The advertising glut dooms the social media industry

Summary:  The internet is a mirror in which we can see important aspects of America. Businesses funded by speculation (greed) struggle to survive in an era of few opportunities and falling investment, while high technology and rising inequality reshape America. The social media stocks are in this maelstrom, as virtual advertising space grows faster than their audience and advertisers dollars. Publishers grow desperate, try ever more intrusive ads. Few will survive.

Contents

1. The race for internet revenue.
2. Speculation.
3. Inequality.
4. Analysis of the ad-supported internet.
5. For More Information.
6. Great books about bubbles.

(1)  The race for revenue on the internet

The evolution of the internet is best seen in terms of what pays for it: banner ads, then pop-up ads, then auto-run video ads, and now “integrating” the content with the advertisements (these tends often end by debasing the product). It is an evolution to increasingly intrusive ads, forcing people to either spend more of their time killing the ads — or installing ad blockers (which are in a Red Queen race with the developers of ad technology).

Don’t blame the managers of these companies. That’s as foolish as blaming airlines for the poor service that accompanies the cheap fares we demand. We don’t pay for most of the information and many of the services we get on the internet. As Andrew Lewis said: “If you’re not paying for something, you’re not the customer; you’re the product being sold.” So we have no grounds to complain.

The managers know the futility of this race they’re locked into, but they’re desperate.

(2)  Speculation

The San Francisco Bay area is a city of castles built on clouds, on the massive flow of dollars into companies large and small by greedy investors. A large proportion of its people, rich or just working, live on the money skimmed off from those investments — because many of these companies are not producing profits. It’s the real American dream machine; by comparison the entertainment products produced by Hollywood are as solid as gold bars.

Many of these companies will never produce profits. I’ve spoken before about the biotech bubble, where the grim math of R&D will doom most of these lavishly funded start-ups to some form of crash and burn. Others facets of the big bubble, like Tesla, have been widely discussed. But the structural weakness of the social media mania gets little attention.

Most social media companies — and more broadly, the larger industry of advertising supported internet companies — are doomed in their current form. There are already too many for the advertising industry to support, and venture capitalists continue to manufacture them — their output limited by investors’ willingness to buy their shares, not their actual business prospects.

Driven by the awareness that the clock is running — investors will eventually demand profits — every company seeks to increase their supply of advertising “space”, deepening the glut of ad space — making everybody worse off. Their costs are fixed, while the supply of virtual advertising space can increase faster than the size of their audience or their fuel of advertising revenue.

Hence the frantic search for new advertisement tools that offer higher margins, no matter what the effect on reader satisfaction. {This is why businesses create pricing cartels, or merge until the few survivors can coordinate without direct contact.}

I wonder if we have reached the point where the internet ad-supported business model breaks. First, the shift of traffic to mobile makes effective advertising far more difficult.

Second, some websites might have so loaded up with ads that readers rebel. I’ve stopped reading some websites due to the load of ads: slow to load, too many pop-ups and auto-plays, and the ads interfere with display on an iPad — such as Salon (I brought it up to get the link; my pc immediately jammed). If more people do this, the prospect for profits on the net might disappear for many companies.

In short it’s a death spiral. The few profitable firms (e.g., Facebook, Google) will not only thrive as their smaller competitors fade, but they’ll make some great acquisitions.

(3)  Inequality

The assumption of the internet industry is that they can follow the path of the TV and newspaper/magazine industry to fortune. But times have changed. The revenue of these mass media rested on the prosperity of America’s large vibrant middle class — people who had the money for discretionary purchases and subscriptions.

Four decades of America’s productivity growth has gone into the pockets of the 1%, leaving the middle class a shadow of itself. The rise of pirated media reflects the middle class striving to maintain a lifestyle it can no longer afford, as do people’s reliance on free services and sources of information. These are signs of return to a 19th century-like society (e.g., servants steal).

This slow contraction of the middle class will reshape our society. Charities, community service clubs, and media — all of them rest on an economic foundation that is washing away. This forces them to seek patronage from the rich, another stage in their gathering all the threads of influence in America.

None of this is just happening. The 1% have worked long and hard to gather their strength. We have allowed them to do so. Until we act, they will grow stronger and we will weaken. That’s naturalbehavior, and pointless to condemn or protest.

(4)  A timeline of analysis: the decline of an ad-supported internet

These articles mark the struggle of the industry, sustained so far by the flow of money from dazzled investors (ignoring these companies financial statements).

• Prescient: “The Most Hated Digital Ad Tactic” by Josh Sternberg at Digiday, 3 April 2013 — “Talk to regular Internet users, and they’ll tell you they loathe them. But in this instance, in a world where programmatic ad buying is decimating CPMs, the healthy prices still enjoyed for video ads means adopting a let-users-be-damned attitude. … The price is user annoyance.”
• Recommended, best I’ve seen: “Why web pages suck” by Ben Thompson at Stratchery.
• “Trends in Advertising: Display Ads are Dead” by Josh Hopkins at LinkedIn, 13 September 2014 — More about the future of advertising is integration with content.
• “Fall of the Banner Ad: The Monster That Swallowed the Web“, New York Times, 5 November 2014.
• “Scientific proof that no one pays attention to banner ads” by Alice Truong at Quartz, 10 March 2015.
• “The Death of Outrage” by David Auerbach at Slate, 10 March 2015 — “It once fueled the Internet. Now the Internet’s moving on.” Companies are moving to tighter integration of ads and content.
• “Autoplay shouldn’t rule online video” by Jeroen Wijering at VentureBeat, 4 July 2015 — “How valuable is an impression from an angry, likely irrelevant consumer? … publishers and social networks embracing the technology are gaining more impressions in the short-term without thinking about long-term backlash. … {They} need to stop looking for a Band-Aid for their advertising woes and find creative ways to drive real engagement.”
• “Apple, ad blockers and the decline of the mobile Web” by Philip Elmer-DeWitt at Fortune, 8 July 2015 — “Mobile ad blocking is exploding, mostly in India and Asia. This fall, it’s coming to the iPhone.”
• The executive editor and editor-in-chief of Gawker have resigned in protest over too much “integration” of advertising and content.

(5)  For More Information

For more about the bubble see Wolf Richter’s website, such as “No Growth, No profit, No problem” (17 July 2015). If you liked this post, like us on Facebook and follow us on Twitter. See all posts about bubbles, especially these…

• The new tech bubble takes us to a new world. A mad world.
• How we’ve become accustomed to bubbles bursting the economy, instead of fighting them.
• We see a stock market bubble but prefer to close our eyes.
• Don’t ask if there’s a biotech bubble. Ask why we have another bubble.
• The key things to know about the great American bubble machine.
• When you look back on this day & remember the bubble…

(5) Great books about bubbles