Overview
It has become an axiom that markets and their pricing mechanisms are formed on the basis of current and future “scarcity.”
In Industrial Markets, for commodities to lead to profits for producers they must go through the circuit of: production, distribution and consumption. Due to the rise of mass-production, the industrial world was quickly flooded with an influx of both essential and non-essential commodities. And so the problem for industrial markets was no longer as much the problem of production so much as the problem of consumption - how to create awareness for a product, service or brand.
Consequently, by the late 19th century advertising was invented as an economic solution to deal with the demand problem caused by mass-production. Quickly forging its own industry, the goal for advertising was to recruit the most talented, creative individuals to explore what made human beings purchase. More time, more capital, more attention to detail soon went into merging the magical world of things with human attention, emotions and desires.
What started out in print, in magazines and newspapers, quickly moved to billboards and transportation posters, to broadcast - radio and TV - and by the 1990s advertising was quick to invade this new domain - we now call the Internet.
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Startup digital businesses soon formed with the sole purpose of capturing the attention-based advertising market and by the first decade of the 21st century these corporations as they would soon become left industrial era advertising businesses like magazines and newspapers with an ever decreasing slice of the advertising pie.
Web2
In order to understand how this happened and why the Internet’s incumbent business model became so predominantly advertising-focused, it’s important to consider two key missing properties of early and current Web:
- It doesn’t hold “state”, independent of trusted operators
- It doesn’t have a native mechanism to transfer state
Lack of state is a result of the simplicity of the protocols that the web is built on, such as HTTP and SMTP. State, however, is crucial to the development of services and applications as it can represent value. As such, two key developments have remedied the state drawback. Cookies were invented in order for web based applications written in JavaScript to preserve state on each local device. The problem with cookies however is that they are created and controlled by service providers, not the user. The second development that addressed the lack of state is centralized service providers (i.e., Google, Facebook, Baidu, Tencent, etc.) that hold user state on their own machines. The problem lies in how the internet benefits these centralized companies way more than it does the public.
The second key missing property of the internet, the lack of a native mechanism to transfer state, is partly a by-product of the first issue. Today’s internet has made it easier to transfer information by orders of magnitude and thus has created immense potential for new businesses and services. However, if there’s no easy way for businesses to trade value, they need to find another way to profit from their services.
As a consequence, advertising businesses are the only ones that can efficiently store and transmit the state of billions of users, and, conversely, businesses that can efficiently store and transmit the state of billions of users (i.e, Facebook, Google, Amazon, Baidu, Tencent, ByteDance, etc.) are rendered the only remaining advertising businesses.
Now comes the question of how an ad-focused model has affected Internet marketers, publishers, services and users?
Problems
We’ve outlined 9 problems of the ad-funded Internet:
- Targeted advertising’s inflated and deceptive auction format forces advertisers to overpay for the chance of forming an ongoing relationship with a consumer, yet tracking marketing campaign effectiveness remains misleading, especially if the purchase happens offline, in the future, or on another site from the ad (usually some uninspiring clunky shopping experience);
- Complexity of the ad-ecosystem increases the cost in headcount and difficulty of tasks for digital marketing teams;
- Marketers require managing many processes inclusive of advertising and commerce, and as such, direct-to-consumer brands struggle with growing customer acquisition costs and insubstantial information hindering marketing and commerce supply chain;
- Third-party intermediaries facilitate and profit from every single advertising transaction;
- A richer advertising economy is reliant upon more user data (which feeds ad models), creating misaligned incentives with users and bad UX;
- Users suffer a form of “electronic pollution” consisting of threats to security, threats to privacy, costs in inefficient download times, financial costs in extra mobile data fees, and in the case of the many ads, excessive costs to their attention;
- As users continue to adopt ad blocking technology the consequent shrinking of the remaining ad-funded market seems inevitable;
- With a growing oligopoly of an advertising attention-based market, publishers face both a shrinking market for the ad-blocker-free attention, and a shrinking slice of the advertising revenue pie;
- Advertising favors established businesses, which puts new businesses at a disadvantage, limiting the economy’s growth potential.
Where do we go from here?
With the growth of peer-to-peer, influencer and affiliate marketing, centralized advertising as a business model cannot be sustained because in a fully decentralized and peer-to-peer world, anyone and everyone, anywhere and at any moment, can be a producer, distributor, consumer… or advertiser. Consequently, the lack of marketing scarcity collapses the ability to price advertising under its own weight.
Of course, this is only theoretical and not necessarily was has come to be just yet…
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