Subprime Attention Crisis (FSG Originals x Logic)

1. The internet's economy is built on a fragile foundation of programmatic advertising

Advertising in digital media generated an estimated $273.3 billion in global revenue in 2018.

Advertising dominates the web. The meteoric rise of tech giants and content creators has been fueled by digital advertising. Companies like Google and Facebook derive over 80% of their revenue from ads. This model has made many online services free for users, but it comes with significant drawbacks.

The programmatic revolution. Programmatic advertising, which uses automated systems to buy and sell ad space in real-time, now accounts for the majority of digital ad spending. This highly efficient system allows for precise targeting and massive scale, but it also introduces new vulnerabilities.

• Key players:
  • Demand-side platforms (DSPs): Used by advertisers to buy ad inventory
  • Supply-side platforms (SSPs): Used by publishers to sell ad space
  • Ad exchanges: Marketplaces where DSPs and SSPs interact

2. Online advertising markets mirror financial markets, inheriting their vulnerabilities

Commodification enables a fluid marketplace. The amorphous, shapeless concept of attention has been transformed into discrete, comparable pieces that can be captured, priced, and sold.

From Madison Avenue to Wall Street. The online advertising industry has deliberately modeled itself after financial markets. Many early ad tech entrepreneurs came from finance backgrounds and sought to create "stock exchanges" for ads.

Commodification of attention. Just as grain was standardized in 19th-century Chicago, allowing for futures trading, attention online has been broken down into discrete, tradable units. This process has enabled rapid growth but also introduced systemic risks.

• Parallels to financial markets:
  • High-frequency trading
  • Complex derivatives
  • Opacity and information asymmetry
  • Potential for market manipulation

3. Opacity in programmatic advertising conceals systemic risks

The overall impact of these shenanigans is twofold. First and most obviously, prices will remain inflated, imposing costs on advertisers and publishers. Less obvious but more dangerous in the long run is that these profits eliminate any incentives to change practices within the industry.

A murky marketplace. The speed and complexity of programmatic advertising make it difficult for buyers to know where their ads appear or why they pay certain prices. This opacity allows for various forms of manipulation and fraud.

Hidden fees and conflicts of interest. Marketing agencies and ad tech companies often engage in practices that inflate prices without adding value. These include arbitrage (buying inventory at a discount and reselling at a markup) and undisclosed fees.

• Sources of opacity:
  • Algorithmic "black boxes"
  • Private marketplaces (PMPs)
  • Lack of standardized, transparent metrics
  • Conflicts of interest among intermediaries

4. The value of online attention is eroding, creating "subprime" advertising inventory

Attention is subprime. The bottom is falling out even as prices are pushed higher and higher.

Declining effectiveness. Click-through rates for online ads have plummeted from 44% in the early days to less than 1% today. Many clicks are accidental, especially on mobile devices. Ad blocking is also on the rise, with 75% of North Americans engaging in some form of ad avoidance.

Rampant fraud. A significant portion of online ad traffic is fraudulent, generated by bots or click farms. This fake attention inflates the perceived value of ad inventory while eroding its true worth.

• Factors contributing to subprime attention:
  • Ad blindness and banner fatigue
  • Increasing use of ad blockers
  • Click fraud and bot traffic
  • Poor viewability (ads loading off-screen)

5. Perverse incentives inflate the digital advertising bubble

Like the financial institutions that originated, packaged, and sold mortgage-backed securities in the 2000s, the operators of the programmatic advertising infrastructure have perverse incentives to keep prices high and the market hot.

The agency problem. Marketing agencies and ad tech companies profit from inflated prices and opaque practices. They have little incentive to address systemic issues that might reduce their profits.

Cash flow fuels the bubble. As traditional advertising channels decline, more money flows into digital advertising regardless of its effectiveness. This creates a self-reinforcing cycle that props up the market.

• Perverse incentives:
  • Agencies profiting from arbitrage and hidden fees
  • Ad tech companies benefiting from market complexity
  • Platforms like Google and Facebook controlling both supply and demand
  • Short-term thinking prioritizing growth over sustainability

6. The programmatic advertising crisis threatens the entire internet ecosystem

If this system of advertising is brittle, then the internet as we know it is brittle.

A house of cards. The current internet ecosystem relies heavily on advertising revenue. A collapse in the programmatic advertising market could have far-reaching consequences beyond just marketing.

Potential fallout. A crisis could lead to widespread paywalls, reduced access to information, and the failure of many online services and content creators. It might also affect areas like scientific research and technological innovation that have been indirectly funded by ad profits.

• Potential consequences of a crisis:
  • Sudden shift to subscription models for many services
  • Reduced investment in emerging technologies
  • Consolidation of power among a few well-resourced players
  • Widening digital divide as free services become scarce

7. Controlled demolition and regulation could pave the way for a better internet

Rather than trying to fix a broken market, we should work toward a controlled demolition that reduces its influence in the long run.

Proactive intervention. Instead of waiting for a catastrophic collapse, the author argues for a managed crisis that could lead to positive change. This involves exposing the weaknesses of programmatic advertising and creating space for alternative business models.

Regulatory approach. Drawing inspiration from financial market regulations like the Securities Act of 1933, the author proposes a disclosure-based framework for online advertising. This would increase transparency and stability in the market.

• Potential solutions:
  • Independent research and auditing of advertising effectiveness
  • Mandatory disclosure of key metrics and conflicts of interest
  • Development of alternative funding models for online services
  • Re-imagining online spaces not constrained by advertising imperatives

Last updated: November 7, 2024