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A lightweight book aims a heavyweight punch at the digital advertising ecosystem

Subprime Attention Crisis: Advertising and the Time Bomb at the Heart of the Internet

Tim Hwang
FSG Originals
176 pp.
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General Motors and Ford, the two largest U.S. automakers, are together worth about US$100 billion. The combined value of Google and Facebook is about $2 trillion—20 times higher. What makes these companies worth so much? Ads. In Subprime Attention Crisis: Advertising and the Time Bomb at the Heart of the Internet, Tim Hwang suggests that the digital advertising industry may be on the brink of a global collapse. And if it is not, he argues, then we should push it off the cliff.

Many folks do not realize that the ads they see on their screens are sold through automated real-time auctions that resemble algorithmic trading in financial markets. Buyers bid for attention, and sellers offer eyeballs through which the attention is supplied. The market for online ads managed to grow to its current size because the underlying technology created standard ways in which attention is measured and sold. Attention has been “commoditized” in order for it to be easily traded.

Those who shaped these platforms were inspired by financial markets, Hwang argues, and indeed—under the hood—the industry resembles a stock- or commodity-trading market. The ad-tech industry, he cautions, exhibits strong parallels to the mortgage-backed financial markets that caused the 2008 global financial crisis.

Hwang describes what experts refer to as the “opacity” problem, arguing that companies do not know exactly what they are getting for their ad spend and that they considerably overvalue online ads, just as the market overvalued mortgage-backed securities in the mid-2000s. The book is thin on supporting evidence, but there is indeed a growing academic literature that demonstrates the severity of the opacity problem and the degree to which digital advertising is overvalued (1–3).

The opacity problem is exacerbated by the “subprime” nature of attention, suggests Hwang. Over the past decade or so, the value of attention has deteriorated as a result of fatigue, ad blockers, and outright fraud in the ad-tech space. Combine these factors with companies that want to spend tons of money on a shiny new advertising medium, and you have a bubble waiting to burst.

Opacity and overvaluations are clearly rampant in advertising. A recent study showed that television ads are significantly less influential than the industry claims (4), and another revealed that ad exchanges promise targeting that they cannot deliver, successfully predicting a viewer’s gender only about half the time—just as good as a random guess (5). Still, marketing expenses continue to grow across the board. Why? Because many of us place more weight on unfounded convictions than on scientific evidence. And, as the past year (or four) have shown, falsehood-driven behaviors are widespread.

Ad industry insiders will insist that without robust spending on brand advertising and digital ads, a company’s brand will deteriorate. Tell that to Costco, a company that spends practically nothing on advertising.
Hwang’s conclusion is that we should stick a needle in the digital advertising bubble, or better yet, let the air out slowly, lest a crash cause serious turmoil to the global economy. To do so, he proposes creating independent (possibly not-for-profit) research centers that will keep the industry honest and help ad buyers correct their expectations about the benefits of digital ads.

There is much to enjoy in this short book, and I highly recommend it to those who are interested in this topic. But the notion that we are headed toward a market collapse comparable to the one that occurred in 2008 is one I have trouble buying. Globally, stock markets are valued at around US$100 trillion. The global ad-tech industry is worth maybe $5 trillion and, unlike mortgage-backed securities, is not intertwined with other financial assets. Indeed, if advertisers substantially lower their ad spending, this will hurt the ad-tech industry but will likely also increase profits for the companies in question. Unlike financial markets, there is no contagion.

Will the internet shut down completely or shrink drastically if revenues plummet in the ad-tech industry? In 2019, Google’s 118,899 employees generated $162 billion in revenue ($1.3 million per employee), while Facebook’s 44,942 employees generated $70 billion ($1.6 million per employee). Meanwhile, the ad-free classified-listings site Craigslist is estimated to have raked in about $1 billion in revenues with only 50 employees ($20 million per employee). A deflated ad-tech industry may mean a smaller workforce and a lot less revenue, but I am confident that we would still be able to enjoy most of what the internet has to offer (with fewer ads).

References and Notes:

1. T. Blake, C. Nosko, S. Tadelis, Econometrica 83, 155 (2015).
2. R. A. Lewis, J. M. Rao, Q. J. Econ. 130, 1941 (2015).
3. B. R. Gordon, F. Zettelmeyer, N. Bhargava, D. Chapsky, Marketing Sci. 38, 193 (2019).
4. B. Shapiro, G. J. Hitsch, A. Tuchman, “Generalizable and robust TV advertising effects” (NBER Working Paper No. 27684, August 2020).
5. N. Neumann, C. E. Tucker, T. Whitfield, Marketing Sci. 38, 918 (2019).

About the author

The reviewer is at the Haas School of Business, University of California, Berkeley, Berkeley, CA 94720, USA.