Do Targeted Digital Ads Work Better?

In a previous post, I predicted that Google's double digit growth will come to an end most likely before 2020. I argued that this was due to the fact that advertising spend has been pegged at about 1% of GDP for a century, and that this hard ceiling would make it challenging for Google to continue fast growth amidst increasing competition from Facebook and other social networks.

Recently it was reported that P&G slashed 140 million USD from its digital ad spending, but saw sales rise for 2017Q2. The article also mentions that

Over five years, P&G is aiming for $2 billion in marketing cuts, including media, with a heavy emphasis on cleaning up the digital supply chain.

Despite high double digit growth for the current quarter, it is clear that there are clouds in the horizon for Google.

The ceiling for ad spending

The Bloomberg article mentioned in my previous post presented the following chart showing just how constant ad spending has been as a percentage of GDP. The earliest data point in this chart goes back to 1926, which is very much the beginning of advertising as we know it today. This is when corporations started to take advantage of the government propaganda techniques that had been employed during World War I, in a massive effort to get young men to enlist in the military forces.

We can see that even as the advertising media shifted from street posters to radio to television and finally the mobile Internet, nothing has significantly grown the advertising market relative to GDP. The fact that ad spending has not significantly grown since the era when all we had were street posters is remarkable when you think about it. Ads used to only be on the streets but radio allowed private time with families to be targeted as well. Even then, ad spending remained constant. Importantly in the context of digital advertising, the advent of highly targeted digital ads which collect all sorts of private information about virtually person on the Internet have not detectably increased total ad spending.

The ceiling for ad spending is very robust indeed.

Sophisticated analytics in digital ads

A lot has been made about the highly sophisticated analytics that digital advertising makes possible (often at the expense of privacy, of course). By use of tracking across multiple websites, it is possible to see whether customers who saw banner ads actually came to an e-commence site to make the purchase. All sorts of techniques have been devised to even connect online behaviour to purchases at physical stores. All this should make it possible for the advertisers to see whether their online ads were useful or not. At the very least, there should be an improvement compared to the classical dilemma; "Half the money I spend on advertising is wasted; the trouble is I don't know which half."

The P&G example above suggests however that the improvement may have been illusional. Despite all the analytics that suggested otherwise, 140 million USD of their digital advertising budget apparently belonged to the wasted half. Maybe all the analytics that sacrifices user privacy does not provide any value after all.

The truth of targeting

Targeting means showing your ads to the people who are most likely to respond positively. Targeting is also purportedly beneficial to the end-user who will end up seeing more "useful" advertisements. Because of these benefits, argue the ad companies, collecting all your personal information is a reasonable compromise. However, despite their best efforts, P&G's CFO Jon Moeller did not have kind words to say.

Clearly we don't need to be spending money that is seen by a bot and not a person. Clearly we don't need to be spending money on ads that are placed in inappropriate places, and that's why you see a significant reduction.

The targeting capabilities that we have today apparently are not very good at distinguishing between a bot and a real human being with a profile that matches what P&G desired. From this, it is reasonable to assume that our current targeting algorithms are even worse at spotting the difference between two humans with different profiles.

Again, collecting all that personal information seems to have been in vain.

Future developments to watch

P&G is not the only company cutting back on digital advertising. Unilever is reportedly doing the same. As a result, in the next few quarters, we should get a better picture as to whether these companies will continue to see strong sales growth despite cutting back, or whether they will see negative impacts and eventually come re-invest in digital. We will also be able to discern whether or not there will be a ripple effect as other companies reconsider their ad portfolios.

If P&G and others do not observe a negative impact despite a continued cut-back on digital spending, then this will significantly blunt the growth of digital advertising. Although I expect this to slow down considerably within the next few years anyway, this may come earlier than I previously though. In the short term however, this will actually benefit Google because they are most likely to be able to maintain advertiser trust by implementing measures to counter the bot issues. In aggregate, I would expect a short term boost followed by an earlier slowdown for Google and Facebook , and an much more imminent downfall for other digital advertising companies.

One possible change that I would very much welcome, is a better understanding of how valuable our personal data really is. Television and magazine advertisements do not collect your personal information, but are nonetheless targeted to a certain degree based on the programme or genre that you are viewing. Targeting itself does not necessarily need personal information as long as the ad placement itself is intelligent, and targeting does not need to stalk your whole Internet browsing habits. Digital advertising might not necessarily need to stalk you. By understanding the true value of these privacy intrusions, our society should be in a much better position to discuss whether we have to make these concessions or not.

Can advertising grow beyond the 1% ceiling?

Given that a large number of Internet companies rely on advertising as their main revenue source, the presence of a hard ceiling should worry venture capitalists who are pouring ever increasing amounts of money into them. If tech is to continue to grow as a whole by high double digits, then tech needs to find a way to either break out of this, or to develop new business models with a more direct revenue.

However, as I have argued, I consider it unlikely that digital advertising is more revolutionary than radio or television advertising, and I strongly doubt that the 1% ceiling will be broken. As digital advertising saturates the ad market as a whole, this market will become a zero-sum game and will not contribute to the growth of overall tech.

Therefore, my belief is that tech needs to stop relying on advertising and that this is starting to be an urgent issue. As the tech advertising space saturates, the current incumbents will become stronger and stronger albeit with slower growth rates. On the flip side, it will be harder and harder for new entrants with an advertising business model to make it. Advertising will quickly cease to be a viable revenue strategy for start ups.

Why Discontinue the iPod Nano and Shuffle

Yesterday, Apple announced that it had discontinued the iPod Nano and Shuffle, and that the new iPod line-up would now simply consist of only two iPod Touch devices.

Back when the iPod was introduced into this world (2001), Steve Jobs unveiled the "Digital Hub" strategy in which the PC would be in the centre of you digital life, connecting and managing all the content that you either acquired through your devices (still cameras or camcorders) or purchased (via iTunes or via physical CDs). This was also an assertion that despite the negativity surrounding the future of PCs at that time, the Mac would actually continue to thrive through successful execution of this strategy. Fast forward to 2011, Steve Jobs announces iCloud, which essentially replaces the central position of the PC in the "Digital Hub" with cloud-based services. PCs, iPhones and iPads will be equal citizens and will sync to the cloud; PCs will no longer be the Hub that connects everything together.

Apple has diligently executed on this strategy. For example, managing your photos no longer requires a PC, and even the ones that you only have on a memory card can be transferred to your iOS device (via a card reader) and synced to the cloud. For your music, you can purchase and listen to it from your iOS devices as well as your PCs.

The only devices that still required a PC, the holdouts from the Digital Hub era, were the iPod Nano and the Shuffle. Therefore, Apple's decision to discontinue these projects is symbolic not only of the decreased role of audio only devices, but also of the diminished role of PCs for consumers.

In fact, when you consider the newly announced HomePod which is very much an audio-only device, the argument that this is just about audio-only devices being obsoleted by smartphones no longer holds water. Apple clearly thinks that audio-only devices even without adequate touch screens have an important role. The difference between the HomePod and the iPod Nano and Shuffle, and the reason why one is being newly introduced while the other is being discontinued, is more about being connected to the Internet and being able to directly download/stream content. It is also about being able to use Siri, which again requires an Internet connection (at least today).

This suggests that maybe in the near future, we might see an iPod Shuffle-like device again. This time however, it will use Siri as its main user interface, and it will connect directly to your iTunes library in the cloud or download songs from Apple Music. It might actually be worn on your wrist.

The Law of Conservation of Attractive Profits and Samsung’s Record Quarter

It is being reported that Samsung will soon report a record quarter for its semiconductor business, taking it past even Intel for the first time ever. This is not totally unexpected and is an continuation of a upward trend that started back in 2014. It is also an expected consequence of the modularisation of the smartphone hardware industry as a whole, following a theory that Clayton Christensen originally coined “The Law of Conservation of Attractive Profits”. I have mentioned this quite a few times on this blog as well.

  1. Will Attractive Profits in the Android Ecosystem Move to Component Makers?
  2. More on Attractive Profits in the Cloud
  3. Android OEMs and The Law Of Conservation Of Attractive Profits
  4. The Law of Conservation of Attractive Profits And Personal Computing
  5. Google and the Law of Conservation of Attractive Profits

In a nutshell, the component manufacturers that can produce differentiated products will earn very good profits as the smartphone market becomes more modularised. This is similar to how Intel dominated CPUs during the PC era. 

This does not require near-monopoly power, and so this is what we are also seeing component manufacturers like MediaTek, Qualcomm and even Sony’s semiconductor business showing strong earnings, whereas on the other hand, almost all handset makers are struggling.

Going forward, I expect that the component industry as a whole will show strong profits and earnings. However the market is very competitive, and only those with competitive offerings will reap the benefits. This shifts the balance heavily towards already established incumbents, namely Samsung. Similar to how Intel successfully fended off the threat from AMD using Celerons, I doubt that cheap Chinese semiconductor players will ever unseat them, unless we again see an innovation like the smartphone which will disrupt the whole ecosystem.

How The HomePod Is A Very Typical Apple Innovation

Although I do not have a source handy, I recall that Steve Jobs mentioned in an interview long ago that back during the Apple II days, he had figured out that there were many more would-be software enthusiasts (programmers) than hardware geeks (those that could build and program one-board computers like the Apple I). This philosophy was reiterated in many Apple commercials, for example the Macintosh tag-line, “The computer for the rest of us.”

This, I believe, is the philosophy behind the HomePod. 

  1. Audiophiles today spend a lot of money on buying high-end equipment, contemplating the acoustics of their living room and where to place their speakers. It is reasonable to assume that there are vastly more people who would simply appreciate great music, compared to the number of us who are eager to learn and implement acoustic theory.
  2. Like the Apple II, the Mac and the iPhone, the HomePod is a vastly more integrated system compared to the mainstream alternatives at the time. It is part of Apple’s ecosystem for a great music experience. This has the effect of making the “Chasm” easier to cross, accelerating widespread adoption beyond early adopters. 
  3. It addresses an existing and proven market. We know that there is a market for good sound. We know that people still enjoy entertainment in the living room. Unlike the “smart speaker” market which is undeveloped and still highly speculative, we know the consumer profile to target with the HomePod.

With the HomePod, Apple is taking a proven strategy that has worked for them many times. In my opinion, there is very little doubt that it will easily surpass other “smart speaker” sales, simply by virtue of targeting a proven and vastly larger market.