If like me you follow news and and current affairs closely, you’ve probably come across the theory of ‘peak oil’, which describes the point at which oil production reaches its peak before declining, with perilous consequences for human civilisation as know it (think Mad Max, The Road or any other post-apocalyptic image of your choice).
A few days ago I came across a new ‘peak’ which, although arguably less closely associated with the collapse of our planet’s fragile ecology, might still warrant some consideration. The peak in question is ‘peak advertising’ and if you currently develop or use virtually any kind of digital service, it’s kind of a big deal.
Online advertising will continuously decline in effectiveness going into the future, to the extent that it makes existing models unsustainable (but please don’t panic)
Back in 2013, Tim Hwang and Adi Kamdar from the Nesson Center for Internet Geophysics presented a working paper titled ‘The theory of peak Advertising and the future of the web’. In it, Hwang and Kamdar describe peak advertising as:
“a simple proposition: online advertising will continuously decline in effectiveness going into the future, to the extent that it makes existing models unsustainable.”
What’s behind the decline in online advertising’s fortunes?
According to Hwang and Kamdar, four factors are behind the decline in the effectiveness of online advertising:
- Changing demographics of web users. Younger people, often described as ‘digital natives’, are far less receptive to online advertising than older population segments. The paper cites research showing over 65 year olds, who made up just 5% of the sample group, were responsible for 40% of the total observable effect of online advertising. This indicates that as demographics shift over time, online advertising will become increasingly less effective.
- Rapid growth in the use of ad blocking software. The situation has moved on here even since the working paper was published back in 2013. Recent research commissioned by advertising firm PageFair and Adobe described 2014 as the year ad blocking went mainstream. The repor found there were 144 million active adblock users globally in the second quarter of 2014 (5% of the online population), up 69% on the previous year. Plans are afoot for adblocking on iOS and Android ecoystems, which would drive further mainstream adoption.
- ‘Click fraud’ continues to undermine online advertising. Click fraud occurs when a person or computer program imitates a legitimate user of a web browser to click on an advert in order to generate a charge per click. The paper’s authors cite research which shows that click fraud was thought to have been responsible for $53 million dollars of wasted ad spending in the first two quarters of 2013 alone.
- Ever rising advertising density is reducing the value of advertising. As more and more businesses go digital, competition for users’ attention has increased. This means more ads are competing for a share of user attention. Studies have shown sharp declines in the percentage of viewers who even remember, let alone click on a banner advertising, for example.
Why should we care about the declining effectiveness of online advertising?
From an individual user perspective, it’s hard to feel much sympathy for the plight of the online advertising industry. However, given the critical role online advertising plays in the business models of so many web services (Google generates over 90% of its profits from advertising), I think we should be paying to what’s happening, if only so that we can help improve the way we fund the internet and online services in future.
What needs to change to put the funding of online services on a sustainable footing?
Looking at the factors contributing to the decline of online advertising, it would be easy to single out ad blocking software as the monster of the story. I’ve already read articles where publishers equate ad blocking software to Napster and the impact file sharing had on the music industry.
Recent court cases in Germany brought by publishers against Eyeo, makers of the popular Ad Block Plus software for web browsers, seem to suggest businesses which rely on advertising are hoping legal action will be enough to protect existing online business models. So far, none of these legal challenges have been successful and more and more users continue to install ad blocking. Furthermore, the well-documented battles the music and film industries’ have waged over file-sharing and casual piracy would indicate any future solutions will not succeed if they overlook the feelings of users in favour of legal and/or technological restrictions.
So if a politically-sanctioned crackdown on user freedoms isn’t on the cards (let’s hope not, anyway), how can the system of funding online services be improved? Here’s are some of my thoughts.
- Go back to basics with online advertising to discourage ad blocking adoption. Even amongst those users who have gone out and installed ad blocking software, a majority are prepared to accept online advertising so long as it is ‘reasonable’ in nature. This would mean steering clear of intrusive video ads, ads which take over a user’s screen and generally anything which infuriates. While these measures will not in themselves restore the value of online advertising, they should at least stem the tide of users installing ad blocking opting out of ads altogether.
- Communicate with service users about the importance of advertising to the funding online services. With so many online services presented to end users as free, it is hardly surprising when users do not immediately connect using ad blocking with hurting the funding base for a given service. PageFair, which helps organisations affected by ad blocking, points to examples of where websites have successfully appealed to their users to exempt their site from ad blocking
- Engage users in developing new business models for online services which do not rely on online advertising. Even without the dramatic uptake in ad blocking, I believe the business model of primarily funding online services through advertising would be in trouble. In his book, The Curve, Nicholas Lovell has argued that businesses should accept that the costs of most digital goods are trending towards free. Instead of fretting about ‘freeloaders’ (in this case users who have installed ad blocking software), businesses should be gracious and offer free digital products and services as a first step in developing a direct relationship with customers, some of who will go on to become ‘superfans’ and make a greater financial contribution t your business than others. For example, rather than trying to fund The Guardian’s news production through online advertising, The Guardian should identify fans and persuade them to contribute financially, making appeals and offering rewards similar to those found in free to play games and crowdfunded projects on Kickstarter.