Is online ads business failing?

Today the financial times featured an article about online ads and that they seem to work less and less and most online users find them annoying. Why is that? And is it time to re-think the advertising business?

Market Penetration Peak

It’s pay to play market running on auctions. If you flood the system with dollars you get exposure to people who do not want to see or react to your ads. Driving up bid prices.

They should have market depth metrics to give reasonable caps on investing in a particular performance campaign, but then their revenues take a hit as the bidding competition is driving down bids.

No matter how much money you throw at the problem, there is a maximum impression density before ads turn annoying. And positive reaction to ads also drops if you have extreme penetration of user daily experience with bogus ads. But that is in the interest of the platforms, because the cost for conversion are rising and more money has to be deployed.

It’s just greed. Just actually try to use Twitter, Instagram, LinkedIn and all the ad financed platforms and you will realize that the value of the experience is consistently dropping as more and more useless ads flood the platform.

The reality is they need a new core business to not cannibalize their markets. It’s like they helicopter drop 20 luxury cars into the street for every individual user and wonder why the utilization rates of cars in the street is dropping. Or like you discount and push ever more mobile phone contracts untill there is really no room for growth any more as every user already owns 15 phone contracts.

But in a market where growth is driving the multiples and multiples drive your inorganic growth cost, there is a clear incentive to keep running the model until it can’t work anymore. Then the natural thing would be to liquidate your exposure and push the asset to someone else and deploy your money elsewhere.

Macrofactors

On top you now have rising inflation as seen in bond prices and the pricing of inflation linked bonds, for example. Looking at consumer prices in the real world, the picture looks even more dim. Looking at the industrial capacity around the world and the impact from Covid and the ongoing automation and A.I. wave, you can guess that consumer interest in spending on overly advertised and underly useful products that they do not know already and that were not recommended from their trusted social network is likely to drop. Further increasing conversion cost of ads.

If you add the supply chain issue experienced during Covid and the increasing scepticism from the eco-/environmental footprint of global throwaway goods, the sentiment for purchasing goods should further decline.

If you add all this up, it is clear that (a) market penetration might have peaked, (b) reaction function to add impression drops due to excessive exposure to ads, (c) consumption bundles are dropping in general per user. That means the cost for conversion on any metrics from CPC to CPI to CPO will rise while demand will falter.

It will only take a moment of time for markets to adjust their advertising strategies. Now if you look how heavily markets value growth and you see the risk of ad-driven growth, if you see a shift from low inflation to high inflation and the impact on the discount factor, then it is only natural to assume that BigTechs or FAANGs time at the top of the market cap listings is about to be over.

It’s very difficult to remain bullish on Twitter, Facebook and Google and their advertising business.

Where does advertising money go?

There are two channels where advertising might still work. (a) around great products and (b) around great content.

Content is king. This might lead to a re-imagining of online content. If the filter bubble kids who purchased stuff from their filters are losing basket consumption power, this might lead to a return in actually good and relevant content. So some news outlets might win more followers with strong consumer baskets and the advertising on their platform will become more expensive as it will still work. Platforms like Fox and co could win from this. Also Google and Youtube might adjust their search and filter algorithms. And Facebook, Instagram and so forth might, too. Crowding out content that caters to people who do not spend, and focusing on spenders. Although that is likely what we already see today and might be the reason for all the filter bubbles.

Another content is king type of play is hyper localized information and product consumption. This is why I am bullish on Shopify. Its market place features might lead to a localized version of Amazon and a new era of hyperlocalized shopping working in tandem with hyperlocal news, advertising and content creation and placement. The world hence might turn a bit less global and more localized.

The great product dominance that might also follow will likely lead to the decline of influencers and lifestyle brands that were emerging aroung the laser targeted segmens on the big platforms. Brands that cater ot a base of less than 100.000 people via Instagram ads, based out of London and producing in China, might just start to evaporate and disappear from the global shopping scene and local quality products might become a new thing. Less focused about messaging and nice pictures and story, but more focused on economic impact, quality production and local identity. Although of course the big players will likely invest into these new businesses and run portfolios on these hyper local market segments.

There is also reason to look into new advertising channels as the current strategy of maximizing useless impressions might backfire and lead to a rejection of the platforms overall. So maybe it will not be facebook, twitter and google that place the ads of the future, but maybe it is a distributed web of local dealers and leading brands that now connect via electronic data exchanges and negotiate cross- channel and cross-brand impressions themselves dynamically. But this will remain to be seen.

If the FAANG wants to survive, they need to think decentral and might abandon their flagships as core advertising platforms and they might turn to a more backbone approach. But that of course will require an active sales strategy instead of having users and brands onboard into their systems.

It will remain interesting to see what really happens.