A Select Few: The State of Digital Advertising

By: Stephen Anderson

The New Digital Landscape

            In the early days of the worldwide web, digital advertising was straightforward.  Consumers had access to free content and, in exchange, would endure advertisements.  A cursory glance at the industry seems to show this is still the status quo and, consequently, life is good for digital advertisers.  Global spending in 2017 is expected to be around $229 billion, with projections for 2020 north of $335 billion. [1] However, life is in fact not good for the entire industry.  It is good for only a select few.

Where there is growth in an industry, there is typically room for startups.  Although the digital advertising space is undergoing rapid growth, startups are being squeezed out.  This is due to the concentration of earning power in only a handful of companies, namely Google and Facebook, and the emergence of ad blockers. [2]

There are primarily two types of startups that find themselves in the digital advertisements industry: those that specialize in advertising technology (ad tech), and those that rely on digital advertising for necessary capital (content publishers).  While they are drastically different businesses, both are experiencing the difficulties born from this newfound landscape.

Time to Fold

Although content publishers find themselves on uneasy ground, ad tech startups may be watching the floor fall out from beneath them.  Simply put, it is looking increasingly likely that venture capitalist investments into ad tech has already peaked and is now falling off at a rapid pace.  Since the peak of ad tech deals in 2013, the pace of venture capital investments have dropped by almost 80 percent. [3] Many argue that this is direct correlation to the market consolidation that is taking place. [4] Ad tech startups can thank Google and Facebook for this new reality.

Independent ad tech startups are having trouble finding advertisers to do business with because of the Google-Facebook duopoly.  While they are still able to attract business in certain niches, this will not provide sufficient means for most ad tech startups to stay afloat. [5] Google and Facebook began focusing on how to entice consumers to click ads and are now bearing the fruit of their labor.  To give context, together the companies earned nearly two-thirds of the Internet advertising revenue in the U.S. in 2016. [6] Adtech startups do not have enough revenue to share amongst themselves and that fact alone is pointing towards a flood of consolidation.

Blocking out the Haters

            Content publishers, on the other hand, are facing a different type of challenge.  To say that ad blocking companies are divisive would be an understatement.  Extortionists.  Internet killers. Unethical, immoral, and mendacious covens of techie wannabes.  These all are terms that have been used to describe ad blockers. Nonetheless, as much as digital advertisers may disapprove, it is not illegal to block advertisements. [7] Readers have the fundamental right to decide what content and which scripts enter their system.  Specifically, courts have found that Internet users have a legitimate interest in the prevention of undesired advertising, protection from malicious software, and control of their data. [8] By downloading ad blockers they are exercising that right and filtering the content they digest.

            To be frank, the popularity of ad blockers is more than understandable. They slow down the speed of browsers and, aesthetically speaking, make webpages cluttered and unattractive.  For these reasons, it is no surprise that, as of last year, around 600 million devices were using some form of ad blocking software and there was a 30 percent year to year increase in the use. [9] From the publisher’s point of view, if they lose ads, they lose money.

Legality of Ad Blockers

In order to fully appreciate the impact that ad blockers have caused to the advertising industry, it is necessary to understand the legality of the software.  At a basic level, it helps to define the software’s role not as blocking advertisements, but as filtering advertisements.  They are “selective downloaders.”  This distinction is the primary reason they have prevailed in a number of court decisions, both in the United States and Europe.

            Ad blockers, such as the popular and litigious, AdBlock Plus, are considered filters due to their software programs that whitelist select publishers.  In the case of AdBlock Plus, there are two avenues that allow publishers to become part of the list.  They can either meet a set of criteria or, if you are a larger company, such as Google or Facebook, you may pay.  Although many in the advertising industry have described this as a “patronizing and obnoxious form of gatekeeping,” it is perfectly legal. The reality of the situation is that the large advertisers, such as Facebook, Google, and Verizon, will pay to bypass the ad blockers.

            Not all ad blockers, however, are acting legally.  In the United States, the Digital Millennium Copyright Act forbids the circumvention of a technological measure that effectively controls access to a copyrighted work.  The problem is that some ad blockers do precisely that.  They employ circumvention technologies that elude the defensive measures utilized by publishers. [10] The appearance of this software is not beneficial for any part of the advertising industry, and in response there has been a concerted effort, particularly by the Interactive Advertising Bureau, to put forth principles that address ad blocking.  This response legitimized ad blocking as a recognized tool for enhancing the consumer’s experience.  Whether advertisers like it or not, consumers may now voice their displeasure of intrusive advertising.

Room for Startups?

With all of the above in mind, it would seem that these startups face an uncertain future.  Unfortunately, this is their reality.  Ad tech startups will likely have to consolidate or scale their business to the niche they find themselves in.  Content publishers that rely on website traffic and advertising funds are faced with a new ad blocker-insulated world.  Many publishers, likely including your favorite blog, rely on advertising to fund the free content they provide.  Ultimately, advertising and digital publishing industry must adapt to the new digital age.  Although all may seem bleak, not all hope is lost.

One avenue content publishers can pursue is native advertising.  In order to be a native advertisement, the content of the ad has to align websites style and tone, while also providing information that the website’s audience expects. [11] For example, in a blog the advertisement will look, or at least attempt to look, like any other post on the blog.  The difficult aspect of native advertising is the sincerity, or lack thereof, of the post.  Additionally, the FTC requires advertisements to have certain keywords, such as “sponsored by.”  Ad blockers are forcing content publishers, and the digital publishing industry in general, to become more creative and ingratiate advertisements in a way that is ultimately enjoyable for the consumers, such as the advertisements seen on Instagram.

            In spite of the Google-Facebook duopoly, there are examples of ad tech startups still succeeding. Trade Desk, for instance, went public last year and, earlier this year, reported earnings north of $28 million. [12] Additionally, there is a possibility that companies such as Snap and Pinterest could challenge these giants, and ultimately dilute their share of the market.  If so, ad tech startups could, at least in theory, attempt to take back a percentage of the market.  At the very least, they could expand the niche many find themselves in. 

            At the end of the day, the current landscape of the digital publishing industry makes it difficult for startups to succeed.  Whether it is a well-funded ad tech startup or a content publisher that generates consistent viewers, larger companies and market forces are dictating the terms of the playing field at the moment.  Nevertheless, it will be interesting to track the variety means by which these startups attempt to navigate these obstacles.