But if price fails to reflect reality, the price of the ads being bought and sold will remain stable as the real value of the underlying asset—attention—erodes. That raises the risk that these prices might suddenly “snap” to their real value amid a loss of confidence in what is being bought and sold.
How might this happen? We’ve already talked about one way. Market opacity can cripple the ability of price to accurately reflect value. Simply stated, if it’s impossible to see the underlying assets in a marketplace, it is impossible for the market to price those assets accurately.
Another major contributing factor are the players in the marketplace. A potent brew of greed and insulation from consequences can encourage players to stoke the market and overvalue what is being traded. A critical mass of these bad actors will inflate the bubble and prevent the market from adjusting effectively over time. The record of the 2008 mortgage crisis is replete with examples of banks and rating agencies that took reckless bets and hid the true vulnerabilities of underlying assets.
On the bank side, mortgage-backed securities were traded on an “originate and distribute” basis, which meant that the institutions responsible for creating these assets did not hold them on their balance sheets. Instead, these assets were sold off into the marketplace, where they were traded among a large number of buyers and sellers. Because the originating banks were compensated by volume, bankers had perverse incentives to originate and package as many assets as possible to meet demand. In response to this pressure, banks began issuing mortgages to everyone who applied. Infamously, borrowers were able to obtain high levels of financing for purchasing homes with little money down and with no information required about their job or finances—so-called NINJA (no income, job, or assets) mortgages.9
As the market for mortgage-backed securities grew, the assets were increasingly filled with highly toxic, low-quality mortgages that were unlikely to ever be paid back. This problem was compounded by the Big Three of global credit ratings agencies—Standard & Poor’s, Moody’s, and Fitch Ratings—which were responsible for assigning grades to the packaged securities. The investment banks issuing these assets paid the ratings agencies, perversely incentivizing the agencies to give the banks’ toxic mortgages high AAA ratings.10 The high ratings fueled the market for these assets and obscured the real, underlying fragility of mortgage-backed securities. AAA ratings also enabled massive money market and pension funds, restricted from holding lower-rated assets, to purchase mortgage-backed securities in great numbers.
The incentive to overvalue mortgage-backed securities laid the groundwork for a larger crisis, because it was impossible to hide the underlying weakness of these assets indefinitely. Many of the mortgages packaged into these securities came with a “balloon rate” that would rapidly increase the interest due on the mortgages a few years after issuance. As these triggered in increasingly large numbers between 2006 and 2009, $738 billion in mortgages suffered “payment shock” and default.11 The increase in mortgage failures cast doubt on the purported value of these assets, eventually triggering a widespread panic.
Similar conflicts pervade the modern marketing ecosystem, spurring the expansion of the programmatic market bubble even as the problems continue to grow. Marketing agencies and advertising technology companies play the role of the pre-crisis ratings agencies and loan originators. The business practices of these entities juice the market in ways that assist the growth of a bubble.Perverse Incentives: Agencies and Ad Tech
Market bubbles are seldom a surprise to everyone. Industry insiders can buoy the growth of a marketplace even as the underlying fundamentals grow worse and worse. In the 2008 crisis, financial institutions and ratings agencies profited from the ever-expanding demand for mortgage-backed securities even while they were aware that the market was more fragile than it looked from the outside.12
In the online advertising marketplace, two groups have systemic incentives to oversell the value and price of advertising inventory regardless of issues like fraud, declining attention, and ad blocking. There are the marketing agencies, seeking profits in an increasingly unfriendly business environment. And there are the marketplaces themselves, which will cease to be profitable if people stop buying and selling online attention. These actors work to prop up the price of digital advertising inventory in spite of its eroding value.
The Agencies
Marketing agencies have long played an influential role as the middlemen between buyers and sellers of advertising inventory. This privileged role has come under competitive pressure in recent years as the rise of programmatic marketplaces has facilitated a more direct ecosystem of transactions between advertisers and publishers.13 Functions previously tasked to agencies are now performed by other actors. For instance, creative development of advertising content has increasingly been brought in-house. Large advertisers have built their own internal agencies, and major publishers like Facebook and Google provide creative services directly to large advertisers.14
Financial pressure from clients is also rising. Clients are closely scrutinizing their return on investment and demanding greater transparency. From 2015 to 2018, major brands—including Shell, HSBC, and Mars—undertook top-to-bottom reviews of their marketing budget allocation.15 This wave of budget reviews led to the cancellation of many long-standing contracts between clients and marketing agencies.16 Marketing agencies face ever-shrinking profit margins in light of this loss of market position. This has left agencies scrambling to find other ways of making money in this new environment.
One controversial means of doing so is manipulating the price of advertising inventory through an industry practice known as arbitrage. Marketing agencies sign deals for discounted prices for ad inventory from publishers. These agencies then turn around and resell this inventory at a higher price to their clients, pocketing
