The three unknowns of the modern advertising era
AAS WELL mystical ladle, there has always been something cloudy about advertising. From PT Barnum’s “Mammoth Fat Infant: Only Three Years Old and Weighing 196 POUND STERLING”To the three martini lunches at dawn of TV At that time, it was never entirely clear whether the announcer was an artist, a scientist, a strong liver schmoozer, or a con artist. For all the wit and cunning of Madison Avenue, the business cycle has had a much more direct impact on ad spend. And it was a miracle that companies adopted this medium. From 1904, the Atlantic, an American magazine, wrote that about 75% of advertisements were not paid; however, the remaining 25% have paid so well “that there is hardly a businessman who is ready to sit idly by”.
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In the digital age, guesswork should be a thing of the past. User usernames, device tracking technology and electronic marketplaces processing billions of transactions per day have turned the targeting of individuals into a drone strike rather than a random barrage. Costs have come down, so millions of online businesses, instead of renting space, have turned digital ads into yellow pages on steroids. People spend more time glued to screens, which gives advertisers more leeway to engage them. The result has been breathtaking growth. MoffettNathanson, a research firm, says digital ads have gone from 27% of all dollars spent on advertising in America in 2015 to 52% (TV, the second most important category, fell from 42% to 33%). Until recently, the main question asked on Wall Street was not whether the party was going to continue but how soon would the share of digital reach 80%?
For the first time, last week shook those condemnations. On October 21, Snap, a photo-sharing platform, revealed that it was caught off guard in the third quarter by new privacy measures introduced by Apple to allow users of iPhone and its other devices to prevent advertisers follow them on the web. Although revenue of $ 1.07 billion was only just short of expectations, it lost a quarter of its value in one day. Facebook, a social media giant, recorded $ 28.3 billion in ad revenue, a third more than the year before, but it’s less than expected. It is due to increase its spending next year in part to improve its targeting and measurement techniques to counter Apple’s restrictions. Alphabet, owner of Google, turned the tide, posting its strongest sales growth in more than a decade in the third quarter; its search engine, the source of almost all of its advertising revenue, seems immune to Apple’s changes.
To everyone, the underlying digital advertising market still looked vibrant. But their divergent performances raise three big questions about the future of advertising. Despite all its aura of precision, it is still an industry full of unknowns.
The first concerns the correlation between advertising and economic growth. Sir Martin Sorrell, Chairman of S4 Capital, an advertising agency, notes that digital ads easily outperformed their analog counterparts during the pandemic, indicating a break in the centuries-old link with GDP due to a structural change as the economy evolves online. But that this change continues is a matter of faith, not of fact. The economic factors may already be reappearing. Facebook and Snap have both said tangled supply chains will reduce incentives to advertise during the lucrative holiday period due to fewer products on the shelves. Moreover, even if the link with GDP frayed, online ads appear to be closely linked to the growth of e-commerce, which Facebook says is slowing as the pandemic subsides. In the United States, it is increasingly evident that consumer confidence is on the decline, which could affect one of the main factors that could fuel the advertising boom: the explosion of new businesses, many of them are small online retailers.
The third unknown concerns companies that pay for all ads. Tech giants provide few details about where they come from, the size of their companies, and how they spend their money. The result is a lot of detectives and frustrating guesswork. Brian Wieser of the groupM, the world’s largest media buyer, estimates from Facebook billing address data that Chinese manufacturers selling overseas account for nearly $ 10 billion in social media advertising this year. It points to third-party data suggesting that more than 40% of sellers in Amazon’s marketplace are from China, but Amazon is not disclosing this information. There are few reports quantifying how many small versus large advertisers, and whether they pay for brand-related advertising or direct sales. The industry remains as murky as ever.
From gray flannel suits to simple flannel
Platforms promise accuracy to their advertisers based on consumer data. But they fail to reveal enough information for outsiders to assess the robustness of the digital advertising craze. The result, shared by many in the industry, is cheerful optimism that the market will continue to grow like Topsy. The past few days have been a welcome opportunity to reconsider this thought. ■
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This article appeared in the Business section of the print edition under the title “Mad Men v Machines”