I Would Short the Digital Ads Market if I Could

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Ads and ad revenue have been in the headlines a lot recently, with the Musk acquisition of Twitter, the increasing interest rates and looming recession, and platforms like Twitch increasing ad density. The ad space is a highly competitive game, with companies piggybacking on polarizing and extreme content.

According to data from the Interactive Advertising Bureau, in 2022 alone over $616 billion was spent on online advertising, with over $200 billion in the US alone. But is it really worth it? Ads are purchased based on impressions, not necessarily conversions. This means that platforms like Google, Facebook, Twitter, Instagram, LinkedIn, and TikTok have no incentive to place your ads in a relevant spot. So why spend so much on ads if you can't accurately measure the return on investment (ROI)?

Unfortunately, digital advertising has been seen as a "golden bullet" for building a brand and reaching new customers, but as more and more companies use these "golden bullets," they become less effective. Now, it's a situation of corporate stagnation and a desperate attempt at job security for ad departments.

Fraud

Not only are the incentives against you when it comes to selling ad space, but in some cases fraud runs rampant and unchecked. Uber was notorious for its lack of ad auditing and paying per app download. This becomes an issue when large corporations contract with smaller agencies and ad vendors to manage their ads. These vendors often have little incentive to get quality downloads and are more likely to engage in fraud to inflate their numbers. This is a great example of where a key performance indicator (KPI) becomes a target, defeating the purpose of the KPI.

Ad Relevancy

Platforms like Twitter, Twitch, and YouTube try to place relevant ads in front of content so that viewers will engage, but the available ads are scarce compared to the content buckets to fill. More often than not, an ad associated with content will have very little relevancy to that content, and that's not the fault of the publisher. There just aren't that many different ads out there. Procter & Gamble, Unilever, and Coca-Cola are some of the biggest ad spenders, and there is only so much content and so many viewers that these ads will have an impact on.

One could argue that these organizations are competing for brand recognition, brand relevance, and likely combating negative sentiment in the public for whatever reason. But with combined ad budgets creeping into the upper hundreds of millions, if not billions, of dollars, it is unlikely that they couldn't achieve the same effect with a quarter of the budget.

Ultimately, ads are placed on the content that is viewed and engaged with the most. That content is usually polarizing in nature and built around sensationalized headlines, only perpetuating that content.

So Why Buy Ads – A Strong Counterpoint

Ads are largely overpriced – FOR THE LARGEST AD BUYERS. For platforms and projects that already have product-market fit and are looking for scale, digital advertising can be a phenomenal scale tool. The key focus here is product-market fit. Digital marketing will not make or break a product and should only be used to scale something that is already working on a smaller scale.

In summary, are ads overpaid for? Yes. Are ads totally useless? Of course not. What happens when the ad bubble pops? Eventually, advertisers will stop buying, and a huge chunk of revenue for many media platforms will fall away, and it's unclear what will be left.

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