All of these channels provide a certain level of perceived return to the ad buyer. This might be measured in extremely concrete ways—purchases of a product—or in softer ways that reflect a more brand-advertising-based approach. An advertiser might find it valuable to expose a product to an audience that is unfamiliar with it, regardless of the immediate purchases they choose to make. The ad buyer is an investor of a sort, choosing how to allocate limited resources across many different types of promotions that offer different kinds of returns.
In this context, online platforms like Facebook and Google offer new, shiny assets in the broader marketplace for grabbing attention. Google and Facebook do not simply compete with one another for ad dollars; they also compete against the many other kinds of businesses that offer slices of attention for a fee. Digital advertising is just one kind of investment in the marketplace for attention. Ad buyers can choose to spend their limited dollars on digital instead of, say, television, hoping for a greater proportional return.
And for the most part, they have done just that. The meteoric growth of online advertising has come at the expense of traditional attention channels.5 Classified ads, the old advertising workhorse that funded many a local newspaper, were outcompeted by platforms like Craigslist and Google.6 Globally, digital ads are a $273 billion business, but this is just a subset of the bigger industry of advertising. Overall ad spending across all media in 2018 was $629 billion. Digital is, however, poised to take over more and more of that overall amount, and in 2019 projections showed that fully half of all ad spending would go to digital by 2020.7
Digital companies see a future in extracting the advertising dollars still currently invested in older, established channels for distributing messages. This explains in part Facebook’s pivot to video and Google’s continued investment in YouTube. The successful capture of even part of the money that is spent on television ads would bring in billions for these platforms.8
But this is a two-sided game. Facebook and Google do not just compete with television networks and billboard companies for the dollars that advertisers are looking to spend. They are competing with these other advertising channels for public attention, too. The internet captures some of the finite attention that other media channels are vying for as well. People can watch YouTube instead of broadcast television or choose to read blogs over newspapers.
This makes digital advertising a double threat. On the one hand, digital advertisers compete against other media channels for advertising dollars. Coca-Cola, for instance, might choose to put advertising dollars into promoting its latest soft drink on Facebook rather than airing a commercial on CNN. On the other hand, digital advertisers also compete for the viewers that make legacy media channels attractive to advertisers in the first place. Consumers increasingly spend time on Facebook that they might otherwise spend watching CNN. Facebook thus appears more valuable to the advertiser. As advertisers give less money to media like newspapers, they also cripple the ability of newspapers to offer the content that subscribers demand. This makes it harder for legacy media companies to compete against their digital rivals.
This structural shift has far-reaching implications. Consider for a moment what effect this death spiral of legacy media has on ad buyers. It is not just that established media options are less attractive but that over the medium to long term they are increasingly unavailable as options at all.
The movement of consumers to digital platforms makes it riskier and less attractive for ad buyers to buy into anything but digital advertising. The shift of advertising dollars onto online platforms accelerates the deterioration and disappearance of competing outlets for distributing ads. The disappearance of those competing outlets, in turn, accelerates the flow of money onto online platforms. Increasingly, all roads lead to the programmatic advertising economy.
This structural shift looks a lot like the savings glut. Like developing world governments in the 1990s and early 2000s, advertisers confront a media ecosystem where traditional media outlets are looking shaky or are disappearing outright. This produces a huge influx of cash into the online advertising marketplace that has nowhere else to run. Some of that cash will end up in relatively safe places: the U.S. Treasuries of the online advertising world. Some of it will not, particularly as the limited number of safe, high-value opportunities rise in price and disappear into private marketplaces.
Under these circumstances, it would be difficult for the online advertising ecosystem to correct itself even if it had the will to do so. Ad buyers are unlikely to cut their budgets significantly even as the number of options for placing those budgets declines. That provides sufficient fuel for a bubble, despite the persistent problems of opacity and subprime attention.
But feeding that immense level of demand can also take on some perverse characteristics. Loan originators creating mortgages to meet global demand during the 2000s eventually found themselves under intense pressure to look the other way as the quality of those mortgages became shoddier and shoddier. Similarly, the marketing agencies and ad technology companies profiting most handsomely from these developments have few incentives to address the market’s deep structural flaws. In some cases, they may even exacerbate these issues.Perverse Incentives in Financial Markets
Online advertising inventory is increasingly dubious, whether it is ignored, blocked, or entirely fake. But a decline in value is not, in itself, a problem for a well-functioning marketplace. Buyers
