Updated: March 23, 2017
This narrative was the subject of this week’s narrative video, which you can see here on YouTube or embedded at the bottom of this post.
Advertising is the major source of revenue for two of the most high profile tech companies: Google and Facebook. These two, in turn, dominate online ad revenue growth, with very little growth left over for all the many other online ad companies.
Given that total advertising revenue across all media has remained relatively constant as a percentage of GDP over time, it seems reasonable to assume that online advertising revenue will only grow inasmuch as it is able to take share from other ad media, and that there is an absolute ceiling for online advertising equal to the total ad spending across all media, though the latter is still very far off. But there’s also an argument to be made that as online advertising becomes more effective and efficient, companies will need to spend less to get the same results they once got from less targeted campaigns. They could, of course, choose to spend the same amount on advertising and get a bigger bang for the buck, but they might also choose to spend less and achieve the same effect.
There is also the question of the sustainability of the ad business model as it requires more and more data on users to be effective, threatening user privacy. While many users have shown themselves perfectly willing to make this tradeoff, others are less comfortable with it, and Apple and other companies have attempted to differentiate themselves based on their respect for user privacy. Long-term, this trend could go either way – users might slowly yield up their concerns, or they might feel the invasions of their privacy to be increasingly creepy and start to resist ad-based business models. I suspect we’ll actually just see a continued bifurcation by generational cohort, with younger generations increasingly oblivious to privacy invasions and older generations remaining more cautious.
Meanwhile, every company but Facebook and Google is struggling to capture its own morsel of the slice of the pie left by the two giants. Twitter, Snap, Yahoo, and many others are all fighting over this remainder, albeit with different trajectories. And then there are the ad tech companies, who aren’t fighting over ad spend per se, but are still competing for some of the same dollars as Facebook and Google. This is a tough business to be in, but as ever capturing the right audiences and serving up appropriate ad products will win a fair share of ad revenue, as Snap appears to be showing.
In March 2017, we saw another challenge associated with the ad-based business model raise its head in a much more prominent way than previously, as several brands in the UK and then the US began to boycott YouTube and in some cases Google more broadly in response to their ads appearing against undesirable content. At root, this is a problem of scale, with YouTube seeing 400 hours of video uploaded every minute and algorithmic analysis falling short with both false positives and false negatives. Google will be hoping that it can assuage advertisers’ concerns, but this issue brings creators (who want to see ads appear against the widest range of videos possible) and advertisers (who want to limit where their ads appear) into conflict. There’s no easy way for Google to solve the problem without tightening policies around advertising and content in general, which won’t go down well with creators. While YouTube and Google are the main targets of the wrath of advertisers for now, the same problems could plague other hosts of user generated video (such as Facebook) and other ad platforms which focus on programmatic buying.
Narrative video: