Subprime Attention Crisis

by Tim Hwang

  The Plumbing

  The jargon of programmatic advertising evokes a vision of the Wall Street of the 1980s. “Trade desks” buy and sell “inventory” on “exchanges.” You might imagine something out of movies like The Wolf of Wall Street and Trading Places: big, cavernous rooms packed with shouting traders in colorful vests. But this vision of how business is done is long out-of-date. The reality resembles the ultra-quantitative, high-frequency trading of Michael Lewis’s Flash Boys more than it does the predigital, smoke-filled rooms of Mad Men.

  The manual processes for negotiating the sale of advertising inventory have been replaced over time with something far more mechanized. The trading floors of the global exchanges for attention are a mostly silent affair, a global network of humming servers and software that buy and sell slices of attention millions of times per second. In this marketplace, the advertiser operates as a mere supervisor to a large-scale, data-driven, automated process. This transition has been made necessary as the speed of transactions in this marketplace has outstripped the ability of any human to keep up.

  A Tour of Programmatic Advertising

  Being served an ad online is the textbook case of an unremarkable experience. You load up a website or an app on your phone, and an ad appears alongside, in front of, or under the thing that you wanted to see. It’s a small distraction as you browse around online, and for the most part it goes unnoticed. If you—like millions of others—have installed an ad blocker on your phone or web browser, you may never see these advertisements at all. It’s difficult to recall clearly the last five or six ads that you might have run into online. It’s probably even more difficult to recall the last time that you actually clicked on one.

  Yet this boring, mundane occurrence online belies the intricate machinery running under the hood of each and every one of these ads. The modern online advertising ecosystem is a mind-bending, globe-spanning infrastructure designed to deliver billions of advertisements at split-second speeds every minute of every day. What you see at the end point—a banner advertisement that you may instantly forget, or a preroll video that you click to skip as quickly as you can—is only the tiniest piece of an incredibly complex system that is otherwise invisible as you move through the internet.

  The players in the marketplace for attention are the same as they always have been: those who have attention they are willing to sell, and those who are willing to buy. In online advertising parlance, those who sell attention are the “publishers.” Attention can be captured in many different ways. A YouTube star who has millions of viewers tuning in to see her latest video and a social media platform where users are logging on to chat and comment on each other’s photos are examples of publishers with a surplus of attention—other people’s attention—to sell. Publishers sell “inventory”: the opportunity for the buyer to display its message to someone who is paying attention to the publisher. The buyers vary: they include large companies buying advertising to promote their products and marketing agencies working on their behalf, as well as what are known as agency trading desks—specialized companies focused on navigating the programmatic advertising ecosystem.

  The infrastructure of programmatic advertising is architected so that, theoretically, publishers are able to sell their inventory of attention to the highest bidder among a pool of buyers. This is generally done through an arrangement known as real-time bidding (RTB). RTB is initiated by the tiniest of actions—clicking on a link or loading a piece of content—which sets off a rapid, orderly cascade of events, Rube Goldberg–style. As soon as an opportunity for delivering an advertisement appears, an ad server leaps into action, announcing to the marketplace the opportunity to bid for inventory.

  One of the most incredible aspects of the RTB system is that the entire process takes place in real time. The advertisements you see online are not predetermined. At the moment you click the link and load up the page, a signal from the ad server triggers an instantaneous auction to determine which ad will be delivered. The highest bidder gets to load its ad on the website and into your eyeballs.

  This process happens at the speed of light. The inventory must be bid upon and the actual advertisement delivered in the split-second moment between when you click to load something online and the time that the website or content on an app is finally loaded. The entire process of putting out a request for bids, making the bids, evaluating the bids, and delivering the advertisement takes place in under a hundred milliseconds—about a quarter of the time it takes you to blink.1 This happens millions and millions of times across the internet every second, without ceasing and largely without hiccups.

  This combination of rapid bidding and massive scale means that humans cannot be directly responsible for initiating the auction, bidding, and evaluating the bids. There simply is not enough time. Programmatic advertising is facilitated entirely through software platforms that automate this process. These are known as demand-side platforms (DSPs) or supply-side platforms (SSPs). DSPs service the buyers, providing tools to specify certain parameters around their bidding and specify the audiences they would like to target. SSPs provide a suite of tools that are a mirror image of this for publishers, enabling sellers to specify auction rules, set price floors, and control the kinds of advertisers able to gain access to their inventory.

  Once configured manually, programmatic advertising relies on the interactions between algorithms to make the discrete choices to bid on available blobs of advertising inventory. These competing algorithms working on behalf of ad buyers then interact with algorithms working on behalf of the publisher, which choose the winner of the auction and deliver the selected advertisement.

  As with the Nasdaq and the New York Stock Exchange, the buying and selling of advertising inventory does not take place all in one location. There exists a dense, networked set of ad exchanges that facilitate the meeting of supply and demand in this marketplace. At the time of this writing, companies like AppNexus, OpenX, and Smaato are leading players in this space, alongside exchanges operated by larger long-standing players like Verizon Media (formerly Oath) and Microsoft. The largest platforms—Google and Facebook—offer their advertising inventory on their own specialized tools, which operate much like a DSP for buyers.

  Perhaps most remarkably, all of this takes place seamlessly. We are bombarded by ads online but give little thought to the complex, behind-the-scenes machinery of bidding and delivery that makes them possible. This invisibility belies the huge importance of this infrastructure and the implications of the failure of this system for the web and for society as a whole.

  What Happens If This Breaks?

  The economic significance of programmatic advertising is huge. Most obviously, the iconic services of the present-day internet—search engines, social media platforms, and more—are built on a bedrock of advertising both in the United States and beyond. Whether it is Google or Baidu, Facebook or Weibo, all these services rely on a robust, automated market for buying and selling attention to generate revenue. But programmatic advertising is critical not just because it is the business model for a handful of dominant technology players. It is important because it is increasingly intertwined throughout the broader economy.

  Certain goods and services are more interlinked throughout the economy than others. Oil is a prototypical example. The price of oil is important not only because it influences the balance sheets of the companies that extract and refine it. Its influence echoes through the economy, affecting things like the costs of transportation and of the production of certain goods. Because it forms such a fundamental part of the economies of certain nations, the price of oil shapes the balance of power among countries as well.2

  This relative interconnectedness of particular industries has important implications for what happens to the broader economy when those industries run into trouble. One reason that the 2007–2008 subprime mortgage crisis was so damaging was that banks and other major financial institutions at the core of the economy relied on the con
tinued health of what turned out to be shoddy mortgages. When the mortgages failed, so did the banks, which in turn were connected to a vast range of economic activities throughout the world. This served to make a downturn in the mortgage market one that placed intense pressure on other parts of the economy at the same time. Economists contrast the 2008 downturn with the 2001 dot-com bust in technology stocks, which was more isolated and had a less enduring impact in part because the tech companies were less interlinked with the rest of the economy.3

  Programmatic advertising more closely resembles oil than an overhyped mid-1990s technology stock in this respect. For one, advertising is still the primary financial engine funding the creation of most media. The ad exchange infrastructure is deeply integrated into the online world because everyone, from independent stars on YouTube to massive media companies, leverages the programmatic advertising infrastructure. Increasingly, advertising on “nondigital” media like television, radio, and even billboards is facilitated through these global exchanges.4

  The influence of programmatic advertising, however, extends beyond its role in bankrolling the media. The online advertising ecosystem has proven to be a highly flexible infrastructure, one that can transform products and services that weren’t previously monetized through advertising into advertising businesses. It’s easy to forget that products like email were originally operated as fee-based businesses in which various features like storage and spam filtering were monetized as a subscription.5 Services like Gmail transformed this, using the advertising model to make email free to use and monetizing it through the sale of user attention.6

  One way of looking at the interconnectedness of programmatic advertising is to follow the money, asking what kinds of businesses rely on the flow of money from these systems. It’s equally revealing to follow where the wealth generated by advertising is subsequently invested.

  Google is a perfect example of advertising’s remarkable ability to fund other ambitious ventures. Whether underwriting a massive effort to scan the world’s books or enabling the purchase of leading robotics companies, Google’s revenue from programmatic advertising has, in effect, reshaped other industries.7 Major scientific breakthroughs, like recent advances in artificial intelligence and machine learning, have largely been made possible by a handful of corporations, many of which derive the vast majority of their wealth from online programmatic advertising.8

  Online advertising is also important for the wealth it has generated on the individual level. The advertising economy turned Mark Zuckerberg into one of the richest people in the world, and that wealth now supports a range of other endeavors. Zuckerberg has pledged Facebook shares worth more than $45 billion to his Chan Zuckerberg Initiative, which focuses on “health, education, scientific research, and energy,” making it instantly one of the most well-resourced entities in these domains.9 And for every Zuckerberg, there are thousands of other technology entrepreneurs who have made smaller, though still significant, fortunes through businesses funded by programmatic advertising. How these lucky few spend their wealth connects the fate of the advertising economy with a range of other, unrelated causes.

  The fact that these invisible, silent programmatic marketplaces are critical to the continued functioning of the internet—and the solvency of so much more—begs a somewhat morbid thought experiment: What would a crisis in this elaborately designed system look like? What if the advertising revenue generated by the online attention marketplace were to decline rapidly and remain depressed for a long time?

  The immediate and most obvious impact would be on the online platforms and ad exchanges themselves. There would be not just a sharp decline in the revenue generated by their core businesses but also a corresponding pinch in stock prices driven by investor panic in the financial markets. Recall that—for all their market dominance—platforms like Google and Facebook are heavily dependent on their continued revenue from advertising.

  Interestingly, the impact might not immediately be felt by the everyday user of the web. Companies like Facebook and Google hold substantial reserves in cash, and they might be able to weather the short-term impact by drawing on these resources to maintain the status quo. The platforms could continue to offer their services for free to consumers in the hopes that confidence would be restored and ad buyers would return to the market. They could continue to fund product development, hire top engineers, and ensure the flow of quality snacks to their corporate campuses.

  This crisis would generate an intense phase of consolidation beyond the rarefied confines of the Google-Facebook duopoly. Companies without similarly massive cash reserves would face pressure to close or merge to remain in operation. But the net effect in the short term would be that while businesses would be hurting, end users would still interact with their products and services in largely the same way.

  This would be a temporary state of affairs: longer-term, the impact of this crisis would become more apparent to the average user. Intense dysfunction in the online advertising markets would threaten to create a structural breakdown of the classic bargain at the core of the information economy: services can be provided for free online to consumers, insofar as they are subsidized by the revenue generated from advertising. Companies would be forced to shift their business models in the face of a large and growing revenue gap, necessitating the rollout of models that require the consumer to pay directly for services. Paywalls, paid tiers of content, and subscription models would become more commonplace. Within the various properties owned by the dominant online platforms, services subsidized by advertising that are otherwise unprofitable might be shut down.

  Imagine waking up to the announcement that searching the web would now require a monthly subscription fee, or that your favorite social network would have limited features until you added a credit card to sign up for a premium version. Imagine being charged on a per-trip basis for navigating with Google Maps. Think of WhatsApp—which was acquired by Facebook in 2014 but has not made significant money for the platform10—being shut down in order to preserve Facebook’s bottom line. How much would you be willing to pay for these services? What would you shell out for, and what would you leave behind? The ripple effects of a crisis in online advertising would fundamentally change how we consume and navigate the web.

  Silicon Valley would not be the only region hurt by such a crisis. The failure of the programmatic advertising economy would have follow-up impacts throughout the media, considering how many media businesses rely on the programmatic ecosystem. Already in 2013, a survey of publishers revealed that 72 percent of them were offering space to advertisers through automated real-time auctions.11 Condé Nast—the leading mass media company, which owns publications like Wired, The New Yorker, Vanity Fair, and GQ—makes advertising on all of its digital properties buyable through programmatic marketplaces.12 Because programmatic advertising is increasingly a means of selling advertising through channels other than just banner ads on websites, a downturn in this economy might negatively affect some services that you might not immediately suspect. The audio streaming service Spotify, for instance, receives 20 percent of its advertising buys through programmatic means.13

  All of these businesses rely on the continued strength of automated advertising marketplaces to generate revenue. The obvious outcome of a downturn would be for these businesses to cut costs. We might expect a massive round of layoffs in digital media, similar to but much larger than the 2019 firings at prominent content channels like Vice, BuzzFeed, Vox, and Mashable.14 Even a short-term decline in advertising could create massive disruptions. As the 2020 newsroom layoffs triggered by the COVID-19 outbreak show, most media businesses are not well positioned to weather even brief periods of weakness in the market for ads. Media companies dependent on online advertising might also become attractive acquisition targets for the well-resourced online platforms and other buyers in such a financially distressed environment.

  Consider for a moment all of the advertising-supported media that you
consume for free on a daily basis: podcasts, videos, articles, email newsletters, and more. How would it feel to have a large portion of that media suddenly disappear behind a paywall—or disappear entirely? How would your experience of the web change? What would it feel like for Facebook to announce that it was purchasing The New York Times or for YouTube to announce that it was purchasing Vice? What we consume and who controls what we consume would radically change in such an environment.

  We might be able to stomach these changes as users of the web, but it’s important not to lose sight of the significant human costs of such changes. Paywalls rising throughout the web would exclude large populations of consumers unable to afford services that until recently were free. A failure of the online advertising markets would have a serious impact on a wide range of journalists, videographers, and other media creators great and small. Social media and platforms like YouTube serve as free distribution channels, allowing creators to reach much broader audiences than they otherwise would. A changing business model that prioritized subscription and paid access would narrow these prospects and make content creation less sustainable. Not to mention the knock-on effects that might emerge from a radical slowing of the spigot of philanthropic funding—from supporting medical research to fighting climate change—driven by a contraction of wealth in the technology sector.

  In the most dramatic case, a sustained depression in the global programmatic advertising marketplace would pose some thorny questions not entirely unlike those faced by the government during the darkest days of the 2008 financial crisis. Are advertising-reliant services like social media platforms, search engines, and video streaming so important to the regular functioning of society and the economy that they need to be supported lest they take down other parts of the economy with them? Are they, in some sense, “too big to fail”? In an era when the relationship between the government and these platforms is becoming increasingly adversarial, state action to bail out a fragile tech industry might massively reshape the relationship between the state and the internet.15 What if the White House were to offer to keep key internet platforms solvent on the condition that they accept greater regulation and deeper involvement by government appointees in their operations?