80 Business The Economist October 30th 2021
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s well as a louche mystique, there has always been something
murky about advertising. From P.T. Barnum’s “Mammoth Fat
Infant: only three years old and weighing 196 pounds” to three
martini lunches at the dawn of the tvera, it was never quite clear
whether the adman was artist, scientist, stronglivered schmooz
er or con man. For all the wit and wiliness on Madison Avenue, the
economic cycle had a much more direct impact on ad spending.
And it was a wonder companies embraced the medium at all. As
far back as 1904, the Atlantic, an American magazine, wrote that an
estimated 75% of advertisements did not pay; yet the other 25%
paid so well “there is scarcely a businessman who is prepared to
stand idly by.”
In the digital age the guesswork should have become a thing of
the past. User ids, devicetracking technology and electronic mar
ketplaces handling billions of transactions a day have turned the
targeting of individuals into a drone strike rather than a hitor
miss barrage. Costs have come down, so millions of online busi
nesses, instead of renting premises, have turned digital ads into
the Yellow Pages on steroids. People are spending more time glued
to screens, giving advertisers more scope to seduce them. The re
sult has been stunning growth. MoffettNathanson, a research
firm, says digital ads have grown from 27% of all dollars spent on
advertising in America in 2015 to 52% (tv, the secondbiggest cate
gory, has dropped from 42% to 33%). Until recently, the main ques
tion asked on Wall Street was not whether the feast would contin
ue but how soon the digital share would reach 80%?
For the first time, the past week has dented those convictions.
On October 21st Snap, a photosharing platform, revealed that it
had been caught flatfooted in the third quarter by new privacy
measures introduced by Apple to enable users of iPhones and its
other devices to stop advertisers tracking them across the web.
Though revenues of $1.07bn were only just shy of expectations, it
lost a quarter of its value in a day. Facebook, a socialmedia giant,
recorded $28.3bn in ad revenues, a third higher than the prior year,
but that was lower than expected. It is having to increase spending
next year partly to improve its targeting and measurement tech
niques to counteract Apple’s restrictions. Alphabet, which owns
Google, bucked the trend, recording its highest sales growth inmore than a decade in the third quarter; its search engine, source
of almost all of its ad revenue, seems immune to Apple’s changes.
For all of them, the underlying digitalad market still looked vi
brant. But their divergent performances raise three big questions
about the future of advertising. For all its aura of precision, it’s an
industry still full of unknowns.
The first one concerns the correlation between advertising and
economic growth. Sir Martin Sorrell, chairman of s4 Capital, an
advertising agency, notes that digital ads easily outperformed
their analogue counterparts during the pandemic, indicating a
break in the ageold link with gdpbecause of a structural shift as
the economy moves online. But whether that shift continues is a
matter of faith, not fact. Economic factors may already be re
emerging. Both Facebook and Snap said tangled supply chains
would diminish the incentives to advertise in the lucrative holi
day period because of fewer goods on shelves. Moreover, even if
the link with gdphas frayed, online ads appear to correlate closely
with growth in ecommerce, which Facebook says is slowing as
the pandemic fades. In America, there is growing evidence that
consumer confidence is on the wane, which could affect one of the
biggest factors believed to be fuelling the ad boom—the explosion
of new businesses, many of them smalltime online retailers.
The second unknown is the extent to which consumers will
continue to tolerate advertisers stalking them. According to Flur
ry, an appanalytics firm, only about one in five app users have
opted in to being tracked since Apple’s ios14.5 launch in April gave
them the option to choose. That suggests a keen embrace of priva
cy, which vindicates Apple’s hunch. That said, Apple may be bene
fiting at its rivals’ expense. The optin only applies to thirdparty
apps. Meanwhile Apple’s advertising business is booming, espe
cially in relation to searches on its App Store, according to Bern
stein, an investment firm. Moreover, its privacy push is provoking
rivals, such as Facebook, to make countermoves into virtualreal
ity headsets and 3ddigital worlds it calls the metaverse, in order to
create a parallel universe to that dominated by Apple. Bernstein’s
Mark Shmulik calls such domains “walled gardens”. If consumers
discover they are just a way of better bombarding them with ads,
the gardens will soon feel more like prisons.
The third unknown is the firms paying for all the ads. The tech
giants provide little detail about where they come from, what size
of firms they are, and on what they are spending their money. The
result is a lot of frustrating sleuthing and guesswork. Brian Wieser
of Groupm, the world’s largest media buyer, estimates from Face
book’s billingaddress data that Chinese manufacturers selling
abroad account for approaching $10bn of advertising on the social
network this year. He points to thirdparty data suggesting that
more than 40% of Amazon’s marketplace sellers are from China,
but Amazon does not disclose such information. There is scant re
porting quantifying the number of small versus large advertisers,
and whether they are paying for brandrelated advertising or for
direct sales. The industry remains as murky as ever. From grey-flannel suits to just flannel
The platforms promise precision to their advertisers based on
consumers’ data. But they fail to reveal anything like enough in
formation to enable outsiders to gauge the robustness of the digi
talad craze. The result, shared by many in the industry, is blithe
optimism thatthemarket will continue to grow like Topsy. The
past few dayshaveprovided a welcome opportunity to reexamine
that thought.nSchumpeter
The three unknowns of the modern advertising age