On this count, the parallels between the financial markets and the attention markets reveal crucial hints about what the internet might be evolving toward. Indeed, the rush to architect the buying and selling of attention in the model of the financial markets raises the question of whether some of the problems of the financial markets will follow the attention economies of the web.
There is good reason to believe that the financial foundations of the web are perhaps shakier than we think, maybe even producing the conditions for a “subprime” crisis in attention, similar to the dynamics that brought down the global economy in 2008. Examining these parallels is a key step toward thinking about how society, if it’s not too late, might want to re-architect the web for the better, and about whether the web as we understand it will endure.
1
