Advertising On The Internet - December 11th 2006

WHAT IS THE BEST MODEL?

Online advertising is here to stay. It’s already a multi-billion dollar business, and it’s the fastest growing business there is. The scene is dominated by Google with Yahoo and the others struggling to try and catch up. Every new business makes mistakes and experiences growing pains as it makes its way to maturity and online advertising has some way to go before it sorts itself out.

The way online advertising currently works is that an advertiser prepares his ad and submits it to Google (or similar). Google will then display the ad on any web site in its advertising directory that appears to contain something relevant to the ads subject. Then, every time an internet user clicks on the ad, Google charges them for the click and apportions some proportion of the fee to the web site that hosted the ad.

What’s wrong with this model is:

1. The advertiser has no say on where his ad is displayed. This causes potential ethical problems as well as making it almost impossible for him to assess the ads impact on different consumer sectors. Many countries are debating how to control advertising directed at children. Whilst it is fairly simple for the authorities to detect and ban hamburger ads on Nickelodeon, it is very hard to detect and even harder to ban, subtle pedophile ads on children’s web sites!
2. The advertiser has little control over his budget. Whilst he sets the price he’s prepared to pay per click and sets the maximum amount he wants to spend each day, that’s it. Google makes little effort to help advertisers find their way through the huge complexities of their system. They don’t disclose details on how their systems work and they won’t tell you what strategy works best for a particular market. Whilst you are trying to figure out how best to advertise online, you can easily spend buckets of cash to little or no effect.
3. The system is ripe for fraud. Estimates vary on the number of fraudulent clicks on ads from between 10% to 50% of all clicks. Because the websites where the ads are hosted receive a slice of the advertising revenue, it is far too easy to pay a few people to click on ads and equally easy to write some software to simulate users clicking on ads just to get that revenue. There is no doubt that this fraud is big business and must be stamped out before online advertising progresses much further.

For comparison, let’s look at how traditional advertising works. Firstly, you determine the location that best suits your product and the demographic you are targeting. This can be a publication, TV show, billboard or something else. You then prepare your ad to suit that particular location and negotiate with the content provider to determine exactly what exposure you will get for how much money. Once the content provider delivers the ad, you the advertiser can easily check to make sure that what you decided is appropriate and can assess the response to the budget you have set. For future ads, you can tweak your content and the display locations.

There are some alternative online advertising models, one of which is pay-per-action rather than pay-per-click. This means you only pay when your ad generates a sale or some other easily verifiable positive action. Whilst this virtually eliminates click fraud, it invites another type of fraud that can be perpetrated by the advertiser. An advertiser can easily generate brand awareness ads that point to a website that is very hard to buy something from. He is then getting free exposure for his company and product. Traditional advertising decouples exposure from response. There is no guarantee that your ad will generate a positive response and nor should there be. If you are trying to sell a product nobody wants, why should the publisher be penalized by not being paid to display your ad?

You can of course use a traditional advertising model on the internet. You can identify the web sites you want to advertise on and directly negotiate a price with them to display your ad. Of course, you then miss out on potential sales from the millions of internet users who never visit your target publication, but then that’s no different from print or TV advertising so why should you worry? If you want to target teenagers interested in new media, why wouldn’t you invest in ads on YouTube rather than on the scatter gun approach of the pay-per-click model? Detractors of this approach will try and tell you that this is incompatible with the communist ethos of the internet and that you are missing out on millions of other users.

Well, you know what? I’m quite comfortable that my ads don’t appear on blog sites like this one. I would rather pay an advertising agency to identify the best locations and the best types of ad for my particular business rather than having my ads appear on virtually useless sites in the long, long tail of the internet. I’ll display Google ads here because it costs me nothing and generates a small revenue stream. However, if you want to advertise here because my jottings target your particular demographic, send me an e-mail and we’ll work something out that doesn’t inflate Google’s profits. Who knows, if I get popular enough, maybe I can eventually give up the day job.

Comment by David Sawers on March 7th 2007

Google recently announced in one of their semi-official blogs that the rate of undetected click fraud from Adsense was 0.02%!

This number has not surprisingly been greeted with much derision in the technical press. It is impossible to confirm or refute Google's numbers, because all the data comes from them and they are notoriously mean with meaningful data. However, until these numbers are confirmed by an independent third party, I will treat them with the sort of scepticism previously reserved for those oil companies who tried to prove to us that global warming was not caused by the burning of fossil fuels.

Comment by Idetrorce on December 16th 2007

Very interesting, but I don't agree with you.