Where once there was a diverse array of flashy media on the London Tube, now I am barraged with Transport for London ads reminding me to mind the gap. While the gap between the platform and trains is easily missed, the growing gap between digital and traditional advertising is certainly unmistakable. In this article, we go over the nuts and bolts of digital advertising, dissect the digital boom of 2020 and the rise of SVoD and e-Commerce, analyse the Google-Facebook ad tech duopoly, and look forward into the future of digital advertising in a post-COVID and cookieless world. In sum, digital advertising is more efficient and quantifiable than any other solution, cementing its leading role in the industry. Though barely walking, digital advertising is about to go through a transformation due to increasing digitisation, understanding, and acceptance, as well as legal challenges facing ad tech that will precipitate change and innovation in the sector. Accordingly, the future of digital advertising will be increasingly transparent, consumer-faced, and intelligent, dictated by first-party data.
TL;DR: Digital Advertising is nowhere near maturity as it is just now hitting its stride as the most efficient and quantifiable solution for marketing products in a world of increasing digitisation.
Before getting into our analysis of the state of digital advertising, we need to get everyone on the same page. In short, digital advertising is a data-driven strategy to reach and capture consumers across digital channels. Ad Tech refers to the tools employed by digital advertisers. Using targeting capabilities enabled by the availability of customer intent data, digital advertising can identify and capture consumers at every stage of the buying process.¹
Digital advertising is a fast-paced and dynamic process that stands in clear contrast to its traditional static advertising elders. According to Jesse Frederik and Maurits Martijn, “For more than a century, advertising was an art, not a science. Hard data didn’t exist.”² When the first banner ad from AT&T premiered on HotWired.com in 1994, the world saw it just like a billboard, but on a web page and not the highway. However, unlike the billboard on the side of the highway, the banner ad could actually track how many people saw and interacted with it. The massive amount of data available to digital advertisers revolutionised how we view and interact with promotional content and brands.
Digital advertising’s dependence on data produces instant and measurable results. Advertising is no longer an expensive shot in the dark; its data-driven process directs the right ad to the right person at the right time (cue clichéd definition of digital advertising). Instead of blasting out generic advertisements, advertisers can go directly to a target audience of those most likely to convert. This specified and personalised practice reduces waste on both the advertiser and the consumer’s side.
However, with all these data-driven advances in advertising, the gap between digital and traditional forms of advertising has grown increasingly larger. Jeremy Ettinghausen claims “We have now reached the point where if you don’t know how to advertise on the internet, then you don’t know how to advertise at all.”³ It’s safe to say that digital advertising is the way forward, but what does its future hold?
If there was one thing good about 2020, it was the global boost in digitisation. In the age of COVID-19, those who previously had no online presence either transitioned to the digital world or went bankrupt. 2020 acted as an accelerator for digital adoption in both supply and demand as businesses and consumers moved online.⁴ For instance, McKinsey & Company reported that digital adoption in Europe skyrocketed from 81% to 95% during Spring 2020, a leap that typically would take two to three years to be realised.⁵ And as we migrated and meandered en masse towards virtual worlds, digital advertising followed with gusto. Looking at the numbers, global ad spend for traditional advertising was down 18% in 2020, while digital advertising saw an 8% increase in ad spend.⁴ Magna estimates digital advertising accounted for 59% of global ad spend in 2020.⁴
Two arenas stand out as the key catalysts of digital advertising, heightened by the pandemic-induced digitisation boom. Streaming Video on Demand (SVoD), has become increasingly popular, driving consumers away from pay-TV, the former playground of traditional advertising. Additionally, the shift towards e-Commerce is turning consumers away from brick-and-mortar and towards online shopping. Let’s dissect why these arenas are so key for the future of advertising.
SVoD has toppled the throne of traditional television. In 2020, over 30 countries saw SVoD overtake pay TV subscriptions.⁶ As digital advertising and SVoD grows, TV advertising growth will stagnate and plateau in the coming years. However, for advertising, streaming is less profitable than traditional television, with only ⅙ as much revenue per streaming home compared to that of pay TV. Part of this arises from the fact that most homes only subscribe to 2-4 streaming services (unless you’re like my parents who subscribe to 6). Additionally, only half of SVoD are ad-supported (pro for ad-overwhelmed consumers, con for advertisers). As a result, advertisers will turn to new digital avenues to sell their products.⁷ The loss of TV advertising isn’t necessarily a bad thing though, as a recent study revealed that a large percentage of brands actually had negative ROIs for TV advertising, with most ad campaigns (⅔) having a negative or insignificant impact on sales.⁸
The primary draw of SVoD comes from its “on demand” nature, at a much lower price tag than cable TV (hence why my parents pay for 6 streaming services because it is still less expensive than their former monthly DirecTV cable subscription). The unbundling of television, as observed by Benedict Evans, mirrors the mass unbundling across retail and media industries.⁹ However, unbundling goods inherently reduces profit. When we unbundle goods and buy direct products, value chains are disrupted and revenue per user (RPU) is reduced. Doug Shapiro accurately observes that “the pay TV business has been such a great business for so long because people were effectively paying for products they didn’t consume."⁷
But life (er, TV) finds a way. TV remains a great space for mass market consumers and brand awareness. Most of those who previously shelled out the big bucks on TV advertisements will continue to do so. Alternatives for SVoD advertising are arising, such as on Connected TVs and ad-supported networks.¹⁰ Furthermore, we cannot completely write off streaming services as advertising targets as Activate Consulting found that 68% of paid streaming subscribers in the US use one or more free video streaming ad-supported service.¹¹
The rise of e-Commerce has also bolstered the superior position of digital advertising in the industry. As we were all locked at home, e-Commerce became the go-to for shopping, open 24/7 and with no need for a mask or social distancing. Overall, Activate Consulting found that the growth curve of eCommerce accelerated by 5 years in 5 months.¹¹ Meanwhile, Euromonitor International found e-commerce sales to increase 25% in 2020 while in-store sales dropped by 5%.¹² The movement online has altered customer-business relationships, where the customer has considerably more power. In a study by Adobe, researchers found over ⅓ of advertisers thought customers are less loyal to brands and products and that half believe customers have shown new buying behaviours in the last year.¹³
Sure, the pandemic has fostered a turn to e-commerce to fill the void of in-person shopping, but will it last beyond the pandemic? It absolutely will. Growth of e-Commerce is not expected to reverse or decline; rather, it will grow from a high plateau created by the pandemic.¹⁰ While in-store sales were already quantifiable, e-Commerce enables measurable links between advertising efforts and online sales. Previously, in-store sales tell companies nothing about consumer origin. Did they come into the store because they saw an advertisement? Instead of guessing, digital advertisers can track consumer engagement with advertisements and whether those engagements lead to sales. Needless to say, the transparency provided by data-driven advertising analysis can completely disrupt how things are bought and sold, both online and offline.
Somehow I’ve made it this far without even mentioning Google or Facebook, the ultimate arbiters of the ad tech world. This was partly intentional, to fantasise about a world where there is actual competition in the ad tech industry. These two digital platforms are gatekeepers of who sees what, where, and when, responsible for 60% of digital ads. ¹⁰
Why does this duopoly exist? As programmatic advertising and targeting became the norm, data became the basis for successful advertising campaigns. And who has more data than Facebook and Google? To access programmatic advertising solutions, advertisers go to ad intermediation services (such as Google or Facebook) to buy space on publisher sites. Instead of a great unbundling, gatekeepers like Facebook and Google have bundled their own ecosystem with an entire value chain under their control. This is commonly referred to as a “Walled Garden,” i.e. a “closed ecosystem in which all the operations are controlled by the ecosystem operator.”¹⁴ Walled Gardens dictate the advertising process from start to finish. A quote from Ken Paxton, the Texas attorney general involved in a 2020 antitrust probe into Google, nicely sums up walled garden dominance: “If the free market were a baseball game, Google positioned itself as the pitcher, the batter and the umpire.”
Google truly became the dominant player when it acquired DoubleClick in 2007, thereafter strengthening its position by restricting competitor access to data while enabling preferences and speed advantages for its own tools.¹⁵ Meanwhile, Facebook collects psychographic data to leverage information about its users to sell impression-targeted and action-based ads via the Facebook Audience Network (FAN).¹⁶ The lack of transparency and intentional complexity in these Walled Gardens fosters its duopolistic domination of ad tech. Damien Geradin claims “I believe that the ad tech value chain has been made unnecessarily complex by intermediaries (a strategy I like to refer to as ‘opacity by design’) in order to better take advantage of advertisers and publishers.”¹⁷ In this way, competitors, publishers, and advertisers are kept in the dark and reliant on their platform overlords.
In a duopoly, competition is severely compromised. Since the rise of Google and Facebook’s dominance, investment in ad tech has significantly declined, thus crippling the hopes of competition.¹⁸ Apart from funding, smaller ad tech cannot compete with the extensive data that the duopoly has on users. And, as already mentioned, harnessing the power of data is what distinguishes digital advertising from its traditional counterpart.
Unless you’ve been living in a bunker with no internet (indeed these are ~unprecedented~ times), you’ve probably heard about “breaking up big tech.” If you haven’t and you somehow found this article, then long-story short: countries are introducing privacy regulations and serving up antitrust lawsuits while big tech companies are banning third-party cookies. What does this mean for the digital advertising industry?
Facebook and Google paved the way for ad tech, setting the stones for a robust, albeit closed, ecosystem. However, these regulations are likely to change the actions of the duopolists, opening doors for startup ad tech to reemerge and innovate. To be frank, Google and Facebook aren’t going anywhere or leaving the ad tech industry. Though they may lose some of their absolute control, the duopoly will always be lead players in this ecosystem. Altio has observed a tradeoff between privacy and competition. It is important to remember that the ad tech market is completely unregulated at the moment, and this is part of the reason that the duopoly exists. We expect that the inevitable regulation of ad tech will take cues from financial regulation, implementing an ethics wall (colloquially called a “Chinese Wall”) to prevent conflicts of interest. An ethics wall would put up walls inside the walled gardens of Google and Facebook to increase competition and combat self-preferencing and absolute control over the ecosystem.
Industry leaders (that aren’t Google and Facebook) see the future of digital advertising as privacy-first, transparent, consumer-faced, AI-oriented, and vertical. Len Ostroff, SVP of Criteo, calls for contextual advertising, where displayed ads are relevant to the page content, not consumer data.¹⁹ In this vein, Business Wire predicts that contextual advertising will grow to $279.2B by 2025 and Integral Ad Science found that 80% of UK consumers would prefer to see ads that match site content. On the other hand, Ed Carey, Founder & CEO of Audience Town, suggests a vertical shift, focusing on industry-specific solutions to fill the gaps and attract new customers.²⁰ Furthermore, Sheri Bachstein, VP and Global Head of The Weather Company and IBM Watson Advertising, claims that AI is the future of advertising, working as an augmentation of human thought and capabilities to identify and predict patterns, measure sentiment, and assemble creative advertising.²¹ At Altio, we agree with these industry leaders’ thoughts on the future of advertising. Ad tech must be consumer-faced, privacy-driven, and transparent, utilising AI developments to create sophisticated alternatives to cookie and identifier tools.
Altio has the advantage of taking an unbiased, big-picture approach to digital advertising. We are not advertisers or marketers, but we do understand the market, tech, and innovation. In this way, we argue that, from an outsider point of view, ad tech has no choice but to change and, consequently, to grow. While many are wary of the future of digital advertising, we disagree. These changes will force adtech to innovate and chart new routes for data-driven, programmatic advertising, ideally without Facebook and Google holding their hands the entire time. There may even be small-scale imitations of walled gardens. Activate Consulting predicts that companies will eye the creation of “private gardens” to rival the walled gardens of Facebook and Google, using their own first-party data to construct ad exchanges on their own platforms.¹¹
Post-COVID world, digital advertising shows no signs of slowing down. We’ve just now gotten a grip on the power of digital advertising and understanding it, though opaque as it may be. Digital advertisers are going to have to devise solutions for quality engagements as people start to spend less time online and return to a semblance of normal. However, traditional advertising is going to struggle to justify itself to companies, lacking the data-rich KPIs that digital advertising can provide. If we’ve discovered a much more efficient way to market a product, why go back to traditional routes?
Altogether, the conditions of increasing digitisation and time spent online combined with the precarious legal position of the ad tech duopoly create an environment ripe for digital advertising innovation. Has digital advertising reached its peak? Most certainly not. Rather, we may be witnessing the coming of age of digital advertising. So buckle up for the awkward teenage years of digital advertising as the industry grows physically and attempts to forge an identity without identifiers.
¹ Marketo 2018 “The Definitive Guide to Digital Advertising” Marketo, An Adobe Company
² Jesse Frederik and Maurits Martijn 2019 “The new dot com bubble is here: it's called online advertising” The Correspondent
³ Jeremy Ettinghausen 2017 "Why Does Digital Advertising Suck?" Medium.com
⁴ Brad Adgate 2020 "Ad Agency Forecast: Expect The Advertising Market To Rebound in 2021" Forbes.com
⁵ Santiago Fernandez, Paul Jenkins, and Benjamim Vieira 2020 “Europe’s Digital Migration during COVID-19: Getting past the broad trends and averages” MicKinsey Digital.
⁶ Julia Stoll 2021 “SVoD overtaking pay TV subscriptions worldwide 2016-2020” Statista.com
⁷ Doug Shapiro “One Clear Casualty of the Streaming Wars: Profit” Medium.com
⁸ Bradley T. Shapiro, Günter J. Hitsch, and Anna E. Tuchman 2020 “Generalizable and Robust TV Advertising Effects” National Bureau of Economics Research (working paper)
⁹ Benedict Evans 2021 “Presentation: The Great Unbundling” ben-evans.com
¹⁰ GroupM 2020 “Global End-of-Year Forecast: December 2020” GroupM.com
¹¹ Activate Consulting 2020 “Activate Technology & Media Outlook 2021” Activate.com
¹² Michelle Evans 2021 “The Outlook for Retailing in 2021” Euromonitor International
¹³ Adobe and Econsultancy 2020 “2021 Digital Trends: Experience Index” Adobe.com
¹⁴ Pierre de Poulpiquet 2017 “What is a Walled Garden? And why is it the strategy of Google, Facebook and Amazon ads platform?” Medium.com
¹⁵ Dina Srinivasan 2020 “Why Google Dominates Advertising Markets” Stanford Technology Law Review 24(1): 55-175.
¹⁶ Dina Srinivasan 2019 “The Antitrust Case Against Facebook: A Monopolist’s Journey Towards Pervasive Surveillance in Spite of Consumers’ Preference for Privacy” Berkeley Business Law Journal 16(1), 39-101.
¹⁷ Damien Geradin 2020 “Online Platforms and Digital Advertising Market Study: Observations on the Statement of Scope.”
¹⁸ Boris Abaev 2020 “Great Catch, Perfect Match: Why Companies Crave for AdTech Startups” Forbes.com.
¹⁹ Len Ostroff 2020 "Privacy Changes are ushering in a new era of ad tech collaboration" Digiday.com.
²⁰ Ed Carey 2020 "The Future of Ad Tech Will be a Return to Vertical" AdExchanger.com
²¹ Rebecca Bellan 2020 "Forget Identifiers: The future of Ad Tech is AI" Forbes.com