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?
  • I can’t say I see many similarities. The internet bubble was predicated on misvaluing companies on metrics that made little sense; investing based on page views, for example. The financial bubble had less to do with complex financial instruments than with mis-valuing existing instruments, such as securitized mortgages. Certainly, (somewhat) complex statistics when into that mis-valuation, but there’s a decent case it was more fraudalent than accidental.

    The digital advertising examples you site are, first of all, measurable. They’re also comparatively easy to price compared to the non-digital competition.

    Let’s say you’re launching a new magazine. How do you price the advertising?

    Why is that different from pricing advertising on the iPad?

    The only variables that change are the content of the ad, and how effective the content is. But again, digital advertising gives you more tools to measure than than non-digital. How do you test how effective one picture is compared to another? Or a picture compared to a story, or some sort of insert? Such things are similarly difficult, yet you have *more* tools on digital platforms.

    Additionally, as a new market, it’s to be expected that some part of it is speculation. You have people speculating at different valuations (even shorting… probably), and whoever is correct will have the greatest return. In other words, it should be a matter of time because the system is (to a point) self-correcting.

    Also, part of the reason publishers are investing heavily in new ad technology is probably because their market is crumbling at the edges. The previous publishing reality – where the publisher was an essential gatekeeper between content and the audience, since distribution was so expensive you’d lose a fortune on publishing low-quality content – is no longer existant, and has been replaced by one where digital media is nearly free to publish and distribute. The real costs are in the creation and advertising/marketing. So you’d expect to see a re-allocation of publisher money towards advertising, the fragmentation of the content-creation industry (bloggers, not newspapers), the disintermediation between publishers and content creaters (publishers court high-quality content; they’re no longer the gatekeeper, so they can’t set the terms) and so on.

    Frankly, I’d be more concerned with how the dramatic increase in information will change the advertising industry. Previously, brands were cost-effective because they functioned as “proxies” for the quality of the product. As they were reified by advertising, people began use the brands to associate themselves with the qualities embodied by the brand.

    But today, the “proxy” is no longer needed because people have direct access to real information. Detailed specs, explanations of what they mean, and customer reviews remove a substantial part of the market value of a brand. The social value still exists, but it becomes the carrier and not the side-effect. How much money can you put into advertising to prop up the social value? Particularly because the social value is determined almost exclusively through the advertising: it becomes a vicious cycle.

    Unless Seth Godin’s (pipe?) dream becomes reality, and people ramp up investment in their products. Marketing becomes “market research” and customizing products to market segments as a form of differentiation.

    But, yeah. I can see the industry collapsing, but not from these new distribution channels.

  • Caroline Kalinoski

    I agree with Michael. These new forms of digital marketing seem even EASIER to price than traditional print or billboard advertisements. Even if they didn’t have the added ability to measure digital views, I would argue that you could still apply the same fundamentals of how print advertising was valued–number of views is just as easy/hard to estimate for a magazine than an iphone ad if you discount the user tracking ability inherent in technology.

    I think the real problem (from the admittedly non-advertising professional’s point of view) is the social cost of having every single surface/technology we interact with trying to sell us something. At what point does it stop being effective because we’ve learned to tune it out due to its overabundance in our lives?

  • Thanks for commenting guys – I always enjoy the debate.

    I think you both touched on an interesting point of how existing advertising channels are affected by new channels. I would guess that there is a relatively fixed amount of “attention” in the world. Which means that each additional advertisement that is placed makes all existing ads slightly less valuable (b/c there’s more competition for “attention”). Based on this theory not only are new channels (arguably) hard to price – but the very existence of new channels shakes up the value proposition of old channels.

    It’s as if traditional media (tv, radio, print) were the three basic ice cream flavors – chocolate, vanilla, and strawberry – and each of them sold for $5. All the sudden Ben and Jerry’s (digital media) come along with 50 new flavors – how do you price them? And what are chocolate, vanilla, and strawberry now worth?

    And – to your point Caroline – at what point are we making ourselves sick from eating too much ice cream :)