The Problem With Ads On The Internet

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Includes: AMZN, FB, GOOG, GOOGL, VZ, YELP
by: Dana Blankenhorn

Summary

Web ad rates are dirt cheap thanks to intrinsic targeting, ads created through data mining.

Ads based on intrinsic targeting are intrusive and resisted.

Ads consonant with content are service, but require a premium price to reach a premium audience.

The problem with "data mining" is not what you think.

It's not the data. It's not the mining.

It's the product. The product is garbage.

The product of data mining is advertising aimed at people based on who they are. The ads are based on what you buy, which web sites you enjoy, your age, sex, location and specific interests. There is nothing wrong with this in theory, but in practice you're being offered guns when you're looking for My Little Pony, and toys when you're looking for guns.

What Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB) and smaller competitors like Verizon (NYSE:VZ) are doing is called intrinsic targeting. They use data mining to give advertisers the specific audience they want to reach, wherever the audience happens to be. They then sell that audience for a run-of-network price.

There are two results. First, advertising is more intrusive than ever, and the use of ad blockers continues to rise. The Voice of America estimates the loss to advertisers from blocking at $22 billion, and about 22% of smartphone users are now using ad blockers.

Second, site managers find themselves having to go to war against their own users in order to stem the tide of losses. Technology companies are now selling "anti ad-blockers" and some sites are refusing to serve readers who have them installed.

Yet here is a stubborn fact. We like advertising. Advertising does, in fact, provide a service, when it tells us of products and services that are relevant to our needs. Back when there were things called newspapers, the Sunday paper was always the biggest of the week, because it had the most ads in it. Magazines like PC Magazine were chockablock with ads, and that's why we bought them - not for the articles (some of which I wrote) but for the ads.

Why? As consumers we have needs we wish to meet. Advertising, presented to us in an environment where we're ready to act, meets those needs.

Extrinsic targeting is how journalism has always paid its bills. When I was 9 my father once drove me, from our home on Long Island, directly into Times Square on a Friday morning so I could buy the Sunday Los Angeles Times and he could read the real estate ads. The Times is now called Tronc, which calls itself a "content curation" company. Journalism is dead, killed by intrinsic targeting.

The whole point of journalism is to create a defined audience, based on a location, industry or lifestyle, and sell access to those buyers, for premium prices, to companies that wish to sell them stuff. Journalism is market making, and when Google gave advertisers these audiences for 80% off it really did no one any favors. The advertiser got the audience, but not where or how it wanted to be reached, and the advertisements fell on deaf ears. The audience went off to online malls like Amazon.com (NASDAQ:AMZN), or audience aggregators like Yelp (NYSE:YELP), desperate for the information ads and stories once provided.

We all feel more ripped-off than ever before because advertising only provides a service when it's consonant with the potential buyer. We want a billboard for hotels on the highway, we want to hear about new PCs while we're reading about them, and we only want to hear about something to fight old age when we're watching the network news. In these cases, advertisements are a service. An ad for a brokerage, or a new investment opportunity, here at Seeking Alpha is welcomed. An ad for new windows, not so much.

What is broken with data mining, in other words, isn't our privacy. What's broken is the relationship between what we read or watch and the ads we get. The mismatch will continue, either until there's no content left worth reading, until Google and Facebook are the only content, or until premium prices are again offered for the work of attracting a premium reader, like you.

Disclosure: I am/we are long GOOGL, AMZN.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.