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Display Advertising on the Internet Doesn’t Work

Posted: September 6th, 2012 | Author: | Filed under: Amazon, Apple, Companies, Facebook, Google | 1 Comment »
Online Pop-Up Advertising

Pop-Up Advertising ( Wikipedia )

Facebook’s stock price has been dropping like a rock.  Most pundits exclaim that the reason is because there is no “mobile strategy.”  Some attribute it to the weakness of the virtual goods market.  Rarely does someone come out and say that it is because by-and-large banner and link advertising doesn’t really work on the internet.

Facebook and Google both make their living off of display advertising.  Adam Curry had some insightful comments on TWiT the other day and I think he was pretty much dead-on.  There are, however a few points which I don’t think the show really got to cover.

Display advertising doesn’t work.  Let’s get that out of the way.  Earning money by trying to get people to click on banner, or link advertising will never work over the long haul.  The only case in which those ads create any sort of value is in brand recognition.  The only companies which are interested in brand recognition are the ones whose revenues are upwards of 20 million.  In other words, not most of the companies which are interested in advertising.  Definitely not the local companies like the cleaners or the barber shop.

For the majority of businesses, which are not VC rich internet businesses, or multi-billion dollar conglomerates, sponsoring a school basketball team is a better way to spend advertising dollars than ads on Google, Facebook, or anywhere else on the internet.

What Adam Curry said about supply and demand was true, but he missed one aspect.  The reason that the advertising on The Verge works for them ( for now ) is that the brands advertising on the site just want to be associated with cool and hip, which is The Verge.  It is more aspiration on the part of the advertiser than real value for value.

Cost-Per-Impression ( CPM ); or the original billing metric for display advertising was based on how many times a given ad was displayed, later revised to be whenever an actual person, not a bot, saw the ad.  Relatively quickly, after things settled with the innovation that Google brought to the marketplace, advertisers realized that an impression was truly worth near zero, and clicks were the thing.  Google then changed to Cost-Per-Click ( CPC ) as the billing metric and things got marginally better.  The problem now is that clicks can’t really be trusted for a myriad of reasons.  The primary reason is gaming and fraud.  One can pay huge numbers of people peanuts in western currencies to click on a given ad.  No matter how clever the algorithms get, they were still designed by people and other people will be able to figure out how they work.  Until algorithms in a completely unrelated area can be devised entirely by machines can they be truly opaque to humans.  Even then, there is still the chance that they can be reverse engineered since they would have to be governed by logic.

Let’s get back to Facebook and Google and why Facebook’s stock is in the toilet.  Assuming that impressions are worth near zero and clicks are worth next to zero one would claim that volume would drive revenue.  This is true in the case of Google.  Google keeps their operating costs at next to nothing given their size and they have an absurd number of people using the product.  Google can then make some money based on impressions and clicks.  This is not the same amount of money as they would be making if the same number of people were actually buying some product at a fixed margin from them, but a decent amount of money given their investment.

Google has an impending problem, which is that CPM near zero is rapidly becoming zero and the CPC next to zero is dropping to zero as well.  Google can shuffle costs and can produce hardware and other products ( Google Play, Q, Drive, etc… ) to earn more money.  In other words, Google is trying to figure out something else to do to earn profit.  Facebook on the other hand has no other prospects, and they are not nearly as thrifty as Google.  The next big thing, that people in the ad game are suggesting, will be social advertising, or that you will buy the same things that your friends.  I don’t buy that, it is too easy to game, and the basic hypothesis is flawed, I think that there is a kernel of value there, but not enough to support multiple billions of dollars in revenue over 20 years.

I can not write Facebook or Yahoo completely off, however and here is why: Apple.

If you care to remember, Apple competed in two “dying” markets where there was “no more money to be earned” and the “barriers to entry were too high.”  Those two markets were personal computers and portable music players.  If we look at those two markets, we see that IBM, Dell, Compaq, HP and others were enjoying decent margins while Apple was slowly dying.  When Steve Jobs came back to Apple, he focused relentlessly on improving the product and charging for it (AKA value for value ).  He produced PCs and laptops that were outwardly the same as their competitors more or less with the exception of a few design flourishes.  They produced a PMP that was competitive at first blush, but certainly not generations ahead of its competitors.

The reason that Apple later trounced them all was that in the race to the bottom, the focus was on what corners to cut.  If someone was using resistors that had 5% tolerance, a competitor would drop it to 2% tolerance to save money and reduce the price to the customer.  If someone was using hard-drives that had 36,000 hours MTBF ( Mean-Time Between Failures ) they would find someone to charge them less for drives that had 32,000 hours MTBF.

In this number-crunching mutually-assured destruction competition, everyone took their eyes off of the simple fact that what they were producing was shit, and it was becoming shittier by the generation.  I can’t even say the word Compaq without thinking about burnt out toaster.  They were the worst PCs ever.

Apple, at the time, kept making the best computers they possibly could, in every dimension.  The software was top-notch, the hardware was top-notch.  The Apple computer or iPod would look good, be easy to use, last forever, and if it didn’t they would replace it immediately.  That has been changing a bit recently, but it was true for their PMPs and computers in the very early 21st century.  As such, Apple could easily charge 20% to 40% more for a comparable item than their erstwhile foes.  HP, IBM, Dell, and Compaq, however couldn’t understand how they were doing it, or why their customers were defecting to Macs.  It didn’t make sense to them, why would someone want to pay so much more for a similar product.  Most of them thought it was an anomalous blip, that there must just be more artsy people than they had originally thought.

What they didn’t understand was that many people just got sick of taking computers back, dealing with stonewalling customer service, etc…  They just wanted something that worked.  After the 3rd or 4th failure, they probably were complaining about it to a friend who said, well I have a Mac, and if something is wrong I just take it in and they take care of it ( social advertising for you ).  That is all it takes for most people when they are completely ready to buy something else that really solves their need or want.  In other words, value for value.  In fact, probably because the others set a floor so low for the products, it helped with the image of Apple as high-end, cementing the enhanced value of what Apple was offering in their minds.

I digress.  I would argue that Facebook has an opportunity to not enter this awful battle to the bottom for online advertising.  They could try to do something that provides real, true value for people.  I have no idea what this looks like, probably being right there when someone decides to buy something, to help them find the exact right product, similar to Amazon, who I view more as an advocate for me, helping me find just the right thing when I want it, not before or after.  Or maybe they could go the sinister way and try to make me buy crap that I don’t need through Psycho-analysis and data mining.  Either way would make them truckloads of money, but it has to be high quality.

There is still one point of caution for anyone involved in mobile or online advertising, or anyone thinking about investing in that space.  Apple, that great beacon that refused to battle to the bottom, tried to do something new and fresh with advertising – iAd.  It failed.  If they can’t do it, perhaps no one can.


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