Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?

Read more...

Latest Comments

  • Ron Giuntini said More
    As always a good read.
    I have always... Thursday, 25 January 2018

In an earlier analysis, I looked at some of the dynamics involved in Playing the Online Adblocking Game

This analysis examines the dynamics involved in the Online Adblocking Game, which includes such players as Online Users, Content Providers, Advertisers, and Adblock Software and Services Providers. The first part of the analysis will examine trends in online ad revenues and ad pricing models, as a backdrop for analysis of the Adblocking Game. The second part of the analysis will introduce adblocking and describe its use. And the third part of the analysis (or perhaps third and fourth) will discuss the adblocking game.

My previous analysis focused more on the nitty-gritty of trends in web advertising models, how ad blocking works, and the tensions that adblocking has created for Advertisers, Content Providers (Publishers), and Users.

This analysis focuses on wider trends in Internet access by Users that are causing large shifts in the dynamics between Advertisers, Content Providers (Publishers), and Users. In particular, three trends in Users’ Internet access are causing other ecosystem players to change the way they interact with Users: (i) Users are spending more time accessing the Internet from mobile devices than they are from non-mobile devices; (ii) Users are shifting their gateway to access to the Internet from web browsers to apps; and (iii) Users are spending more time on web platforms than they are on other, more fragmented websites.

In the first part of this analysis I describe how advertising dollars have remained relatively constant over time, even as radically new venues for ads have appeared. I then describe how it was the advent of ad networks that enabled Advertisers to cost-effectively advertise on the Internet, but that the ensuing dynamics have led to a grotesque over-proliferation of ads. I end this part with a discussion of how the ad situation for mobile Users is exacerbated by the unnecessarily poor quality of mobile web browsers.

In the second part of the analysis, I describe how trends in the way Users have been accessing the Internet have led to decreases the effectiveness of previous modes of advertising.

In the last part of the analysis I discuss how the ecosystem may continue to evolve from where it is now.

A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

Spending on Advertisements Is a Zero-Sum Game

I was very surprised to learn that the amount of money spent on advertising has been remarkably consistent over time. Eric Chemi, in “Advertising's Century of Flat-Line Growth,” explains how since the 1920s, advertising spending as a percentage of GDP has remained within narrow bounds, averaging 1.29% (see Figure 1):

Looking at data since the 1920s, the U.S. advertising industry has always been about 1 percent of U.S. GDP. It’s surprisingly consistent, mostly tracking between 1 percent and 1.4 percent—and averaging 1.29 percent…

This 1.29-percent number combines advertising spending on television, radio, billboard, newspaper, magazine, trade journals, and the Internet.

Figure 1

Source: Eric Chemi, “Advertising's Century of Flat-Line Growth”

During remarkably consistent, advertising venues have shifted radically, from newspapers to magazines to radio to TV, and now to the Internet (see Figure 2).

Figure 2

Source: Eric Chemi, “Advertising's Century of Flat-Line Growth”

Even as these dramatic shifts have occurred, however, the total amount of advertising has remained constant. As new venues for advertising appear, rather than having new funds being allocated to these new venues, the new venues have instead been stealing advertising dollars from existing venues (see Figure 3, taken from Eric Chemi).

Figure 3

Source: Eric Chemi, “Advertising's Century of Flat-Line Growth”

In other words, advertising has consistently remained a zero-sum game. As Eric Chemi puts it,

That means the only way to expand in this business is to steal share. “Everything is a share game,” says Goldstein, as declines in older media give way to growth in newer media. It has been a continuous trend from the beginning.



There appears to be a predictable growth rate for new media. For each “new” medium at the time—radio, television, and Internet—the growth pattern has seen similar curves. The first five years saw rapid (but declining) growth rates, and after the fifth year, growth rates steadied. The Internet is certainly disruptive, but no more disruptive than TV and radio in the past.

On the flip side, the implication of this is that if a certain venue becomes a less effective one for advertising, then ad dollars will simply leave that venue and find some other, better locale. Matthew Yglesias in “The ad blocking controversy, explained” describes this perfectly as it relates to Internet adblocking:

…[I]f content blockers render a whole class of ad spending ineffective, the spending won't vanish — it will pop up someplace else.

 

The Role of Ad Networks

During the early days of the Internet, the vastly dispersed nature of websites on the Internet meant Advertisers had to contract with large numbers of Publishers in order to reach sufficiently large numbers of Users for their ads.  As such, it wasn’t until the advent of online ad networks that advertising on the Internet became a cost-effective means for advertisers to reach potential customers. Wikipedia describes online ad networks as follows.

An online advertising network or ad network is a company that connects advertisers to web sites that want to host advertisements. The key function of an ad network is aggregation of ad space supply from publishers and matching it with advertiser demand... The fundamental difference between traditional media ad networks and online ad networks is that online ad networks use a central ad server to deliver advertisements to consumers, which enables targeting, tracking and reporting of impressions in ways not possible with analog media alternatives.

Thalamus provides a nice listing of Top Online Display Ad Networks.

According to Ben Thompson, in “Why Web Pages Suck,” it wasn’t until about 2010 that shares of online advertising started to approach shares of Users online attention. He goes on to describe how ad networks actually place ads on websites.

The way it actually works is a little complicated: unlike print ads, which were delivered days ahead of time and inserted along with editorial copy before going to press, ads today are delivered “programmatically”. The process is actually kind of amazing, and consists of several different pieces (my reference to “ad networks” has been a bit simplistic):

•  When a user requests a URL, the publisher checks to see if they have any directly sold ads available (because of the scale problems noted above, fewer and fewer publishers have fewer and fewer directly-sold ads; advertisers just aren’t interested)

•  If they don’t, the publisher asks an ad exchange for an ad

•  The ad exchange, which has built up a profile of the user across all the different sites where the ad exchange is used, sends the (anonymized) user profile and website description to a variety of demand-side platforms (DSPs) (which actually sell the ads)

•  The DSPs examine the user profile and website description and a host of other factors and offers up the price they are willing to pay to serve an ad to the user

•  The ad exchange selects the highest price, retrieves the ad, and sends it to the publisher to display

All of this happens on a just-in-time basis, and you can see why advertisers love it: to a greater extent than ever before they are reaching exactly who they want to reach at the most efficient price possible. The result has been a huge increase in advertising on the Internet.

Based on this description of ad placements, it becomes clear the power to choose which ads to place where has switched from being controlled by Publishers (prior to the advent of ad networks) to being controlled by Advertisers (subsequent to the advent of ad networks). Ben Thompson furthers this issue.

From publishers’ perspective, the fixed cost of a printing press not only provided a moat from competition, it also meant that publishers displayed ads on their terms…

… [T]hat is no longer the case. Ad spots are effectively black boxes from the publisher perspective, and direct windows to the user from the ad network’s perspective. This has both modularized content and moved ad networks closer to users.

And the problem with this shift in control, of course, is that Ad Networks (i.e., Google) and Advertisers have different incentives than do Publishers: Advertisers want their ads to capture the attention of Users over the attention both of other ads and of website content, whereas Publishers want their content to capture the attention of Users. The subsequent battle for Users’ attention has led to an arm’s race in advertising, which has led to a significant degradation in Users’ viewing experiences. Ben Thompson describes this phenomenon in “The Facebook Reckoning”:

The problem is that online ads are inherently deflationary: just as content has zero marginal cost, so does ad inventory, which means it’s trivial to make more. A limited amount of total advertising dollars spread over more inventory, though, means any individual ad is worth less and less. This resulted in a bit of a prisoner’s dilemma: the optimal action for any individual publication, particularly in the absence of differentiated ad placements or targeting capability, is to maximize ad placement opportunity (more content) and page views (more eyeballs), even though this action taken collectively only hastens the decline in the value of those ads. Perversely, the resultant cheaper ads only intensify the push to create more content and capture more eyeballs; quality is very quickly a casualty.

Of course, it is the ad arms races and subsequent degradation of Users’ experiences that has led to the growing adoption of adblocking by Users. As Jason Calacanis in“Apple's brilliant assault on advertising -- and Google” puts it:

Google makes a massive portion of their money, according to studies, getting people to accidentally click on ads (40% of people don’t know Google Ads are ads). Ads that are taking up the top 11 of 13 search results on some search pages.

Google kept heating up the water until they accidentally boiled the frog. And the frog is us.

As an aside, in my previous analysis of the adblocking game, I created a model comparing the optimal choice of ads by Publishers as compared with that of Advertisers. In that analysis I assumed:

•  Publishers could control the type of advertisements placed on their sites.

•  More obtrusive ads would be more likely to be clicked by Users, thereby generating more revenue for Publishers in the short run.

•  More obtrusive ads would lead more Users to block ads, thereby depriving Publishers of revenues in the longer run.

•  More obtrusive ads are more costly for Advertisers to create.

The model showed that the costliness of more obtrusive ads would lead Advertisers to choose less obtrusive ads than would Publishers. Had I used a model with a longer time horizon, however, and considered the opportunity costs to both, namely,

(i)  Advertisers, who could find some other venue to place ads, as per the discussion in the first section of this analysis, and

(ii)  Publishers who would have to find some other means of generating revenue to support their sites or otherwise “go out of business,”

then the model might very well have shown that Publishers would choose less obtrusive ads than would Advertisers.

 

Mobile Browsers Are Particularly Unsuited for Advertising

Due to the limited screen size on mobile devices, together with their abilities to display only one screen at a time, the User experience of advertising on mobile devices has degraded far more rapidly than that on non-mobile devices. More from Ben Thompson:

What is interesting is the particular impact that mobile has had on this dynamic [ad deflation]:

•  First, mobile display ads stink. Unlike a PC browser, which has a lot of space to display ads alongside content, content on mobile necessarily takes up the whole screen (and if it doesn’t, the user experience degrades significantly, making quality a casualty once again). This results in mobile ad rates that are a fraction of desktop ad rates (and remember, desktop ad rates are already a fraction of print ad rates)

•  Second, on mobile, clicks are expensive from a user experience perspective. Not only do PCs typically have faster broadband connections to download assets and more powerful processors to render pages, they also have multiple windows and tabs. On a phone, on the other hand, clicking on a link means you can do nothing but wait for it to open, and open quite slowly at that. The cost of clicking a link, already quite high because of the deluge of crap content and particularly-annoying-on-mobile ads, is even higher because of the fundamental nature of the device.

Jason Calacanis describes these same concepts in“Apple's brilliant assault on advertising -- and Google”:

Given the increasing size of our desktop monitors, multiple windows to choose from, and increasingly fast cable modems and fiber connections, ad blockers have been a minor innovation on the desktop this past decade. (We hate you if you have fiber, really.) On a desktop, you barely notice the ads are gone, because the ads weren’t laying on top of the content. They were typically around the content.

On an iPhone, well, you’re dealing with 5-10% of the screen size of your desktop monitors, so publishers putting up a roadblock on the content, then asking you to use your fat fingers to hit the tiny little X or ‘skip the ad in 4… 3… 2… 1…’ is just overbearing.

Mobile advertising is so ugly and intrusive, it actually makes people AVOID mobile browsing.

However, a large part of the problem with accessing the Internet through a mobile browser has to do with the bad design of the browser itself, as opposed to the small size of the screen on a mobile device. Nilay Patel makes this point in “The mobile web sucks”:

… [T]he web browsers on phones are terrible. They are an abomination of bad user experience, poor performance, and overall disdain for the open web that kicked off the modern tech revolution. Mobile Safari on my iPhone 6 Plus is a slow, buggy, crashy affair, starved for the phone's paltry 1GB of memory and unable to rotate from portrait to landscape without suffering an emotional crisis. Chrome on my various Android devices feels entirely outclassed at times, a country mouse lost in the big city, waiting to be mugged by the first remnant ad with a redirect loop and something to prove.

By supporting lousy User experiences using mobile web browsers, certain players, including Apple and Facebook, have been able to steer Users toward accessing the Internet from locales from which they can better generate profits, namely apps. Nilay Patel continues,

The overall state of the mobile web is so bad that tech companies have convinced media companies to publish on alternative platforms designed for better performance on phones. Apple doesn't allow anyone else to build a new browser engine for the iPhone, so Facebook's Instant Articles is really just Facebook's attempt to sidestep that restriction by building an entirely new content rendering system — Facebook's major stated motivation for Instant Articles is an attempt to bring down the 8-second average loading time for mobile web pages. You will note that Facebook hasn't built an app for desktops, or tried to roll out Instant Articles for the desktop; the web works just fine when the browsers actually work.

Similarly, Apple News lets you publish directly onto iPhones, bypassing Apple's own Safari browser, which feels mildly crazy.

Nilay Patel concedes that while the ad situation on the Internet has gotten completely out of hand and the situation surely needs to be reined in, we should recognize that the problem could also be improved by improving the quality of mobile browsers. Yet, by not forcing improvements in web browsers, we are all complicit in enabling Apple and Facebook (and others?) to control large parts of what started out as being a completely free and open web.

Yet there's some excitement over this: I just read Ben Thompson's excellent piece explaining how the ad market for smaller publishers leads inexorably to bloated web pages that load poorly. That piece was itself a response to John Gruber saying that Apple's new Safari Content Blocker system would cause a "reckoning" for publishers by letting users block performance-degrading Javascript. And yes, most commercial web pages are overstuffed with extremely complex ad tech, but it's a two-sided argument: we should expect browser vendors to look at the state of the web and push their browsers to perform better, just as we should expect web developers to look at browser performance and trim the fat. But right now, the conversation appears to be going in just one direction.

And that's troubling. Taken together, Apple News and Facebook Instant Articles are the saddest refutation of the open web revolution possible: they are incompatible proprietary publishing systems entirely under the control of huge corporations, neither of which particularly understands publishing or media. Earlier this year, I called Facebook the new AOL; Instant Articles comes from the same instinct as AOL trying to bring Time Warner's media content into its app just before the web totally kicked its ass. Apple and Facebook are turning their back on the web to build replacements for the web, and with them replacements for HTML and CSS and every bit of web innovation it's taken 20 years of competitive development to achieve.

 

Go to: Part 2: Trends in Internet Use Have Decreased Advertising Effectiveness

More Blogs

Playing the Marijuana Market Transition Game

26-09-2018 - Hits:1892 - Ruth Fisher - avatar Ruth Fisher

Download PDF Timeline of US Marijuana Laws California Is Different from Other Legalized States Description and Implications of CA Legislation Marijuana Supply Chain Regulations and Realities Players of the CA Market Transition Game CA Market Evolution to Date Future Market Evolution   California is currently transitioning from illegal and semi-legal markets for marijuana to legal markets. The black and...

Read more

Playing the Virtual Reality Game

29-08-2018 - Hits:1992 - Ruth Fisher - avatar Ruth Fisher

Key Concepts Before we can understand the issues related to 360°, 3D, AR and VR technologies, we have to understand some key concepts. Immersion and Presence The goal of 360°, 3D, AR and VR technologies is to immerse users in an environment, so that they feel they have been “teleported” to this new...

Read more

Is Our Economy Playing the Demand Side or Supply Side Game?

10-08-2018 - Hits:836 - Ruth Fisher - avatar Ruth Fisher

Which actions should government take to spur economic activity during economic recessions? Liberals tend to believe in Demand Side Economics, that is, demand drives the economy. So during recessions, government should stimulate demand through spending. Conservatives, on the other hand, tend to believe in Supply Side Economics, that is, supply drives...

Read more

Why Don’t Projects Go As Planned?

26-06-2018 - Hits:921 - Ruth Fisher - avatar Ruth Fisher

Business projects, government programs, and social activities. We make plans and projections for the activities we are going to undertake. Yet, when we actually implement the programs, all too often, the results don’t turn out as well as we had planned. Why not? I had a client, for example, that employed...

Read more

Playing the Public Roadways Game

03-05-2018 - Hits:1411 - Ruth Fisher - avatar Ruth Fisher

Electric scooters (“e-scooters”) are one of the latest hot new tech toys on the scene. Several start-ups have unloaded thousands of rentable e-scooters onto the streets of major cities in the US. The scooters offer users a cheap and convenient way to travel short distances across town. These scooters are...

Read more

Discussion of the Mapping Apps Game

07-04-2018 - Hits:1094 - Ruth Fisher - avatar Ruth Fisher

Mapping apps, such as Waze and Google Maps, have created enormous value for users by helping them get to where they’re going faster. As least initially, when few people were using mapping apps, the apps were particularly helpful for individual users in rerouting them around traffic problems. However, now that...

Read more

What Makes the Most Popular TED Talks So Popular?

19-03-2018 - Hits:1276 - Ruth Fisher - avatar Ruth Fisher

Suppose a friend told you that he was planning on doing a TED Talk, and he asked your advice on how to make his talk one of the most popular TED Talks out there. What would you tell him? This is exactly the type of question Data Scientists seek to answer...

Read more

Playing the Used Technology Game

09-03-2018 - Hits:1905 - Ruth Fisher - avatar Ruth Fisher

Smartphone manufacturers, such as Apple and Samsung, have thrived for the past fifteen years using a specific business model that involves (i) Swiftly releasing next generation products that contain significant advancements over previous generations of products, and (ii) Selling next generation technologies at a premium. However, more recently, sales of used and refurbished...

Read more