I’ve been doing a lot of reading lately about the financial bubble/bust of 2008. Most authors I’ve read agree that one of the major forces that led to the meltdown was the creation and sale of exotic financial instruments that were very hard, or in some cases, impossible to price. Similarly, reflecting back on the technology bubble of 1998, one of the driving forces for the crash was people buying and selling stock in companies that had little or no cash flow. Citing both these cases, I think it’s safe to say that there are two telltale signs that indicate an industry is headed for disaster:

1) Everyone foresees unlimited growth potential

2) People are buying and selling things without knowing how much they were worth

Now, it’s not my intention to be the person on the street corner heralding the end of the world with a cardboard sign, but I do think it’s important to take a step back every once in a while and see where things are headed. For me – the area of interest is digital advertising.

Digital advertising is tricky – it’s inherently hard to price. Unlike financial instruments, the value of an ad (e.g. banner ad, text ad, video ad etc…) is different for each advertiser. There is no underlying “asset”, but rather, what you pay for is an opportunity for people to see your message. Financial instruments are worth the same thing no matter who owns them, but the value of advertising is different for every advertiser.

Additionally, the avenues for digital advertising are becoming increasingly fragmented. The digital advertising industry is no longer just standard banner ads; there are now digital ads everywhere. Every day publishers are thinking up new and untested forms of advertising, which they then try to sell to advertisers. Some of the more recent examples are iPhone ads, iPad ads, and social media ads. How could these new advertising products possibly be appraised and accurately priced? It’s nearly impossible! But still, even without knowing how much they are worth, advertisers are buying these new digital ad products and encouraging publishers to continue creating increasingly “exotic” advertising opportunities.

Looking at the digital ad industry, one could argue that both of the “doomsday” signs are now true – 1) Everyone foresees unlimited growth potential (and publishers are investing heavily to pursue new advertising technology) and 2) people are buying and selling “new media” advertising products with no way of knowing how much they are worth.

I’m not saying that we’re on the precipice of disaster, but I do think it’s important to keep these things in mind – because another thing that all bubbles have in common is that just before the crash, no one sees it coming.

The Digital Ad Bubble?