Welcome to part two of my summer field trip back to the world of online advertising. This is the dark middle episode of the trilogy, focusing on the struggles of online publishers and the rise of advertising middlemen.
Act I: The Internet shreds the economics of the newspaper business
The news industry has had a brutal 20 years of revenue declines and layoffs. People often blame the big tech companies for this. In their telling, Google, Facebook, Craigslist, and their ilk are the Legion of Doom, endlessly cooking up new schemes to defeat the Superfriends. This is wrong, and gets in the way of progress toward a new, more sustainable business model.
Newspapers were hugely profitable in the second half of the 20th century, but not because of crusading journalists. They were reaping the rewards of local monopolies on physical distribution, because printing presses and delivery trucks were expensive. That meant readers had to buy the whole bundle of hard news and features, regardless of which section they wanted, and advertisers who wanted to reach local customers had few alternatives.
The Internet smashed that monopoly in three ways at once.
Every news outlet in the world started competing for reader attention, which revealed that a lot of journalism was just slightly different versions of the same story, with little marginal value to the reader. Aggregators like search and social media made this more obvious but were a symptom, not the cause.
Advertisers suddenly had many more options to reach their target customers, which destroyed publisher pricing power. Even worse, it turned out advertisers didn’t like their brands showing up next to controversial news stories.
The bundle broke open, and newspapers lost their cash cows because it turned out that services like classified job postings, real estate listings, and movie times could be cheaper and better if they weren’t tied to local news brands and didn’t need to be priced to subsidize hard news reporting.
A proportionate reaction from a news CEO who understood this in the early 2000s would have been dead-assed panic and rethinking everything from the ground up. Instead, while the sharks were circling, news publishers just kept swimming. The New York Times spent $1 billion on a new skyscraper that they proposed in 1999 and opened in 2007. By 2011, NYT Company revenue had been cut in half.
ChatGPT put this together for me. I spot-checked a couple of numbers so I think it’s right.
Act II: Bad ad formats destroy online publishing’s reputation
Prioritize short-term wins too much, and you can destroy your long-term value. Duh. Besides the fable of killing the golden goose, this has been taught in business school case studies for decades. Yet, somehow online publishers (all of them, not news companies specifically) have spent 30 years deploying a series of user-hostile and sleazy ad formats that have given the entire industry a bad name.
Here’s a partial list.
Pop-up ads that opened a new browser window to steal your attention. So hated that they made it acceptable for browsers to disable them, legitimizing all the ad blocking that followed. Yet publishers went back to this well with “overlay ads.”
Auto-play videos in postage stamps in the corner of your screen. This only exists because advertisers pay much more for video ads, and can’t reliably tell if their ads are in legitimate video streams.
Tiny and/or ineffective X buttons to close ads. This keeps them open longer and generates accidental clicks.
“Related content” ad units at the bottom of articles that are full of gross health images, teasers about fake celebrity scandals, and so forth. It’s like ending every course at a Michelin-starred restaurant by having the waiter force-feed you a can of spray cheese.
Hijacking the browser back button to show you a full page of unrelated ads, instead of the actual page you wanted to return to.
That last one is recent and used by big brands who should know better. Publishers continue to abuse useful browser features for the sake of another few pennies of ad revenue. This is even worse on the mobile web, where the accumulated cruft on a tiny screen makes articles almost unreadable. Who thinks this is good for user loyalty?
I have heard yield managers at publishers claim they are only doing this because of the economic challenges that the industry faces. If they don’t run the bad stuff today, the company might not even be around tomorrow.
I don’t buy it. Plenty of online ad formats don’t make users’ blood boil. Mobile app gamers will actually complain if you take away their option to watch a video to get more coins or gems or whatever. While Facebook ads have more than their fair share of problems (such as widespread scams), they also fostered a whole new industry of direct-to-consumer brands. And newer journalist-led organizations (with lower overhead costs FWIW) have built sustainable businesses without resorting to these formats.
If the only way you can stay in business is by abusing your readers’ attention, maybe you’ve got deeper problems.
Act III: Middlemen give bad actors a back door into the ecosystem
The online advertising industry is home to many honest advertisers and publishers, but it’s also a persistent source of fraud and crime. Bad actors create fake sites with fake traffic in order to sell fake attention to real advertisers. Or, they create real-looking ads for real-looking sites that are actually scams, and use fake payment credentials to buy real attention from real publishers in order to lure in more victims.
This is possible because of the prevalence of middlemen – ad networks and ad exchanges/SSPs. These are legitimate companies, but their business model is based on aggregating thousands (or millions) of buyers and sellers, mostly through automated systems. This arms-length relationship makes it really easy for a bad actor to list bad inventory or buy ads for scam sites.
To be fair, middlemen do a lot of work to detect and stop fraud. I know many of the people who do this professionally, and they are dedicated, hard-working, and deeply principled. The problem is they will always be fighting a rear-guard action because the front door is not well-guarded.
In real-world finance, KYC (know-your-customer) laws mandate identity verification and risk assessment before starting a business relationship. There’s an even more rigorous, expensive process to become an SEC-registered broker dealer. This doesn’t prevent all financial crime, of course, but past abuses and scandals have led to these sorts of industry-wide efforts to make it harder.
Online advertising has been around for 30 years and still has virtually none of this. There are no mandatory authentication standards, so you can never be sure a buyer or seller is who they say they are. Some middlemen are very careful about vetting new partners, but practices vary widely. It’s not hard to find an unscrupulous middleman that makes getting a new account as easy as filling out a few Web forms. And since middlemen often stack on each other (ad networks buying via SSPs, etc), once you’re in somewhere, you’re in everywhere.
Unfortunately, I doubt that today’s middlemen will ever self-regulate their way to rigorous authentication. Past efforts to reduce specific types of fraud, such as ads.txt, have led to material revenue declines for big players. I don’t think the industry, built as it was on openness, even knows how much of it would evaporate under stricter scrutiny.
Well, that all sucks.
As promised, we are ending on a depressing cliffhanger. News institutions have crumbled, the user experience is terrible, and fraud lurks around every corner. Next week the plot thickens with the arrival of giant consumer platforms, but a focus on actual people could actually end our field trip on a hopeful note. Bring on the John Williams music and tune in next time.
Ideas? Feedback? Criticism? I want to hear it, because I am sure that I am going to get a lot of things wrong along the way. I will share what I learn with the community as we go. Reach out any time at [email protected].
