Economist - Advertising and Technology - Special Report

September 13th 2014

S P E C I A L R E P O R T

A D V E R T I S I N G A N D T E C H N O L O G Y

Little brother

20140913_SRAdtech.indd 1 01/09/2014 13:37

In the modern world of business, it is useless to be a creative, original thinker unless you can also sell what you create.

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Proud Sponsor of the Advertising and Technology Special Report.www.ogil�do.com

The Economist September 13th 2014 1

ADVER TISING AND TECHNOLOG Y

SPECIAL REPOR T

A list of sources is atEconomist.com/specialreports

An audio interview with the author is atEconomist.com/audiovideo/specialreports

CONTENTS

3 DataGetting to know you

5 Smartphones and tabletsMoving targets

6 Programmatic biddingBuy, buy, baby

7 Advertising agencies Leaner and meaner

8 PublishersVirtual beauty parade

9 Online videoCracking the screen

10 The futureThe world wild web

1

A FEW MONTHS ago Progressive, an insurance company, ran a video adon Facebook featuring a grown man who acts like a baby and is carriedaround in a sling. The ad urged youngsters to “act your age” by renounc-ing their parents’ car insurance and buying their own. When Facebookemployees chuckled about it during a meeting, David Fischer, the firm’s41-year-old head of marketing, wondered why he had never seen it. Hewas too old, his colleagues said. Progressive was trying to appeal toyoung drivers, so it served up the ad only to them.

In 1963 David Ogilvy, the father ofMadison Avenue and author ofaclassic business book, “Confessions of an Advertising Man”, wrote: “Anadvertisement is like a radar sweep, constantly hunting new prospects astheycome into the market. Geta good radar, and keep it sweeping.” Halfacentury later advertisers are at last taking him at his word. Behaviouralprofiling has gone viral across the internet, enabling firms to reach userswith specific messages based on their location, interests, browsing his-toryand demographicgroup. Adscan nowfollowusers from site to site: acustomerwho looksonline forflights to Frankfurtwill be inundated withGerman holiday offers. Conversant, a digital-marketing firm, uses an al-gorithm to deliver around 800,000 variations of an ad to its big clients’prospective customers to make it as irresistible as possible. Kraft, a foodcompany, monitors online opinions on its brands in an office which itcalls “the looking glass”.

Extreme personalisation in advertising has been slow to come, ex-cept in search advertising, where Google��ahoo and other engines havebeen servingup ads tailored to users’ interests foryears. Butnowit hasar-rived in earnest. According to one poll by Adobe, a software company,most marketers say they have seen more change in the past two yearsthan in the previous 50.

In the classic advertising model, firms used to place ads with mediathat brought together the audiences they were after. They would go forbusiness executives in the Wall Street Journal, for example, or youngsterson MTV. But now advertisers no longer have to rely on media as proxies

Little Brother

Technology is radically changing the advertising business, with profound consequences for both consumers and companies, says Alexandra Suich

ACKNOWLEDGMENT S

Many people generously gave oftheir time and expertise to help withthis report. Apart from thosementioned in the text, particularthanks are due to Frank Addante,Tim Armstrong, Adam Bain, JenniferBarrett-Glasgow, Jim Caruso, ToddCullen, Vincent Digonnet, Patrickvan Eecke, Nick Emery, Paul Framp-ton, Rajeev Goel, Simon Hay, ScottHowe, Terence Kawaja, Jason Kint,Jim Lanzone, Jon Leibowitz, BlairLevin, Bob Lord, Louis Mastria, NealMohan, Norman Pearlstine, SridharRamaswamy, Mark Read, KristiRogers, John Rose, Paul Rostkowski,Marc Rothenberg, Randall Rothen-berg, Michael Rubenstein, SherylSandberg, Quincy Smith, RupertStaines, Kevin Trilli, Amy Wang,Thomas Whang, Charles Weiss,Michael Yu, Mark Zagorski and PaulZwillenberg.

2 The Economist September 13th 2014

SPECIAL REPOR TADVERTISING AND TECHNOLOGY

2 for consumers, because they have more tools and data to targetprecisely the people they want to reach.

The world wide web turned 25 in March, and the first ban-ner ad on it ran 20 years ago, but until a few years ago advertisingon the internet did not add up to much. That has changed. Lastyear online advertising made up about a quarter of the $500 bil-lion global advertising business, and it is rising fast. Some of the21st century’s most powerful companies, including Google,emerged on the backofit. Companies thatused to flourish in pre-digital advertising have struggled to keep up. “Media used to bebased on scarce distribution,” says Dave Morgan, an internet vet-eran and the boss of Simulmedia, a television-advertising com-pany. By contrast, online advertising space is unlimited andprices are low, so makingmoney is not as easy as it was in the off-line world, even for digital natives such as Yahoo.

All the same, new entrants continue to join the fray, enticedby the big opportunities they see as well as by the falling cost ofstarting digital-media businesses. According to eMarketer, a re-search firm, Americans spend over 12 hours a day consumingmedia (sometimes concurrently), and digital media account foraround halfof that total.

Digital advertising is being buoyed by three importanttrends. The first is the rise of mobile devices, such as smart-phones and tablets, which began when Apple introduced theiPhone in 2007. Now more than 1.7 billion people (around 20% ofthe world’s population) use smartphones.

Mobile devices, which are intimately connected to theirowners, have changed the way in which people travel the inter-net. Users now prefer apps (self-contained programmes onsmartphones) to websites’ home pages, and in America they arespending less time on desktop computers. “It took 150 years forthe newspaper industry to contract,” saysMeredith Kopit Levien,head of advertising for the New York Times. “The desktop indus-try will contract because ofmobile in a tenth of that time.”

The second, related trend is the rise ofsocial networks suchas Facebook, Twitter and Pinterest, which have become an im-portant navigation system for people looking for content acrossthe web. “The convergence ofsocial and mobile has given an ad-dressable audience online that’s 100 times bigger than ever be-fore,” says Jonah Peretti, the founderofBuzzFeed, an online newsand entertainment site. Social networks hold rich data abouttheirusers, who volunteer lots ofinformation about themselves.Facebook and Twitter can also see where else people go online,which can help them sell their users’ attention to advertisers.

The third big developmenthas been the rise of real-time bid-ding, or “programmatic buying”,a new system for targeting con-sumers precisely and swiftlywith online adverts. Publishers,advertisers and intermediariescan now bid for digital ads elec-tronically and direct them to spe-cific consumers at lightningspeed. Jonathan Nelson of Om-nicom Group, a large advertisingcompany, says his firm has thechance to bid for around 10m on-line advertising “impressions”(ads seen by a user) every sec-ond. Real-time bidding willspread further as more screens,such as televisions and bill-boards, become connected to theinternet.

The lines between established media businesses are be-comingblurred. Richard Edelman, the boss ofEdelman, a public-relations firm, describes the media and advertising business as a“mosh pit”. Media companiesare producingmore contenton be-half of advertisers, dubbed “native advertising”. At the sametime some advertisers have taken to hiring their own journaliststo produce stories, websites and videos. The new advertising-technology (ad-tech) industry is making inroads into the busi-ness of traditional advertising agencies. Publicis, a big advertis-ing group, is becoming “much more an internet company thanan advertising group”, says its boss, Maurice Lévy.

Look at me

Jeff Goodby, the boss of Goodby Silverstein & Partners, anadvertising agency, finds that clients’ biggest question is whetherpeople will even notice their ads. Consumers are dividing theirtime among many screens, and ever fewer of them are watchingTV programmes live. Even so, television advertising has kept itsdominance for now because it is one of the few ways to reach awide audience, especially during live shows and sportingevents. But advertisers worry that they could fragment theirbrands by having to come up with lots of different ads to reachconsumers across many media, says Keith Weed, chief market-ing officer ofUnilever, the world’s second-largest advertiser.

This special report will show that technology is profoundlychanging the dynamics of advertising. Building on the vastamount of data produced by consumers’ digital lives, it is givingmore power to media companies that have a direct relationshipwith their customers and can trackthem across different devices.An entire industry has sprung up around targeted ads. Third-party tracking companies gather information on browsing hab-its and online purchases, often invisibly. “A site is not one com-panyanymore. Asite is tensofhundredsofcompaniesall know-ing where you are and what you’re looking at,” says Chris Babelof TRUSTe, a firm that provides privacy services. Nikesh Arora,formerly chief business officer at Google and now vice-chair-man of Softbank, a Japanese media company, says a race is on tohave the best data and become the “intelligence broker”.

Consumers may gain from advertising tailored to their par-ticular needs, and so far most of them seem content to accept theensuing loss ofprivacy. But companies are sensitive to the poten-tial costs ofoverstepping the mark. As the head ofone British ad-vertising firm puts it: “Once people realise what’s happening, Ican’t imagine there won’t be pushback.” 7

1Media to watch

Source: ZenithOptimedia

advertising spending$bn

United States: Global:

*For ages 18+, double-counts for multitasking †Forecast

average time spent on different media*hours per day

internet-advertising spending$bn

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Internet

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Mobile (non-voice)

Desktop andlaptop, onlineOther digital

TelevisionRadioPrintOther

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Traditional displayOnline videoSocial media

ClassifiedPaid search

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1

IN “DIVERGENT”, A book series and Hollywood film, hu-mans in a post-apocalypse Chicago are split into five differ-

ent groups according to their aptitudes and values. All 16-year-olds take a test to be categorised for life. The world of online ad-vertising is not quite as rigid as that, but gathering informationabout users and grouping them into sellable “segments” has be-come big business. Data are crucial to the $120 billion online ad-vertising economy.

“This is an information war,” says Omar Tawakol, the bossofBlueKai, a data broker, which tracks users online and sells thatintelligence to companies. “This is 100% about having more in-formation about the customer and being able to generate morecommerce as a result of it.” The internet has made it much easierto gather data about users because they leave traces whereverthey go. Facebookand Twitter accumulate heaps of information,including ages, friends and interests, about people who sign upfor accounts and spend time on their sites. Some of it is collectedwithout users being aware of it. For example, Facebook’s “Like”and Twitter’s “Tweet” buttons on other websites carry a codethat enables the social-networking companies to track users’movementseven iftheydo notclickthose buttons, says PeterSta-bler, an internet analyst at Wells Fargo Securities.

The advertising industry obtains its data in two main ways.“First-party” data are collected by firms with which the user hasa direct relationship. Advertisers and publishers can compilethem by requiring users to register online. This enables the com-panies to recognise consumers across multiple devices and seewhat they read and buy on their site.

“Third-party” data are gathered by thousands of specialistfirms across the web. “We have this tremendous growth of com-panies that people do not talk about as household names,” saysMahi de Silva, the boss ofOpera Mediaworks, a mobile-advertis-ingcompany that is one ofthem. To gather information about us-ersand help serve appropriate ads, sitesoften hosta slew ofthirdparties that observe who comes to the site and build up digitaldossiersabout them. BlueKai, forexample, compilesaround 1bil-lion profiles of potential customers around the world, each withan average of50 attributes.

To identify users as they move from site to site, third partiesuse technologies such as cookies, web beacons, e-tags and a vari-ety of other tools. Cookies, widely used on desktop computers,are small pieces ofcode that are dropped on a user’s browser. Ac-cording to TRUSTe, the 100 most widely used websites are mon-itored by more than 1,300 firms. Some of these firms share datawith other outsiders, an arrangement known as “piggybacking”.

All this allows firms to glean what sites users have visited,what they have shopped for, what postcode they live in and soon. From this the firms can infer other personal details, such astheir income, the size of their home and whether it is rented orowned. Typically web users are tagged when they visit a partic-ular website, but companies are getting cleverer about expand-ing their reach. RadiumOne, an advertising-technology com-pany, puts cookies on users, normally unbeknown to them,when they clickon a weblinksent by a friend.

Data-gathering on mobile devices can be even more pre-cise. PubMatic, a firm that helps publishers sell advertising spacein real time, provides some 50-70 data points about users ondesktops and around 100 on mobile, including the mobile de-vice’s precise position. Mobile users spend close to 90% of theirtime online in mobile applications, or “apps”, which do not sup-port cookies, so advertisers, app developers and intermediariesuse other tools, such as their device’s ID, to recognise them.

Companies stress that they do not know users’ names. Butthey identify them by numbers, and as they build up detailedprofiles about those numbered users, there is concern that the in-formation might be traced to individuals. This puts the compa-nies in an awkward spot. They like to boast about their robusttracking and data offerings but do not want to spookusers by ap-pearing to know too much. Firms such as Facebook, which havepeople’s names and other personal information, insist that theyrespect users’ privacy when selling information to advertisers.

Tag, you’re it

Collecting and dealing with all that information requires alarge cast of characters. Data brokers earn their living by helpingadvertisers and publishers manage their own first-party data, aswell as selling them more data about users. They divide theminto segments defined by location, device, marital status, in-come, job, shopping habits, travel plans and a host of other fac-tors, and auction those segments off to buyers of ad space in realtime. This segmentation can become highly specialised. For ex-ample, eXelate, a data broker, sells “men in trouble”, presumed tohave relationship problems because they are shopping onlinefor chocolate and flowers. Another data firm, IXI, sells a segmentcalled “burdened by debt: small-town singles”.

Most consumers have never heard of the companies thatmake a full-time business ofgathering data about them, but theydo know some of the firms that do it as a sideline. Forbes, a pub-

Data

Getting to know you

Everything people do online is avidly followed byadvertisers and third-party trackers

SPECIAL REPOR T

lishing company, sells data about readers who visit its site. Politi-cal campaign groups rent out their lists to firms as a way to gener-ate cash. OkCupid, a dating website, used to sell informationabout users’ alcohol consumption and drug use, but says it nolonger does.

Credit-card companies, including Visa, MasterCard andAmerican Express, all sell anonymised data about their card-holders to advertising companies. Bidders for advertising spacecan go to MasterCard to buy aggregated segments of consumerswho are likely to subscribe to particular telecommunicationsservices, for example, or stay at particular hotel chains. Ameri-can Express has an edge, says someone in the data business whohasworked with the company, because it actually issues the card(whereas MasterCard and Visa are in partnership with banks),enabling it to put cookies on users when they log in to checktheirstatements and see where else they go online.

Auctions can also be data mines. Some companies pluginto the exchanges where firms buy and sell advertising just toglean information about users and publishers. Brokers that buyand sell advertising, known asad networks, collect reams ofdataacross the web. For example, Mindshare, a media buyer, wantedto find the best place to advertise for its client Kleenex, a tissuemanufacturer. It tookpart in search auctions to see where peoplewere Googling for cold and flu remedies, but deliberately kept itsbids low enough to lose. Then it concentrated its marketing on re-gions where lots ofpeople seemed to have the sniffles.

Companies have always tried to find out as much as theycould about their consumers. Direct marketers used to huntthrough public records, such as birth and marriage certificatesand property deeds, and catalogue companies would sell lists oftheir customers to competitors. But the internet has vastly ex-panded the scope of data collection. Sometimes users explicitlyallow services to track information about them, but often theyare not asked, and the information is gathered by third partiesthat can use it without consumers or regulators knowing how.

Firms keep trying to get a rounder picture of users’ lives.One wayofdoingthat is tryingto workoutwhich devices belongto the same owner. Companies that require users to log in, suchas Facebook, Google and Twitter, have an advantage, becausethey are able to recognise the same user across devices. Beinglogged into the same Wi-Fi also provides a clue.

Companies are also keen to connect the offline and onlineworlds. Facebook, forexample, has joined with Datalogix, a dataprovider, to link purchases in both spheres. Acxiom, one of thelargest data brokers with expertise in the offline world, recentlypaid more than $300m to buy LiveRamp, a firm that helps matchoffline data about customers with online information.

This is not as new as it sounds. Fifteen years ago Double-Click, an online-advertising firm that was later snapped up byGoogle, bought Abacus, a firm with troves ofdata about people’soffline purchases, but privacy advocates kicked up such a fussthat DoubleClick abandoned the project and in 2006 sold Aba-cus. The fuss has died down. “The technology has improved, soit’s easier to anonymise stuff,” says Scott Knoll, the boss of Inte-gral Ad Science, an analytics firm, who formerly worked at Dou-bleClick. “Companies are doing it under the radar screen.”

Data firms say they take pains to protect users’ personal in-formation, and sometimes have trouble keeping track of them.Privacy-conscious consumers regularly delete their cookies. Andadvertisers point out that they do not want sensitive informa-tion. “I don’t care if you’re cheating on your taxes or on yourspouse. We are not trolling for personal information,” says onedigital-advertising executive. “We are trying to figure out if youare a high-value customer and are in the market for a car.”

Sometimes advertisers do not use information they have

“We cando moretechno-logicallythan we’repermittedto culturally”

because they do not want to look as though they are spying oncustomers. “We can do more technologically than we’re permit-ted to culturally,” says Tony Weisman of DigitasLBi, a digital-ad-vertising firm. Some advertisers wait for a few days before target-ing users who had been shopping for a particular item becausetheydo notwant to leton howmuch theyknow. “We are activelytrying to figure out where the boundaries are,” says Simon Flem-ing-Wood, the chief marketing officer of Pandora, a digital-musiccompany. “And in the meantime we’re being conservative.”

Breathing down your browser

The system of data-gathering that underpins online adver-tising raises several questions. One is consumerprivacy. Ad com-panies say they will not use sensitive personal and health infor-mation for advertising purposes. But Kate Kaye, who covers thedata industry for Advertising Age and did some research on sexu-ally transmitted diseases for a story, found herself targeted withads offering support to HIV sufferers days later.

Another concern is how to prevent data leakage. Manycompanies are wary of giving third parties access to their data incase they are laxer about security or share it with competitors. InJune Reuters, a news agency, had its website attacked by the Syri-an Electronic Army through a third-party advertising networkcalled Taboola which sat on its site. Others worry about a databreach from perhaps a rogue programmer who could de-anony-mise the vast amount of information firms have collected. “Thequestion becomes, who is policing that? And are those checksand balances really there?” asks Mr Knoll of Integral Ad Science.

As more information is attached to cookies and devices, itbecomes easier to identify users, says Ed Felten, a professor ofcomputer science at Princeton University. Mr Felten and othershave shown that, given enough information, anonymous datasets can be de-anonymised. One study found that it took onlytwo data points to identify more than half the users. “The idea ofpersonally identifiable information not being identifiable iscompletely laughable in computer-science circles,” says Jona-than Mayer, a Stanford University computer-science researcher.

Besides, different countries have different standards ofwhat data count as personal information. Germany forbids anymarketing to people of specific ethnic groups or political affili-ations without their consent, but America does not. More broad-ly, in Europe an e-mail or IP address is considered personal,whereas in America it might not be. Data-gathering and digitalmarketing there have largely escaped the regulator’s grip, exceptin the finance industry.

Regulators around the world increasingly find that technol-ogy has outrun them and are trying to catch up. In Europe a new


SPECIAL REPOR TADVER TISING AND TECHNOLOG Y

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MARKETERS’ MANTRA OF reaching “the right person,with the right message, at the right time” has become a lot

more achievable in the past few years. Mobile devices, unlikedesktop computers, are typically used by only one person,which isa greathelp to advertiserswho want to target specificus-ers. Being closely connected to people’s personal lives and dailyhabits, the mobile device is the true “mini-me”. This year, for thefirst time, Americans will spend more time on mobile devices(not counting talking) than they do on desktop computers. InBritain that tipping point will probably be reached in 2015.

Global spending on mobile advertising has advanced rap-idly, nearly doubling to $19.3 billion between 2012 and 2013, ac-cording to the IAB, an industry group. Mary Meeker, an internetanalyst at Kleiner Perkins, a venture-capital firm, has noted thatadvertising on mobile devices has not kept pace with theamount oftime people spend on them. In the next few years mo-bile will be the fastest-growing part of internet advertising.

From a commercial point of view, a mobile’s best feature isits location-tracking capability, which shows exactly where thephone is. Advertisers are experimenting with “geofencing”,which allows them to reach people within a particular area. Forexample, 1-800-Flowers, a flowerretailer, has tried sending ads to

mobiles within driving distance of a shop. Pantene, a shampoobrand owned by Procter & Gamble, got together with the Weath-er Channel to target people with ads for specific hair products tosuit the weather in their postcode.

Beacons—small wireless devices that use radio signals tocommunicate with nearby mobile phones and tablets—will be-come an integral part of in-store marketing within a couple ofyears, says Ann Lewnes, chief marketing officer at Adobe, a soft-ware firm. Some retailers, including Duane Reade, an Americandrugstore, and Tesco, a British retailer, are already testing them.Beacons can communicate with apps to offer consumers cou-pons and deals. Within large stores they could also help withmapping and navigation.

Advertisers are also starting to think about other specialfeatures of mobile phones. One of them is voice-recognitiontechnology, which would enable consumers to talk back to ads,says Michael Barrett of Millennial Media, a mobile-ad exchange.In India, where not many people have smartphones, companiessuch as Facebook are experimenting with “missed call” ads,which allow a user to make a brief call to an advertiser and gethim to ring back with an ad along with some entertainment,such as a sport score or music.

Too small to count

In spite of the attractions of mobile advertising, there areseveral reasons why companies are proceeding with caution.Some worry about the accuracy of the data they work with, in-cluding location and demographic information, because mobileis so new. Smartphones’ small screen size, too, remains a pro-blem, which helps to explain why mobile-advertising rates arelower than those for desktop display. Mobile consumers do notpay much attention to “baby banners” at the bottom of a screen,and spend less time on long-form content, which reduces theirtolerance for longvideo ads. Ads thatencourage people to down-load apps account for a large proportion of mobile-ad spending.Firms have had to retool theiradvertisingofferings for mobiles toallow for the small screens and the different way that people usethem. Google has introduced a format that allows users to ringfirms whose ads pop up when they search.

Most firms have found that people engage more with “na-tive” ads—which camouflage as content within apps—becausethey have to scroll through them when reading, and the smallscreens make it hard to spot the tiny icons indicating these are“paid posts”. But even on desktops the line between content andadvertising has become less distinct. Ben Edelman, a professor atHarvard Business School, notes that over the past decade the yel-low background which used to mark the ads in Google’s search

Smartphones and tablets

Moving targets

What advertisers love, and what they hate, aboutmobile devices

2Way to go

Source: ComScore

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privacy directive, now being drafted and likely to come into ef-fect in 2016, will introduce extremely strict (some say stifling)rules on data collection that will apply across the European Un-ion. Websites already have to make it clear to users that third-party cookies are tracking them. Even in China, where individ-uals’ rights have not loomed large, President Xi Jinping has askedhis prime minister to look into data security and privacy issues.

In America a government proposal to make it harder totrack people online has fallen flat. Instead, under the digital-ad-vertising industry’s system ofself- regulation users can go onlineto opt out of being targeted with ads (but not of being tracked).Ads delivered by firms that have signed up to the self-regulationprogramme feature a small “Ad Choices” icon on which peoplecan click to opt out, though according to Chris Babel of TRUSTe, amere 0.00015% of those who see the icon take advantage of thatoption. And users who delete their cookies are automaticallyopted back in and keep having to repeat the process.

Some American advertisingexecutivessee more regulationas inevitable, especially in relation to third parties and data bro-kers. According to Jim Halpert of DLA Piper, a law firm, who co-chairs its global data-security practice, “the issue is not advertis-ing. It is rather that some entities can sell lots of informationabout individuals without those individuals knowing about it.”There is very little oversight of how this information is used orwhere it is sold. Annual audits of third-party data collectorscould help ensure that the information is used fairly, says MrHal-pert. So far concerns about unfair practices have been raisedmainly by academics, tech geeks and some vigilante consumers,not the public in general, but that may be because most peopledo not even know that they are being followed. 7

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JONA MICI, A 27-year-old media trader, sits in front of herscreen at Varick Media Management, a real-time advertis-

ing company in New York, and explains how she uses superfastalgorithms to buy 20m-30m advertising “impressions” a day. To-day one of her clients, an American bank, has asked her to findnew customers. At first she guides the algorithm to buy as manyimpressions as possible near bank branches. Then she narrowsher targets, choosing criteria that produce a better hit rate. For ex-ample, she finds that tablet users sign up more often than iPhoneusers, and afternoon seems to be a better time than morning. Sheinstructs the algorithm to bid more for consumers that have re-cently visited the bank’s website, who may be more easily per-suaded. In her office less than two miles from Wall Street, MsMici embodies the excitement and entrepreneurialism of an in-dustry in the midst ofmomentous change.

The advertising industry is going through something akinto the automation of the financial markets in the 1980s. This hashelped to make advertising much more precise and personal-ised. Some advertising agencies and media companies have toldtheir executives to read “Flash Boys” by Michael Lewis, a bookabout Wall Street’s high-speed traders, to make quite sure theyget the message.

Real-time bidding sounds high-tech but straightforward.When a consumer visits a website, his browser communicateswith an ad server. The server sends a message to an exchange toprovide data about that user, such as his IP address, his locationand the website he is visiting. Potential ad buyers send their bidsto the exchange. The highest one wins and an ad is served whenthe website loads. All this typically takes about150 milliseconds.

In reality, though, the ad-tech ecosystem is stupefyinglycomplex. Luma Partners, an investment bank, has put togetherthe “Lumascape”, a bafflingly crowded organisational chartshowing several hundred firms competing in this market. Sellersof advertising space often go through technology firms: a “sup-ply-side platform” (SSP) helpspublishers sell their inventory, anda “demand-side platform” (DSP) gives access to buyers. Manychoose a data-management platform (DMP) to store and buy in-formation about users. Ned Brody of

�ahoo, an internet com-

pany, makes lightofall the three-letteracronyms: “Itusuallyendswith WTF,” he quips.

Real-time bidding is a form of “programmatic” buying,which means using computers to sell advertising space. An ad-vertiser can buy a certain number of impressions on a website inadvance at an agreed price and execute the order by computer,avoiding the need for paperwork, spreadsheets and faxes. Thetechnique was first used over a decade ago in search advertising,in which advertisers bid for search terms entered by users, and

Programmatic bidding

Buy, buy, baby

The rise of an electronic marketplace for online ads isreshaping the media business

3Getting real

Source: International Data Corporation

Global real-time bidding revenue, $bn

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results has faded every year and has now disappeared altogeth-er. These days search ads just show a miniature “ad” icon.

Consent to being tracked is more complicated on mobilephones, where firms’ privacy policy (assuming they have one)comes in verysmall print, and manyconsumersare not tech-sav-vy enough to know when their location is being monitored,even if they have agreed to it.

Some appsdo notmake it easy to tell howtheycollect infor-mation and with whom they share it. America’s Federal TradeCommission has already brought a handful of cases, includingagainst Path, a social-networking app that was taking informa-tion from address books on people’s phones, including namesand numbers, without their consent or knowledge. Another onewas against Goldenshores Technologies, a firm whose free flash-lightapp did not tell consumers that itwassharing location infor-mation with third parties, including advertising networks.

Beacons will cause new complications, because they canopen up apps without a user’s express permission. “No one hasyet defined what is OK from the standpoint ofconsumer privacy,because mobile is a brand new platform,” says Adam Foroughi,the boss of AppLovin, a mobile-marketing company. “Nothinghas been regulated.”

Most importantly, advertisers are worried about annoyingtheir customers. Consumers have come to expect (if not wel-come) advertising on desktop computers, but not on theirphones, which they regard as more personal. “I don’t want tocross the line with a client and repent for making a mistake.There’s no commercial upside to that,” says John Wren, the bossof Omnicom, the advertising company. So advertisers are pro-ceeding with caution. 7



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Google and other companies serve relevant ads alongside thesearch results.

Over the past18 months real-time biddinghasspread acrossthe web. According to IDC, a research firm, around 20% ofonlinedisplay advertisements in America are now sold this way; by2018 that figure is likely to rise to 50%. Online video and mobileads, too, are increasingly traded in real time. “Ten years ago youwould never have had the information technology cheapenough to do these transactions,” says Mike Driscoll, the boss ofMetamarkets, an advertising-analytics platform.

A study by BCG, sponsored by Google, found that ad-vanced behavioural targeting, which uses technology to reachspecific users with the desired characteristics, helped advertisersincrease their return on investment by 30-50%. One popular tac-tic is “retargeting”, which allows advertisers to look for peoplewho have visited their website before and show them an ad re-lated to an item they were looking for but did not buy.

So far programmatic buying has taken hold mainly inAmerica, which accounts for around a third of global ad spend-ing, along with Britain and continental western Europe, but it isset to become a global trend. Singapore is already home to sever-al ad-tech firms. China, which will overtake Japan to become thesecond-largest online-advertisingmarket afterAmerica this year,is behind in automated buying because it does not have third-party ad servers ordata that advertisers trust. Instead advertisersoften rent advertisingspace by the day, so they can go to websitesand check that their ads appear. But even Chinese websites willgradually move to buying by computer.

The automation of media buying has raised all sorts ofquestions, such as how much ad-sales staff should be paid, andwhether they are still needed at all, when machines seem to bedoing the work so much more efficiently. Bob Pittman, the bossof Clear Channel, says that automation will “free up very smartpeople…from grunt work”. But it may also free them up to lookfor another job.

Advertising agencies that specialise in buying media spacefor clients have set up their own trading desks to buy digital me-dia on behalfofclients and capture some ofthe margin for them-selves. But some of the world’s largest advertisers, such as Proc-ter & Gamble, are already bringing more of it in-house, causingconcern that advertising agencies may lose their edge in the fu-ture (see next article). Upmarket publishers have been cautiousabout making their premium ad space available for sale by com-

puter because they think, probably rightly, that it will put pres-sure on prices. But more of them are testing the market. Some,such as the New York Times, the Wall Street Journal and The Econ-omist, have created private exchanges which limit the number ofadvertisers who can bid for their ad space or buy it in advance,giving them more control over pricing.

Wait for it

For all its promise, programmatic buying has not yet deliv-ered greater transparency and efficiency. Advertisers and pub-lishers complain, not without cause, about a “technology tax”,claiming that 60-80% of ad spending is siphoned off by ad-techfirms which take advantage of the market’s opacity.

But these are early days. “We are only where search adver-tising was in 2001,” says Konrad Feldman of Quantcast, a real-time advertising firm. Over time the system will become morestreamlined and sophisticated, just as the finance industry didafter it went electronic. Some companies, including AOL andGoogle, are already tryinghard to become the one-stop shop thatprovides everything needed to buy ads across the web��enturecapitalists are also scouring the terrain. In the meantime adver-tisers need to watch out. Curtis Houghland, the boss of Atten-tion, a social-media agency, advises clients not to sign contractsformore than sixmonths because technology is changing so fast.

The rise of real-time bidding is important because it offers aglimpse of how other ad-supported media may change overtime. As more devices, including television sets, radio and out-door billboards, become internet-equipped, a market for adver-tising space that can be bid for will spread to other industries,eventually even to television. And in the longer term the coming“internet of things”, such as connected homes and cars, could bepowered by a system similar to programmatic buying. Accordingto John Battelle, an entrepreneur, “media are layingthe trace pathfor how we interact with information-based services in everycategory ofendeavour.” 7

For all itspromise,program-maticbuying hasnot yetdeliveredon greatertransparencyandefficiency

GAUGING THE STATE ofhealth of the advertising industryis easy: just stroll along the waterfront in Cannes when the

admen hold theirannual gathering in June. These days the primebeachfront tents are occupied by technology companies likeGoogle, whereasonce-storied agencies, such asOgilvy& Mather,are relegated to dark, signless buildings, away from the sun andsand. Lee Bristol, a senior executive in the early days of Bristol-Myers Squibb, a pharmaceutical company, once said he couldsum up an adman in five words: “�

es, sir! No, sir! Ulcer!” Now ad-vertising executives are even more stressed by the twin afflic-tions of increasingly stingy and independent clients and power-ful new competitors.

Margins have become slimmer across the industry, both increative services (coming up with slickads) and in media-buying(securing the spots where ads run), which has been hit by real-time bidding. The four large holding companies—WPP, Omni-com, Publicis and IPG—own agencies that do both.

Advertising agencies

Leaner and meaner

Technology has made life harder for admen, but theywill not disappear

SPECIAL REPOR T



2 Miles Young, the boss of Ogilvy & Mather, is putting on abrave face, claiming that technology has been a boon to creativ-ity and enabled agencies to come up with ideas and campaignsthat would not have been possible before. But there are probablymore agency bosses who see their martini glass as halfempty.

Coming up with an enduring campaign like “A diamond isforever” used to keep an agency nicely fed and watered for al-most an eternity. Jeff Goodby at Goodby Silverstein & Partnersfondly remembers the “three and out” era, in which agencieswould produce three adsapiece forprint, TV and outdoorand getpaid handsomely. Digital media are much bittier and the pace ismuch faster. Brad Jakeman of PepsiCo, a drinks company, sayshis firm used to give agencies between four and six months toproduce a piece of content and would pay between $700,000and $2m foreach ofthem. “Nowwe need an agency that can pro-duce content in days, with each piece costing$10,000-15,000,” hesays. Clients are also workingwith feweragencies. Until fairly re-cently General Motors was using70 agencies to advertise its cars;now the number is down to three.

The rise ofthe internetand ad-tech serviceshasencouragedsome large advertisers to set up their own ad-buying depart-ments. Technology firms, including Adobe, Oracle, Salesforceand IBM, offer software that can do some of the things agenciesused to charge for, though Brian Wieser of Pivotal ResearchGroup, which studies the industry, says this probably accountsfor only 5% of the ad-agency business.

The mad men know they have to hire maths men, but put-ting two and two together can be harder than it sounds. Clientswant their agencies to be tech-savvy, but Bob Ivins, MindshareNorth America’s chiefdata officer (a new role at agencies), has la-mented his industry’s “Bermuda triangle”: “Ideas vanish out ofthin air because they are brought down by the lack of talent, in-frastructure and business model.” This summer the only internsMindshare hired in America were maths experts—and it can behard to attract the best talent without the pay ofWall Street or theglitterofSilicon Valley. This is true even in China. An advertising-agency boss in Beijing says that talented engineers want to workfor electronics companies.

Safety in smaller numbers

Now agencies are looking for salvation in mergers. Lastyear Omnicom and Publicis announced plans to merge to be-come the world’s largest advertising holding company. The dealfell apart earlier this year because of personality clashes, butmore consolidation is likely. Sir Martin Sorrell, the boss of WPP,predicts that within five years there will be even fewer indepen-dent advertising firms. Michael Roth, the boss of IPG, says mat-ter-of-factly: “We’re the next one to be consolidated.”

The ad-tech firmsare gleefully forecasting the imminent de-mise of Madison Avenue’s middlemen, but they may be wrong,for two reasons. First, ad tech has introduced so much complex-ity into the business that clients may want to hold on to agenciesfor advice, and agencies’ creative services are likely to remain indemand when brands are having to churn out so many differentpieces ofcontent.

Second, the prediction that technology companies likeGoogle will start to compete head-on with the agencies is likelyto prove wrong. To provide full client services they would needto hire thousands of new employees, for limited gains. Google’smargins this year are expected to be around 50%, whereas WPP’sare forecast at just 17%—and that is for the largest and one of themost successful advertising agencies. Perversely, the agencies’mediocre returns may protect them from being wiped out bynimbler competitors. Their tents in Cannes may no longer havethe best views, but the admen will still be there. 7

BREAKFAST CEREALS ARE usually harmless enough, butKellogg’s, which makes a lot of them, has become many

publishers’ worst nightmare. Starting in 2009, the firm began topour a lot of money into digital advertising, and today it spendsaround 25% of its $1.1 billion advertising budget online. Thatshould be cheery news for digital publishers, but it has notworked out that way.

Behavioural targeting and programmatic buying have al-lowed Kellogg’s to find the users they want to reach more easilyand for less. It has now established a price benchmark of $5.40per 1,000 impressions, down from around $12 just a few yearsago. “Data have allowed us to find that audience at that price,”says Jon Suarez-Davis, the company’s vice-president of digitalstrategy. In the longer run the new techniques should allow Kel-logg’s to cut its spending on advertising, because digital involvesless waste.

Publishers on the internetmake money from advertising,subscriptions or a combinationof both. Many are newspapersand traditional media compa-nies that have moved into thedigital age (such as the NewYork Times or CNN in Americaand the Guardian in Britain).Others are internet-born, pro-ducing content or hosting infor-mation (such as Facebook, Goo-gle’s YouTube and Yahoo).Competition for online adver-tising is fierce. The supply of adspace on the internet isvirtuallyinfinite. Demand, on the otherhand, is limited.

Publishers

Virtual beauty parade

Technology has put the squeeze on publishers inonline advertising

4Socialising

Source: eMarketer *Forecast

Advertising revenue, $bn

0

10

20

30

40

50

2011 12 13 14*

othermobile

othermobile

Google: Facebook:

1



Behavioural targeting has complicated media companies’lives because it has made their once-vital role of aggregating au-diences for advertisers much less important. Advertisers cannow find the specific users they want for themselves. The mediamodel has become “demand-led versus supply-led”, says NigelMorris at Dentsu-Aegis, an advertising agency. Companies stillcare about the context in which their ads appear online, butmuch less so than they used to under the traditional model. “Iam lookingfirst for the consumer, second for the ad products thatletusgetattention and third at the publisher,” saysTariq Shaukat,chief marketing officer at Caesars, a casino and hotel chain. Andreal-time bidding has “hammered” many upmarket publishersby reducing their prices, according to Henry Blodget, the boss ofBusiness Insider, a news website.

Local newspapers have already suffered from a precipitousdecline in classified advertising, much of which has moved toGoogle. The new advertising technology is inflicting furtherdamage on them because online bidding allows advertisers tosee where users live. “Local isn’t valuable any more,” says Rich-ard Frankel of Rocket Fuel, a firm that uses algorithms to buy ad-vertising space for clients. “Anyone can sell local.”

Make it special

The advertisingmarket is splitting into two. Digital advertis-ing has become increasingly commoditised, with online spacebeing sold more cheaply on exchanges. To compensate, publish-ers are investing more in creating unique content for advertisersthat can command higher prices. It is a bit like a chainstore suitmanufacturer adding a bespoke tailoring unit.

“Content marketing”, as this is called in advertising circles,can take different forms. Red Bull, an energy drink that has pio-neered this trend, produces videos of extreme sports and hostsevents. Chipotle, a restaurant chain, has produced a satirical on-line show about industrial farming. “Native” advertisements, of-ten deliberatelymade to looklike editorialcontent, are becoming more popular be-cause consumers tend to spend more timelooking at them.

Websites that require users to log inenjoy an advantage because they knowquite a lot about them. “�

ou’re not a fakefleeting instance of y��ou’re you,” saysBrian Boland at Facebook. “�

ou’re thesame you on your desktop, your iPhoneor your Android.”

Advertisers also like publishers withscale. The internethas transformed expec-tations about the number of people whocan be reached through a single publica-tion. The New York Times’s 31m monthlyonline users pale by comparison withFacebook’s1.3 billion. The combination ofsize and knowledge about consumers hasgiven tech giants an edge in online adver-tising. Google and Facebook alone con-trolled over47% ofall digital advertising inAmerica last year, according to eMarketer,and over 57% ofmobile advertising.

Technology companies are engagedin three races to accumulate even morepower. The first is to serve advertisementson websites other than their own. Theyhave been involved in a slew of deals tobroaden their reach. Last year Twitterbought MoPub, a mobile-ad firm, for a re-

ported $350m, which will help it serve ads to users across mobileapplications. In July�

ahoo acquired Flurry, which specialises inanalytics for mobile apps.

The second is to invest in measurement systems that allowthem to demonstrate the effectiveness of their online advertis-ing. In May Google and AOL each bought a measurement firm(Adometry and Convertro, respectively). Facebook has formed apartnership with Datalogix, a data broker, to try to connect itson-line advertisements with offline buying.

The third is about who will create and own an “uber identi-ty” which consumers can use to manage their online activitiesacrosswebsites. Google and Facebookboth passionatelywant towin this race. Mobile consumers can already use their Facebookaccount to log into around 80% of the most popular mobile apps.This gives Facebooka head start.

Google dwarfsFacebookin revenue aswell as in diversity. Itserves ads on behalf of publishers and advertisers not just on itsown sites but across the web. It owns Android, the world’s mostpopular mobile operating system, as well as

�ouTube, the

world’s most popular digital video service. It is trying to get usersto join its Google+ offering, which manages all Google servicesvia a single log-in. As with its search results, Google is trying topredict what its customers might want before they even know itso it can get closer to them. In China Alibaba, an e-commercegiant, has built up a strong advertising business by showing adsfrom merchants that sell goods on its platform. Amazon, whichholds huge amounts ofdata, is starting to invest more to scale upits advertising business and compete head-to-head with Google.

Next year “Mad Men”, a television drama about the adver-tising business, will air the final episode of its final season. It hasbeen wildly popular, but the end is nigh. The talkaround the wa-ter cooler now is about “Silic��alley”, a show about tech geeksand their quest for wealth. Television audiences have a goodnose for the next thing. 7

2

ONLINE VIDEO IS following in the path ofbroadcast television and cable, radicallychanging how and what people watch.Around 195m Americans, or 77% of Americaninternet users, already watch videos online.In China, where people are suspicious ofgovernment-censored television, the figureis nearly 500m, or 70% of those who use theweb. This year digital-video advertising inAmerica is forecast to grow by 43%, against amere 3% for TV advertising. Yet they startfrom such different bases that television willstill rise by $2.2 billion, against $1.8 billionfor online video.

The battle lines are somewhat blurred.Probably more than half of all premiumonline-video advertising minutes arescreened on the websites of big televisioncompanies, such as CBS and ABC. Increasinglyit will make more sense to talk about “video”as a single category rather than “television”and “online video” separately.

Online-video ads are good for internetadvertising: they are richer and more engag-ing than banner ads, and advertisers likethem. But online video is not about to unseatTV. Advertisers want to reach young consum-ers, who watch lots of content on the in-ternet, but they do not want to miss olderones, who still watch plenty of television.And it is a myth that younger consumers havemore discretionary spending than olderones, says Claire Enders of Enders Analysis, amedia consultancy. In Britain, people overthe age of 45 control 70% of the nation’sdisposable income.

Contrary to what you might expect,online video can be more expensive thantelevision ads per thousand impressions,because so little high-quality ad space isavailable. Advertisers still fret about the riskof a digital debacle. Last year Nissan inad-vertently ran an ad alongside a video of awoman being beheaded in Mexico.

Cracking the screen

Online video is flourishing, but it is not about to kill television

SPECIAL REPOR T

line-privacy services, thinksthere will be a “Michelangelo”moment in response to the clan-destine collection of consumerdata, a reference to the Michel-angelo software virus infectionin 1992 that prompted people toinvest in anti-virus software.

A study by BCG suggests itis a myth that youngsters aremore comfortable than olderpeople with sensitive dataabout them being collected on-line. The privacy of personaldata remains a big concern foraround 75% of consumers inmost countries. American andEuropean consumers share sim-ilar views about online pri-vacy—although their respectiveregulators do not.

Gathering and sharingdata will become ever morecomplex as more digital devicescollect information about usersand more media connect to theinternet. Consumers alreadytrust their mobile devices withwritten communications, cred-it-card details, personal appsand more, and will continue touse them for ever more onlinepurchases. The coming internet ofthings, which will connect ob-jects ranging from fridges to shoes to the web, will complicatethings even more because it will generate vast additional quanti-ties of personal information. “If you thought there were a lot ofdata on the internet today, you ain’t seen nothingyet,” says AndyHobsbawm ofEVRYTHNG, a firm that works in this field.

What price privacy?

That makes it all the more important to set up a system ofrules for online data collection and advertising. ChristopherSoghoian, a privacy activist, suggests that consumers could starta “fair data” movement, in the vein of “fair trade” campaigns.They could support firms with transparent and ethical policieson data-sharing, privacy and security, in the same way that theymightchoose to give theirbusiness to firmsthatwere considerateto their employees and to the environment. Verizon, a wirelesscompany, recently launched a programme offering subscribersdiscounts and other deals if they agree to share information,such as browsing activity and location, and accept that it will beused for targeted advertising.

In future there might be two options for targeted advertis-ing, says Clement Tsang, an online-advertising executive in Chi-na, just as there is now talk of creating a two-tier internet, with afree slower version and a paid-for faster one. Consumers couldcontinue to get free services from Facebook, Google and otherson the understanding that their personal data will be collectedand used; or they could pay a monthly fee to ensure the site didnot track them.

For most of the quarter-century that the internet has beenaround, ithas relied on advertisingbased on extensive consumertracking across the web. So far people seem to have been willingto put up with that. Until they start protesting, David Ogilvy’s ra-dar will keep sweeping. 7



“HAVE YOU EVER clicked your mouse right here?” askedthe first banner advertisement in 1994. “You will,” it confi-

dently predicted. These days advertisers are feeling less certainof themselves. They are still trying to come to grips with the rad-ical changes technology has brought to the way advertising isconsumed, sold and personalised.

If technology can help advertising become more relevant,clever and innovative, that is worth celebrating. Firms such asFacebook, which gives each consumer a different landing pagewith updates about their friends, and Google, which tailorssearch results to what the system knows about the user, haveshown that personalised content can have great appeal. Thesame idea might workfor advertising.

But advertisers and data firms have to be careful. Whenconsumers sign up for services like Facebook and Google, theyhave a fair idea that information about them might be used in allkinds ofways, though few ofthem are aware ofhow much track-ing goes on. Yet when online data are gathered by third parties,making it possible to target ads across the web, it is often donewithout consumers’ consent or knowledge and with few, if any,checks and balances.

Brand owners are trying to harness technology to helpthem understand their customers better without making themfeel they are being spied on. The boundaries are shifting all thetime. In “Minority Report”, a science-fiction film with TomCruise made in 2002, screens recognise people’s eyes and showads tailored to particular individuals. That no longer seems allthat outlandish. Conversely, web users have adjusted their on-line behaviour in response to revelationsaboutgovernment spy-ing made by Edward Snowden, who used to work for America’sNational SecurityAdministration and subsequently leaked largequantitiesofdocuments. According to one study, people are nowless likely to search for sensitive information online.

Michael Fertik, the boss of Reputation.com, which sells on-

The future

The world wild web

Technology has transformed advertising, butconsumers need to be kept on board

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