Subprime Attention Crisis
Page 3
This is a long way of saying that the web that we experience when we roll out of our beds and unlock our phones is sustainable only because of the continued health of programmatic advertising. Change that, and the whole edifice of the economy built on top of it begins to change with it. Persistent lack of confidence in the online advertising markets would produce a web that would be more fragmented, less accessible, and stuck at a slower rate of growth quite distinct from the last few decades of rapid growth in the technology sector. Reasonable minds can disagree about whether these changes are long overdue or desirable, but it is certain that a sudden transition would be painful.
The skeptic might point out here that it is easy to imagine a doomsday scenario but quite a different thing for that speculation to become reality. Would a sustained, global collapse in programmatic advertising actually be possible? How might it come about?
Even as the world grapples with a global recession in the wake of the COVID-19 pandemic, programmatic advertising appears poised to grow, grow, grow over the long term. The dominant, ad-driven platforms of the web continue to be some of the largest and most profitable businesses in the world. Traditional forms of advertising—the dollars that put ads in newspapers and magazines, for instance—are not yet fully integrated into the ecosystem of online programmatic advertising. This means that there is room for growth: these dollars may yet become part of the ad exchange system.
But such a rosy situation may mask deeper systemic risks lurking within the system. Like the financial markets prior to the crisis of 2008, the modern infrastructure of the ad economy might have produced explosive growth while simultaneously introducing a set of vulnerabilities that could make this money machine less stable over time. Indeed, the parallels between the financial industry and the evolving economy of online advertising give us clues as to where things might be going and the less evident cracks that might lie beneath the surface.
2
Market Convergence
It is easy to take the presence of advertising on the internet as a given. The infrastructure of programmatic advertising has so robustly supported the rise of the modern giants of the technology sector and operates so efficiently that it often seems as if the internet was always meant to work this way.
That the internet was predestined to be one way or another is an attractive but ultimately wrong idea. There is nothing essential about the internet as we know it. The internet is not inherently open or democratizing, nor is it inherently closed or authoritarian. Digging into the history of the internet quickly reveals that the present-day internet is just one of many different information networks that could have come to be.1
In that sense, the internet has been actively designed at each stage in its history. An ever-compounding set of choices has resulted in the particular experience that we have of it today. This is true of the selection of advertising as a primary money machine for funding the web. It is also true of the precise way that we set these advertising marketplaces up.
To that end, we need to say why the programmatic advertising ecosystem has ended up bearing such a close resemblance to the structure of the financial markets. What forces encouraged the online programmatic advertising marketplace to take the shape that it did? How much was coincidence, and how much was an active effort to structure the market for attention online in this precise way? How much does the rise of programmatic advertising owe to the structural similarities with finance?
This chapter argues that the resemblances between the programmatic advertising markets and the financial markets are more than skin-deep. While software engineers might have laid down the code that enabled advertising to explode as the primary moneymaker for the web, its design has been inspired not by the culture of nerds in garages but instead by the more buttoned-up world of the capital markets.
From Wall Street to Silicon Valley
Online advertising predates the rise of the internet as we know it today. Companies like America Online (AOL), Prodigy, and CompuServe were precursors to the modern web in the 1980s and 1990s, allowing customers to use their computers to access a limited “walled garden” of chat rooms, media, and shopping over their phone lines.
These services received monthly fees paid by their subscribers, but they also relied on advertising as a major source of revenue. Prodigy was pitched as “a new advertising medium … that would assemble audiences for marketers much as niche TV channels do.”2 AOL became a major channel through which other emerging dot-com companies of the era could advertise to prospective users.3 AOL also experimented with allowing businesses to pay to sponsor content on the platform. CBS would pay to be the exclusive provider of sports reporting, 1-800-Flowers would pay to be the official flower delivery service, and so on.4
But the advertising taking place on these early platforms was still a far cry from the large-scale automation and split-second bidding of modern programmatic advertising. Myer Berlow, who ran AOL’s advertising operation, hailed from the advertising world of New York and had “no experience with anything computer-related.”5 In the 1990s, the early internet was increasingly commercialized, but it was still organized in ways that relied on teams of human salespeople working to sell advertising space on these platforms.
Search engines, which were made necessary by the ever-increasing sprawl of the internet and the lack of effective tools for exploring it, would alter this model entirely. During their early years in the 2000s, search engines like Google were able to acquire huge numbers of users who relied on them to find things on the web, but these search engines faced the tricky challenge of figuring out how to make such a tool pay off as a business.6
Advertising was by no means the most obvious way to make operating search engines a solvent business. In its early years, Google anticipated that only about 10 to 15 percent of its revenue would be derived from advertising.7 The rest of the revenue was assumed to come from the licensing of its “search technology to other websites … [and] a hardware product that would allow companies to search their own operations very quickly, called ‘Google Quick Search Box.’”8 These initial projections, of course, would soon be blown away by the torrent of money generated by advertising.
Getting advertising to work on a search engine required automation. Google pulled away from the competition by creating AdWords, a product that enabled advertisers to place promoted listings alongside search engine results. AdWords combined two contemporary advances into one efficient product.
First, Google adopted advertising auctions, an idea proposed and implemented by GoTo, an early Google competitor run by the entrepreneur Bill Gross.9 Buyers of advertising would bid against one another for the rights to show their message when a user searched for a term like “insurance,” with the winner paying a penny more than the second-highest bidder (a “Vickery second-bid auction” in economics parlance).10 This maximized the amount paid for the advertising inventory available with each search result.
Second, Google incorporated an algorithm that assessed the quality of an ad by looking at its various elements and predicting whether users were likely to click on it. This metric would then influence the value of the bids made by various advertisers, sometimes leading a bidder offering a lower price to win the auction based on the quality of the ad. This system was intended to align incentives such that advertisers would create ads that were relevant and useful to Google users.
The combination of auctions and adjustment via a quality metric was a huge success. AdWords transformed Google from a speculative venture to one of the most profitable enterprises of the last century. From then on, there was, in the words of the journalist Steven Levy, “nothing but glory in the bottom line.”11 Other products followed, built on the infrastructure developed for AdWords. Google AdSense, which allows publishers to earn money by offering space on their websites that the platform sells to advertisers, launched soon afterward and was similarly successful.
The success of AdWords and AdSense depended on a major technical fe
at, which the engineering-centered culture of Google was well positioned to achieve. Coordinating and resolving a colossal number of simultaneous auctions required a high capacity to deploy reliable and robust computer systems. The development of this infrastructure was led not by an MBA but by Eric Veach, a Stanford computer science graduate whose previous work involved developing the software that rendered animations at Pixar.12 In fact, the debut of AdWords was viewed with consternation by the existing sales team at Google. The replacement of their more traditional approach with an algorithmically driven, automated auction was seen as confirmation of their long-held suspicion that Google’s cofounder, Larry Page, “wanted to do away with [the sales team] entirely.”13
Products like AdWords originated within a profoundly technical culture and were made possible by software engineers. But quite a different set of experts would take those innovations and mold them into the present-day programmatic advertising infrastructure. Google began enlisting economists to manage these vast marketplaces; the new team members viewed the algorithmic exchange for packaging and selling attention as deeply akin to the financial markets.
Hal Varian, who joined Google in 2002 and who would eventually play a role as the company’s chief economist, became the “godfather to the advertising effort.”14 He would oversee a project to create a “search-word advertising equivalent of the stock market” that would divide keywords into high-cap, mid-cap, and low-cap segments and generate its own version of the Dow Jones Industrial Average.15 AdWords and AdSense changed the paradigm for distributing advertising inventory, moving it from a world of qualitative judgment and persuasive salespeople to one of quantitative analysis and automated algorithms. As Steven Levy would recount in his 2011 history of Google, “Varian realized that [Google] was the embodiment of the Silicon Valley ethic … Most Internet companies were still selling ads the way Madison Avenue had always done it. Google saw the entire exchange differently.”16
This adoption of the financial markets as a metaphor for the online advertising markets was not a phenomenon limited to Google, or even to the domain of search advertising. As the early templates of programmatic advertising pioneered at Google became more popular as a model for buying and selling attention, many continued to draw inspiration from the financial markets. One Wall Street Journal feature reporting on the nascent platforms that would evolve into modern programmatic ad exchanges remarked that these tools allowed “selling web advertising space like pork bellies.”17 The New York Times observed that “quants have become a force in the advertising industry, much as they became a force on Wall Street starting in the 1970s and 80s.”18 As the hype grew around these platforms, the stock exchange was a frequent point of reference in explaining the distinctiveness of open marketplaces for ads.19
DoubleClick, founded in 1996 by Kevin O’Connor and Dwight Merriman, was a major player in the nascent business, helping advertisers place ads across various publishers online and measuring their performance. DoubleClick survived the 2001 dot-com crash and in 2007 launched one of the first exchanges allowing publishers and advertisers to buy and sell inventory. The New York Times described the platform as a “Nasdaq-like exchange.” DoubleClick representatives explained it as a “mix of eBay and Sabre, the airline reservations system that travel agents use. The service … let advertisers see information about what competitors bid for particular ads … [and] let publishers try to ensure that they sell their ad spots at the highest possible price.”20 DoubleClick was acquired by Google in 2007 for $3.1 billion.21
Other players in this primordial phase of the online advertising market would adopt similar framings, sometimes even boasting previous careers in finance. Right Media, another early ad exchange pioneer acquired by Yahoo in 2007 for $680 million, was described by The Wall Street Journal as a virtual markets “where buyers and sellers of Internet ads can efficiently find one another … not unlike the role stock exchanges play for shares.”22 The founder and CEO, Michael Walrath, had worked at the brokerage firm D. H. Blair and the hedge fund Sands Brothers Asset Management.23 Walrath cautioned against assuming a strict similarity, but he recognized that his platform was “loosely modeled on the stock market.”24 AdECN, another early competitor in this space, explicitly adopted the stock market model in much of its marketing and product design. AdECN’s cofounder, Jeff Green, described the aim of the company as “trying to be the New York Stock Exchange of advertising.”25 When the platform launched in Britain in 2008, the CEO, Bill Urschel, called it the “equivalent of the London Stock Exchange’s Big Bang in 1986 … That allowed the elimination of the middle man, the introduction of variable trading and electronic trading.”26 Green now runs a different ad technology company, The Trade Desk, and says that his new company uses “a system much more like the Goldman Sachs of online advertising.”27
It is significant that the stock exchange was the model adopted by entrepreneurs who were designing the platforms that became today’s programmatic advertising infrastructure. This mode of thinking was “an engine, not a camera,” in the sense that it acted as “an active force transforming its environment, not a camera passively recording it.”28 The rise of programmatic advertising was not just a continuation of the commercialization of the web that was underway in the 1990s but also a process that actively shaped the rules and practices of how attention would be traded online.
There are two intertwined developments that make the modern online advertising ecosystem possible. The first is a set of technological developments. It is indisputable that certain technological advances were needed to allow AdWords to enable the buying and selling of advertising at huge scale and split-second speed without human intermediaries. But this first set of developments does not tell the whole story about how the programmatic advertising system came to be. Technology enables the game to be played, but it does not dictate the rules of that game.
The second, equally important development that gave birth to the programmatic advertising marketplace was ideological: the adoption of the mental frames of finance. Capital markets like the New York Stock Exchange served as a crucial inspiration, providing a template that early advertising technology entrepreneurs drew from in setting the rules of these novel markets in search and display advertising.
Market Commodification
How do we characterize the influence of the finance industry on the development of the business model of the internet?
One simplistic approach is to think of the entrepreneurs who constructed the modern edifice of programmatic advertising as, essentially, commercializers. The nascent open internet—the child of academic and government funding—needed to become financially sustainable as a business. The efforts of companies like GoTo and AOL served to bundle user attention online and extract money from this attention through advertising. As a result, what was formerly a sphere of nonprofit and public research was transformed into a sphere of for-profit and private enterprise.
But this version of events denies the internet its historical place as a communications platform and broadcast medium, very much the successor to the telegraph, radio, and television.29 The transformation of attention into something monetizable is, of course, not a new phenomenon. Predigital advertising was engaged in the buying and selling of attention through billboards, newspaper ads, and television spots just as modern-day advertisers pay to grab attention online. The infrastructure of online advertising did not invent the commercialization of attention.
Thinking of the internet’s transition as a simple shift from noncommercial to commercial misses an important nuance. We should distinguish mere commercialization from the specific kind of commercialization wrought by the ad technology entrepreneurs of the 1990s and 2000s. Earlier generations of advertisers bought and sold attention, but never at the speed, scale, and level of granularity characteristic of today’s programmatic advertising marketplaces. What is different about the present-day online advertising system is the extent to which it has enabled the bundling of a multitude of
tiny moments of attention into discrete, liquid assets that can then be bought and sold frictionlessly in a global marketplace.
Attention is commodified to an extent that it has not been in the past. There are many different ways of making money, and the internet could have commercialized—even through advertising—without developing the extreme level of commodification that has occurred.
Commodification may seem somewhat mystical, but it represents a fairly straightforward process of evolution that appears in many marketplaces. To get an intuition for why this might be the case, consider a hypothetical market for chickens on a small island. For an economist, the dynamics of this market are simple. The chicken farmer raises chickens and then sells them to a number of local customers, from the butcher to the sandwich shop to someone who wants to keep a chicken as a pet. This system works pretty well: the farmer can travel physically from place to place hawking a small number of chickens and haggling with potential buyers. The price at which a given chicken is sold is based on the specific characteristics of that chicken and the needs of the farmer and her buyer.
This type of market arrangement works at a small scale, but it quickly becomes awkward as the marketplace grows. Now imagine that our small island is connected to the mainland by a highway that leads to a massive city. Our farmer, who previously had to meet and haggle with only a handful of potential buyers, is now confronted with a marketplace many times greater than what she had to contend with before. The farmer suddenly has a vast number of people she might be able to sell to. Those potential buyers are likely people the farmer has never met. If that big city is connected by roads, railways, and airports to parts farther afield, the potential number of buyers could be overwhelming. Personally identifying a buyer and negotiating the price for each individual sale becomes challenging to manage effectively.