Digital advertising desperately needs supply side reform.
Every passing year the internet gets more filled with advertisements. Even when you think there were no more places for ads, they find some. Even when you think people will finally snap and get annoyed to the point of considering boycotts, no one seems to mind. As a vocal advertising critic, I find it annoying to no end that the volume of ads on the internet increases monthly and I want to explain how the economics of the online advertising business is so broken as to require government regulation to fix.
As with all markets when left to their own devices the price of advertising is set by supply and demand. In a stable market there is an equilibrium point where the demand curve and the supply curve meet at a specific price and a specific quantity which will remain more or less stable until there is a shock to the status quo. This has not happened in online ads, otherwise the quantity of advertising would not be continually increasing. The reason why is that unlike in traditional, physical advertising there is no limit to the space where ads can be displayed. Therefore, a decrease in the price of ads means that most businesses will buy more ads, and that doing so will not drive up the price very much even as new banners/video segments/mid rolls etc are introduced. Internet users are of course aware of the arms race, and actively spur it on. When users get better at skipping ads and using ad blockers the response from companies is often to increase the number of ads in the hope that at least one will be heard or seen. And when skipping ads becomes more and more common, the price of any given ad must decrease as the usefulness of it decreases too.
Meanwhile most internet media is reliant on advertising as their primary source of income, and as there is essentially infinite space for ads on the internet the trend is for advertising to get cheaper over time. Cheaper ads mean less income for the sites hosting them which must increase the space they dedicate to ads to make the same revenue as before. For any given site, or for any given creator on a site the price of advertising can go up as there is a limit to how many ads say Spotify will run per hour. The thing with the internet however is that there is an almost limitless supply of other competing actors which rely on advertising as part of their business model and will happily sell ad space at a lower price than the biggest actors. In aggregate, the fact that there is a million substitutes for any given advertising opportunity drives down prices, and in aggregate the lack of physical space to run out of means that the prices don’t really stabilise. This has disastrous effects for independent online media which risks driving away readers or viewers by having too many ads, while also needing progressively more ads as the price for a single ad trends downwards.
It becomes practically impossible to break the negative feedback loop on declining ad prices, which also means that the user experience is also stuck in a negative feedback loop. Advertising becomes a toxic business for everyone involved when there is no price stability. But paradoxically, most companies cannot afford to not advertise as consumers are already inundated with ads from their competitors. And this is all before we even get to issues like how online advertising systematically invades privacy in order to custom tailor targeted ads, and before we get to how the biggest players like Alphabet act as buyers, sellers, and exchanges for digital ads.
I’m firmly convinced that if the EU is serious about cleaning up the internet and stopping abusive behaviour from tech giants like social media firms and Alphabet the best place to start is at the root of the problem: ads. My solution would be to artificially set a minimum price for an online advertisement to make the market better for creators and internet users. Where exactly to set the limit is above my pay grade, but artificially limiting supply is a crucial part of any stable solution.
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I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
Cover photo by Negative Space from Pexels, edited by Karl Johansson