Online advertising results clouded by nonsensical jargon

Defensive adtech industry is especially adept at making the simplest things impossible to determine

Facebook gave Mark Zuckerberg the perfect birthday present when the social media network turned 20 last week. Meta, the owner of Facebook, Instagram and Whatsapp, reported all-time record earnings: banking $40bn (£32bn) in revenue in the past three months, and a net income of $14bn. Meta’s share price has quadrupled in just over a year, making it the best performing of the Big Tech “FAANG” stocks, a select group of titans that includes Apple, Amazon, Netflix and Google.

Meta can splash the cash around like a sailor on shore leave. It is giving $50bn back to shareholders in the form of a buyback, making its first ever dividend payment and can even indulge its co-founder’s obsession with creating a 3D world, a “metaverse” – which Zuckerberg alone seems to think is a good idea. This cartoon caper has swallowed up $42bn in R&D expenses so far, but that barely leaves a dent on the $90bn of expenses the company incurs every year. Meta can do all this because it does one thing very well, which is to deliver potential buyers to products and services, so advertisers keep returning. Everything now looks OK at the OK Corral.

Or does it? Let’s look at it a different way, and ask: is digital advertising as good as it could be? Just how effective is it? Advertisers may express delight that Team Zuckerberg’s wizardry is bringing them customers, as they luxuriate in the data and dashboards Meta provides. It seems great value compared to the bad old days, when they had to blanket the airwaves or billboards with expensive ad campaigns. But are ad buyers paying more than they would be in an efficient market? And what would an efficient digital ad market actually look like?

There are clues that all is not well. One is the sheer size of the profits made by Alphabet and Meta, and their squeeze on what we might think of as the third “player”, the open ad market. Since both run a straightforward matching algorithm, shouldn’t those costs be minimal, and prices lower? It doesn’t cost Tinder billions of dollars a quarter to match profiles.

Another is in the quality of the ads. We’re all familiar with this scenario: you buy a product, say a camera, then are chased around the web for weeks by advertisements for the same camera. Why are fit young professionals getting ads for walking aids, and not gyms?

This highlights an awkward truth. While the adtech giants can say they’re efficient, efficiency is not effectiveness. In e-commerce, which relies on performance advertising, only one metric matters. And it isn’t “reach”, or some such fancy-sounding proxy. It’s simply how many units of your product you shifted, and how much you spent on digital ads to acquire those sales. Here, the story isn’t so great. Anyone claiming that their ad campaign had “great reach” when it was designed to shift units is either bluffing, or lying: they either don’t know the answer, or they won’t say.

Bridging this gulf in meaning, between the economists’ watchword “efficient”, and the marketers’ “effective” is the regulators’ challenge. Speaking to people in both camps finds them clinging onto obscure jargon. The advertising industry can be notoriously defensive, and the adtech part is particularly adept at making the simplest things opaque. Anyone for a “demand side platform”?

“It’s difficult for regulators, let alone the lay person, to understand what’s going on,” said one industry veteran.

“Programmatic markets [the automated buying and selling of digital ad space] are very efficient, and those markets always clear – but so does the oil market,” he said, explaining that supply always meets demand and a deal is done. “But that doesn’t mean there isn’t an Opec in the room manipulating the price. Is there an Opec in digital advertising too?”

Finding out, by encouraging a competitive challenge from the open adtech sector, is not easy. Late last year the Competition and Markets Authority concluded a two-year investigation into Meta by imposing commitments on the company, which would promise not to use privileged insights to gain an advantage. Google is under continuing scrutiny from a separate investigation. But isn’t scale and privileged insight what that “efficiency” is all about? That’s what the duopoly insists. And to complicate things further, Google is set to block third party cookies from its browsers, just as Apple has from its browsers. This has the consequence of hurting Meta, which needs the trackers, and the third party sector even more so.

Regulators have plenty to think about. My advice is to remember that lowering the cost of doing business should be the ultimate goal – and the adtech industry is barely on the first step of a long journey. Alphabet and Meta have almost limitless resources at their disposal to confuse them. So getting the economists and the marketers talking the same language would be a great start.