Have We Reached Peak Advertising?

Jun 19th
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The internet runs on advertising. Google is funded almost entirely by advertising. Facebook , likewise. Digital marketing spends continue to rise:

Internet advertising revenues in the United States totaled $12.1 billion in the fourth quarter of 2013, an increase of 14% from the 2013 third-quarter total of $10.6 billion and an increase of 17% from the 2012 fourth-quarter total of $10.3 billion. 2013 full year internet advertising revenues totaled $42.78 billion, up 17% from the $36.57 billion reported in 2012.

Search advertising spend comes out on top, but that’s starting to change:

Search accounted for 41% of Q4 2013 revenues, down from 44% in Q4 2012, as mobile devices have shifted. Search-related revenues away from the desktop computer. Search revenues totaled $5.0 billion in Q4 2013, up 10% from Q4 2012, when Search totaled $4.6 billion

The growth area for digital advertising lays in mobile:

Mobile revenues totaled 19% of Q4 2013 revenues, or $2.3 billion, up 92% from the $1.2 billion (11% of total) reported in Q4 2012

Prominent venture capitalist, Mary Meeker, recently produced an analysis that also highlights this trend.

So, internet advertising is growing, but web internet adoption is slowing down. Meanwhile, mobile and tablet adoption is increasing fast, yet advertising spend on these mediums is comparatively low. Nice opportunity for mobile, however mobile advertising is proving hard to crack. Not many people are clicking on paid links on mobile. And many mobile ad clicks are accidental, driving down advertiser bids.

This is not just a problem for mobile. There may be a problem with advertising in general. It’s about trust, and lack thereof. This situation also presents a great opportunity for selling SEO.

But first, a little background....

People Know More

Advertising’s golden age was in the 50’s and 60’s.

Most consumers were information poor. At least, they were information poor when it came to getting timely information. This information asymmetry played into the hands of the advertising industry. The advertising agency provided the information that helped match the problems people had with a solution. Of course, they were framing the problem in a way that benefited the advertiser. If there wasn’t a problem, they made one up.

Today, the internet puts real time information about everything in the hands of the consumer. It is easy for people to compare offers, so the basis for advertising - which is essentially biased information provision - is being eroded. Most people see advertising as an intrusion. Just because an advertiser can get in front of a consumer at “the right time” does not necessarily mean people will buy what the advertiser has to offer with great frequency.

Your mobile phone pings. “You’re passing Gordon’s Steak House….come in and enjoy our Mega Feast!” You can compare that offer against a wide range of offers, and they can do so in real time. More than likely, you’ll just resent the intrusion. After all, you may be a happy regular at Susan’s Sushi.

“Knowing things” is not exclusive. Being able to “know things” is a click away. If information is freely available, then people are less likely to opt for whatever is pushed at them by advertisers at that moment. If it’s easy to research, people will do so.

This raises a problem when it comes to the economics of content creation. If advertising becomes less effective for the advertiser, then the advertisers is going to reduce spend, or shift spend elsewhere. If they do, then what becomes of the predominant web content model which is based on advertising?

Free Content Driven By Ads May Be An Unsustainable Model

We’re seeing it in broadcast television, and we’ll see it on the web.

Television is dying and being replaced by the Netflix model. There is a lot of content. There are not enough advertisers paying top dollar as the audience is now highly fragmented. As a result, a lot of broadcast television advertising can be ineffective. However, as we’ve seen with Netflix and Spotify, people are prepared to pay directly for the content they consume in the form of a monthly fee.

The long term trend for advertising engagement on the web is not favourable.

The very first banner advertisement appeared in 1994. The clickthru rate of that banner ad was a staggering 44% It had a novelty value, certainly. The first banner ad also existed in an environment where there wasn’t much information. The web was almost entirely about navigation.

Today, there is no shortage of content. The average Facebook advertisement clickthrough rate is around 0.04%. Advertisers get rather excited if they manage to squeeze 2% or 3% click-thrus rates out of Facebook ads.

Digital advertising is no longer novel, so the click-thru rate has plummeted. Not only do people feel that the advertising isn’t relevant to them, they have learned to ignore advertising even if the ad is talking directly to their needs. 97-98% of the time, people will not click on the ad.

And why should they? Information isn’t hard to come by. So what is the advertiser providing the prospective customer?

Even brand engagement is plummeting on Facebook as the novelty wears off, and Facebook changes policy:

According to a new report from Simply Measured, the total engagement for the top 10 most-followed brands on Facebook has declined 40 percent year-over-year—even as brands have increased the amount of content they’re posting by 20.1 percent.

Is Advertising Already Failing?

Our industry runs on advertising. Much of web publishing runs on advertising.

However, Eric Clemons makes the point that the traditional method of advertising was always bound to fail, mainly because after the novelty wears off, it’s all about interruption, and nobody likes to be interrupted.

But wait! Isn’t the advantage of search that it isn’t interruption advertising? In search, the user requests something. Clemons feels that search results can still be a form of misdirection:

Misdirection, or sending customers to web locations other than the ones for which they are searching. This is Google’s business model. Monetization of misdirection frequently takes the form of charging companies for keywords and threatening to divert their customers to a competitor if they fail to pay adequately for keywords that the customer is likely to use in searches for the companies’ products; that is, misdirection works best when it is threatened rather than actually imposed, and when companies actually do pay the fees demanded for their keywords. Misdirection most frequently takes the form of diverting customers to companies that they do not wish to find, simply because the customer’s preferred company underbid.

He who pays becomes “relevant”:

it is not scalable; it is not possible for every website to earn its revenue from sponsored search and ultimately at least some of them will need to find an alternative revenue model.

The companies that appear high on PPC are the companies who pay. Not every company can be on top, because not every company can pay top dollar. So, what the user sees is not necessarily what the user wants, but the company that has paid the most - along with their quality score - to be there.

But nowadays, the metrics of this channel have changed dramatically, making it impossible or nearly impossible for small and mid-sized business to turn a profit using AdWords. In fact, most small businesses can’t break even using AdWords.This goes for many large businesses as well, but they don’t care. And that is the key difference, and precisely why small brands using AdWords nowadays are being bludgeoned out of existence

Similarly, the organic search results are often dominated by large companies and entities. This is a direct or side-effect of the algorithms. Big entities create a favourable footprint of awareness, engagement and links as a result of PR, existing momentum, brand recognition, and advertising campaigns. It’s a lot harder for small companies to dominate lucrative competitive niches as they can’t create those same footprints.

Certainly when it comes to PPC, the search visitor may be presented with various big player links at the expense of smaller players. Google, like every other advertising driven medium, is beholden to it’s big advertisers. Jacob Nielsen noted in 1998:

Ultimately, those who pay for something control it. Currently, most websites that don't sell things are funded by advertising. Thus, they will be controlled by advertisers and will become less and less useful to the users”

If Interruption Advertising Is Failing, Is Advertising Scalable?

Being informed has changed customer behaviour.

The problem is not the medium, the problem is the message, and the fact that it is not trusted, not wanted, and not needed.

People don’t trust ads. There is a vast literature to support this. Is it all wrong?
People don’t want ads. Again, there is a vast literature to support this. Think about your own behavior, you own channel surfing and fast forwarding and the timing of when you leave the TV to get a snack. Is it during the content or the commercials?
People don’t need ads. There is a vast amount of trusted content on the net. Again, there is literature on this. But think about how you form your opinion of a product, from online ads or online reviews?
There is no shortage of places to put ads. Competition among them will be brutal. Prices will be driven lower and lower, for everyone but Google.

If the advertising is not scaleable, then a lot of content based on advertising will die. Advertising may not be able to support the net:

Now reality is reasserting itself once more, with familiar results. The number of companies that can be sustained by revenues from internet advertising turns out to be much smaller than many people thought, and Silicon Valley seems to be entering another “nuclear winter”

A lot of Adsense publishers are being kicked from the program. Many are terminated, without reason. Google appear to be systematically culling the publisher herd. Why? Shouldn’t web publishing, supported by advertising, be growing?

The continuing plunge in AdSense is in sharp contrast to robust 20% revenue growth in 2012, which outpaced AdWords' growth of 19%.....There are serious issues with online advertising affecting the entire industry. Google has reported declining value from clicks on its ads. And the shift to mobile ads is accelerating the decline, because it produces a fraction of the revenue of desktop ads.
Matt Sanchez, CEO of San Francisco based ad network Say Media, recently warnedthat, "Mobile Is Killing Media."
Digital publishing is headed off a cliff … There's a five fold gap between mobile revenue and desktop revenue… What makes that gap even starker is how quickly it’s happening… On the industry’s current course, that’s a recipe for disaster.

Prices tumble when consumers have near-perfect real time information. Travel. Consumer goods. Anything generic that can be readily compared is experiencing falling prices and shrinking margins. Sales growth in many consumer categories is coming from the premium offerings. For example, beer consumption is falling across the board except in one area: boutique, specialist brews. That market sector is growing as customers become a lot more aware of options that are not just good enough, but great. Boutique breweries offer a more personal relationship, and they offer something the customer perceives as being great, not just “good enough”.

Mass marketing is expensive. Most of the money spent on it is wasted. Products and services that are “just good enough” will be beaten by products and services that are a precise fit for consumers needs. Good enough is no longer good enough, products and services need to be great and precisely targeted unless you've got advertising money to burn.

How Do We Get To These Consumers If They No Longer Trust Paid Advertising?

Consumers will go to information suppliers they trust. There is always demand for a trusted source.

Trip Advisor is a great travel sales channel. It’s a high trust layer over a commodity product. People don’t trust Trip Advisor, per se, they trust the process. Customers talk to each other about the merits, or otherwise, of holiday destinations. It’s transparent. It’s not interruption, misleading or distracting. Consumers seek it out.

Trust models will be one way around the advertising problem. This suits SEOs. If you provide trusted information, especially in a transparent, high-trust form, like Trip Advisor, you will likely win out over those using more direct sales methods. Consumers are getting a lot better at tuning those out.

The trick is to remove the negative experience of advertising by not appearing to be advertising at all. Long term, it’s about developing relationships built on trust, not on interruption and misdirection. It’s a good idea to think about advertising as a relationship process, as opposed to the direct marketing model on which the web is built - which is all about capturing the customer just before point of sale.

Rand Fishkin explained the web purchase process well in this presentation. The process whereby someone becomes a customer, particularly on the web, isn’t all about the late stages of the transaction. We have to think of it in terms of a slow burning relationship developed over time. The consumer comes to us at the end of an information comparison process. Really, it’s an exercise in establishing consumer trust.

Amazon doesn’t rely on advertising. Amazon is a trusted destination. If someone wants to buy something, they often just go direct to Amazon. Amazon’s strategy involves what it calls “the flywheel”, whereby the more things people buy from Amazon, the more they’ll buy from Amazon in future. Amazon builds up a relationship rather than relying on a lot of advertising. Amazon cuts out the middle man and sells direct to customers.

Going viral with content, like Buzzfeed, may be one answer, but it’s likely temporary. It, too, suffers from a trust problem and the novelty will wear off:

Saying “I’m going to make this ad go viral” ignores the fact that the vast majority of viral content is ridiculously stupid. The second strategy, then, is the high-volume approach, same as it ever was. When communications systems wither, more and more of what’s left is the advertising dust. Junk mail at your house, in your email; crappy banner ads on MySpace. Platforms make advertising cheaper and cheaper in a scramble to make up revenue through volume.

It’s not just about supplying content. It could be said newspapers are suffering because bundled news is just another form of interruption and misdirection, mainly because it isn't specifically targeted:

Following The New York Times on Twitter is just like paging through a print newspaper. Each tweet is about something completely unrelated to the tweets before it. And this is the opposite of why people usually follow people and brands online. It's not surprising that The New York Times have a huge problem with engagement. They have nothing that people can connect and engage with

Eventually, the social networks will likely suffer from a trust problem, if they don’t already. Their reliance on advertising makes them spies. There is a growing awareness of data privacy and users are unlikely to tolerate invasions of privacy, especially if they are offered an alternative. Or perhaps the answer is to give users a cut themselves. Lady Gaga might be onto something.

Friends “selling” (recommending) to friends is a high trust environment.

A Good Approach To SEO Involves Building Consumer Trust

The serp is low trust. PPC is low trust. Search keyword plus a site that is littered with ads is low trust. So, one good long term future strategy is to move from low to high trust advertising.

A high trust environment doesn’t really look like advertising. It’s could be characterised as a transparent platform. Amazon and Trip Advisor are good examples. They are honest about what they are, and they provide the good along with the bad. It could be something like Wikipedia. Or an advisory site. There are many examples, but it's fair to say we know it when we see it.

A search on a keyword that finds a specific, relevant site that isn’t an obvious advertisement is high trust. The first visit is the start of a relationship. This is not the time to bombard visitors with your needs. Instead, give the visitor something they can trust. Trip Advisor even spells it out: "Find hotels travelers trust".

Telsla understands the trust relationship. Recently, they’ve made their patents open-source, which, apart from anything else, is a great form of reputation marketing. It’s clear Telsa is more interested in long term relationships and goodwill than pushing their latest model on you at a special price. Their transparency is endearing.

First, you earn trust. Then you sell them something later. If you don’t earn their trust, then you’re just like any other advertiser. People will compare you. People will seek out information. You’re one of many options, unless you have formed a prior relationship. SEO is a brilliant channel to develop a relationship based on trust. If you're selling SEO to clients, think about discussing the trust building potential - and value proposition - of SEO with them.

It's a nice side benefit of SEO. And it's a hedge against the problems associated with other forms of advertising.

Published: June 19, 2014

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Comments

June 22, 2014 - 9:15am

Great article. I think we're all slowly becoming more ad blind. Ads are seen as being untrusted in general. Look at Adsense - they used to have more discrete styling - now they're "louder". This is because we became blinded to the older format. In a sense, if you make money from advertising, you're constantly having to change and adapt to prevent this "blindness".

June 23, 2014 - 8:50am

This article is so littered with assumptions it would take an age to debunk all of them but I think the crux of your argument is flawed.

You have focused your attack on the 'interruption model' of advertising on what is predominantly a demand fulfillment audience; ie. people who want a product / service and are simply looking for it. Compare this to creating demand where until you make them aware or what is available, the audience has no desire to search for it.

Demand creation is where 'interruption' advertising has always excelled and your evidence does not suggest otherwise.

You use Amazon and Tripadvisor as examples of success in the 'trust model' however neglect to mention that both brands have invested in mass market advertising in the past.

I work in search marketing and so have a vested interest in seeing demand for our services increase but not at the expense of other forms of advertising. When trying to create demand for a product or service the 'interruption model' has always been the most effective way of doing so - the internet on the other hand has shown itself to be very effective at supplying demand, hence the decline of the Yellow Pages.

June 25, 2014 - 8:17am

Cheers Andrew

Thanks Paul - fair comment. I think the telling statistic for interruption marketing is the expected industry response/conversion rate. Around 2-3%. Is that the best we can expect? Why are we missing all the rest?

Trip Advisor, in particular, used aggressive SEO in the early days to build audience. I agree that there are other channels in play that contribute to success.

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