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Online Ad Bust

“Half the money I spend on advertising is wasted, the trouble is I don’t know which half.”
– John Wanamaker, Philadelphia retail giant, circa 1893

During the internet boom that defined the previous bull market, before 2000, one thing was clear. Advertising as we knew it was dead. Any maven or guru of the ‘net pointed to the ability to target audiences with pinpoint precision and collect real-time data on how effective the spending was. It was a feature that broadcast, direct mail, and print media would never be able to achieve.

Fifteen years on, we can see just how this has worked out. The short answer is that advertising is just as wasteful and untargeted as ever, even online. Worse, advertisers have not substantially moved away from broadcast ads, with teevee still the largest category of spending.

Is internet advertising a flop, or was the hype just ahead of the promise?

Um ... no.

Um … no.

Advertising is a $187B industry in the US. Though it is the fastest growing category, online advertising accounts for 28% of that figure, or $53B. Television advertising is the largest category at $79B and holding its own. Print advertising has fallen to $28B overall, in third place.

The amount spent online is impressive, but it has not yet taken over advertising as we know it. Behind the headline numbers it’s even less impressive.

Google( NASDAQ: GOOG) dominates online advertising, collecting nearly 90% of its revenue, or $59B per year, from google ads. Of that, a full $36B comes from the US, which is to say 2/3 of all online advertising spent in the US. For all the fame that android, chrome, and gmail bring google the revenue comes from paid search ads. It isn’t really a tech company, but an advertising company.

It's all about the clicks, except when it's all about the money.

It’s all about the clicks, except when it’s all about the money.

They aren’t the only big player in online advertising. Behind only google in paid clicks is the Rubicon Project (NASDAQ: RUBI). They place most of the ads in things like apps and so on that annoy us constantly. They are far behind google at only $150M or so in revenue, but growing rapidly. What’s more amazing is that they have yet to be profitable, however, confounding investors eager to get into the online ad biz.

This is far from the only threat to google’s prominence, too. A recent report by the company found that over 5% of all ad clicks come from “injected ads” or malware that has been attached to a user’s browser for the purpose of placing ads. Many of the advertisers don’t know they are supporting such horrible invasions, either. It brings the term “viral marketing” a new meaning.

Google is very concerned about this problem because they want to protect the browsing public from malware that … oh, let’s be real, they want to protect their revenue. Without adwords, they would have nothing at all.

What advertising really is.

What advertising really is.

For all of this, what can we make of the effectiveness of online ads? No one really knows – especially the advertisers who don’t even know they are paying for injected ads. Companies still favor television simply because they know what they are getting – a solid 30 seconds to make their pitch precisely on their terms.

Many studies with well-known brands have concluded that online advertising is almost certainly useless in most cases. It certainly generates clicks and everyone can measure them – and publish them in fancy charts and graphs. But if you do a search for “Nike”, as one example, and you get the paid Nike ad, how is that any better than the top result nike.com? The answer is that it isn’t. The ad is a total waste.

When Facebook launched its ads, it proudly announced shortly afterwards that a full 70% of their advertisers saw a 3X return on their investment – that is, they saw $3 in sales for every dollar spent on ads. That’s great if you’re down for spending a third of your sales on advertising. What if you’re not in the biz of the latest fashion or something else that can’t boast a huge markup? And what about the other 30% of advertisers, did they see even less than $3 in sales for ever buck in ads?

The short answer online is about the same as on teevee and in print – no one really knows what they are getting, except to the extent they know they are overpaying like crazy.

So what is online advertising worth? Not that much. For all the promise, online simply has not lived up to the hype at all.

Unless you sponsor Barataria, of course, for very reasonable rates.

10 thoughts on “Online Ad Bust

  1. Targeting ads based on search might be useless, but some research has shown that targeting ads based on shopping do prove helpful in pushing the consumer over the edge to buy. So, you check out athletic shoes on Amazon or search a site and shop for Reeboks, but often don’t buy right away. Then you start seeing ads for those brands showing up on all kinds of sites you visit, and it is more like to push you toward buying a particular brand. Still not great, but no advertising ever has been. It most certainly has an effect….the problem is companies want to link it to sales, but that’s not how advertising works. You don’t just see a message and buy…but there are other effects.

    • Thanks for this addition. You make it sound as though the idea that advertising could be measured directly was never ado-able thing in the first place, however. I can buy that.

  2. It’s not that it can’t be measured….it’s probably more that we don’t have very good yard sticks. It’s the larger problem that faces social scientific research. Surveys and scales are our attempt, but we also know that there is built in error. We want to predict the future, but we can’t see what is really happening when all those little electrical impulses are charging around our neurons. So…we approximate it the best we can. Typically, research into the effects of communication show very small effect sizes. So, scientists conclude that those messages don’t have much influence. I think we see small effect sizes because we can’t measure it very well.

  3. If I think about what influences me to buy something I have to say that I don’t think an online ad ever got me to buy something I wasn’t going to be anyway. But it may have steered me to the right place to buy it to complete the sale so maybe it’s good for something?

  4. I had some of that ad malware on my computer. It was very hard to get rid of and it put ads on everything. But there are so many ads on sites today that I didn’t notice at first. Isn’t that illegal? Why do advertisers support this?

    • I have to confess I had one once, too. I don’t remember what software I downloaded to get it, but it was nasty. I reinstalled chrome quickly to get rid of it.

  5. Do you think Google is mounting up to a monopoly? With the traffic they get for their search engine and their dominant advertising scheme, it seems to me like they have minimal competition. That’s also really strange that people (companies rather) who pay for ads don’t know what the final results will be. I always wondered whether certain forms of advertising were really benefiting those who paid for them.

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