Can Online Advertising Survive?

One of the enduring lessons of economics is that things look rosiest just before they explode.

This happened in the tech industry in the late 90's. Prices, valuations, and interest in the dotcom economy had been soaring for years and had reached astronomical levels. And then, in the course of a few short weeks, reality suddenly reared its ugly head and it all came crashing down.

The online advertising industry may be facing a similar fate. There are some very disturbing trends developing in online advertising that we have chosen to ignore. But they are there just the same:

• Delivery:  According to a Wall Street Journal report, a recent study by comScore found that 54% of display ads paid for by advertisers between May 2012 and February 2013 never appeared in front of a live human being. Furthermore, of the ads that did appear and were counted as "visible" the threshold for "visibility" was so low as to be meaningless -- 1/2 of the pixels had to load for one second.

• Traffic: There seems to be a huge amount of fraudulent traffic to websites. Adweek reports that according to Solve Media the amount of suspicious web traffic was 46% in the 1st quarter of 2013. That means that 46% of the viewership reported by websites may have been bots, not people. According to Adweek, as much as $9.5 billion of the $20 billion that will be spent on online advertising in 2013 may be for imaginary traffic.

• Click Fraud: Nobody knows what the true extent of click fraud is. According to Business Insider "...armies of computers unknowingly infected by hackers to drive fake traffic through ads, generating up to $400 million a year in fraudulent clicks." This is particularly disheartening when you consider that click rates, which include the inadvertent clicks we all make, are at an astonishingly low 2 to 9 clicks per 10,000 ads delivered -- before fraud.

• Prices Are Dropping: According to reports, cost-per-thousand and cost-per-click rates have been dropping steadily for two years. This means advertisers are systematically losing confidence in online advertising's ability to deliver results to them.

• Social Media: Social media is starting to receive the scrutiny it deserves. The magical mystery honeymoon is coming to an end and marketers are demanding to see results. According to Forrester Research, "Social tactics are not meaningful sales drivers."

• Ad Blocking: A program called "AdBlock Plus" claims to have 50 million users. Despite its name, AdBlock Plus is more like AdBlock Minus. It does not block all advertising. In fact, Salon magazine says it derives a substantial part of its income by making large corporations "pay to play." It lets a certain type of advertising through its filtering system. But if big guys won't pay up, none of their ads get through. There is nothing preventing a more scrupulous company or browser from developing a true ad blocker, with no asterisks. In fact, Mozilla (Firefox) was reportedly planning to do just that until someone got to them.

• Dilettantism: When dabblers get involved in an industry, it is generally not a good sign. You could sense the dotcom crash was coming when you were standing in line at the supermarket and the check-out clerks were talking about their tech stocks. We now have big shots working in the online channel who are proud to say they have no knowledge of, and no interest in, advertising.

• Criminality: There is clearly a substantial amount of criminal and deceitful activity going on. The phony traffic, the phony clicks, the phony delivery numbers have to be coming from somewhere.

Any one of these factors alone is disturbing. Put them together and you have a very discomfiting picture.

Of course, the ad industry and the investment and the business communities are very high on online advertising right now because everyone's making money. Just as they were high on the dotcom sector before it evaporated.

As in the dotcom crash, the strong would survive a melt down. But a whole lot of web businesses, media buying firms, and agencies would go down hard. 

Some might even go to jail. It is difficult for me to believe that law enforcement agencies aren't looking into the mushrooming fraud. It could trigger a major event.

I never make predictions. But online advertising is a train wreck waiting to happen. I wouldn't be surprised...


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