How did companies, that offer their main services or products for free, become among the most valuable companies in the world?
Facebook, Google, Twitter, Snap, LinkedIn, the list goes on and on. These are all very well-known brands. But what makes these companies so valuable? What are million and billion dollar evaluations based on, when a company offers its product for free?
The value here is you, the user. Or your information to be more exact. Companies like these, mainly operate on an advertisement based revenue model, which means they rely heavily on advertisers’ willingness to buy ad space from their platform and audience. The better the advertisement possibilities are, the more valuable the company is. And during the past few years, these companies have gotten extremely good at creating attractive advertisement platforms.
Every company advertises in some way, for some reason. Spread awareness, sell products, influence, brand, campaign etc., basically, in a market economy, it is more or less mandatory to advertise in order to survive. Advertising also must change constantly to stay fresh and get noted. The perfect ad for any advertiser would be one that appears to the correct person, about the correct product, in the correct place and at the correct time. But to achieve this is of course impossible. Or is it?
We are now closer than ever, if not partly already there, with digital advertising.
The one thing companies, like the ones mentioned in the beginning offer, is a platform for nearly perfect advertising. They are very good at tracking their users and can learn their behavior, their likes, hobbies, friends, favorite places, etc. With this information, and smart marketing tools, advertisers can now create dynamic ads that are shown to the correct users, at the correct time, in the correct place and about the correct product. Obviously, this is still all confined to the internet, but as mobile phones already surpassed desktop computers as the main internet browsing platform in 2016, and digital advertising spend surpassed TV advertising spend the same year in the US, this is definitely the future of advertising, and still it is only getting started.
Anyone who works in marketing, especially those who work with digital advertising, should know the current possibilities it offers, and how we got here. But as advertising is getting more and more personal, I believe everyone should have at least a basic level of understanding on how digital advertising works. Privacy is always a hot topic and a concern for most of us, but most users have no idea how much information they are giving away just by visiting a webpage, searching for something on google, or liking a post on Facebook. When it comes to advertising, you are constantly being tracked and targeted online, and in very innovative ways.
Before we get into the facts and figures, as a side note, I do not work in advertising, or any other marketing area for that matter. I simply got curious about why user data has become so valuable, which lead me to digital advertising and our digital footprint. The more I read, the more interesting it got. Therefore, I decided to compile my findings and thoughts into this article and publish them for anyone to read. Maybe this can help with understanding online tracking, targeting and how your actions affect what you see.
Digital advertising is only getting started
Digital advertising is growing on every branch, with the latest trends being mobile and video ads. Global digital advertising spend is estimated to grow by 2020 to $335 billion worldwide, or 46,3% of total media ad spend, and mobile ads will continue to grow and be the biggest platform for digital advertising. This is a huge market, and it is still only getting started.
The evolution of digital advertising
When looking at the growth and current market share of digital advertising, it is important to know this is still a relatively new area of advertising and it is constantly evolving. In 20 years, we have moved from simple banner ads to super targeted and personal ads, that can follow the user between sites and even in between platforms, and where bidding for ad space is done in real time, per, per visitor and by computers.
The beginning of digital advertising
Digital advertising technically started with spam email, and already in 1978, but for the sake of time and relevancy, let’s skip that and start where the first internet banner ads were created.
The first banner ad was sold by Global Network Navigator to a law firm already in 1993. Banners got more popular in 1994 when Wired Magazine started to sell ads in large quantities, to a wide range of major corporate advertisers. Wired was even able to report on click through rates (CTR) to their customers.
Banner ads were sold in the beginning simply as direct agreements between the advertiser and website, where ad space was bought and banners kept on the website for the agreed amount of time.
Digital advertising becomes easier and targeted
The first big evolution of digital advertising, around late 90’s, had to do with how ads were bought and sold. Direct agreements gave way to broker services that would package multiple websites, or webpages, into audiences and sell to advertisers through ad networks. Brokers could then categorize and package similar webpages together, e.g. based on their theme or information, and sell this as an audience to an advertiser.
This meant targeted advertising was possible. Advertisers could buy ad space with a specific audience, and thereby target their ads to people interested in that specific category.
Digital advertising gets user friendly
The second evolution came with quality. By late 90’s, banner ads were very common on websites, and thereby also started to get more and more ignored by users, a phenomenon called banner blindness. Click through rates were dropping and with it the advertisers’ ROI. To capture the attention of users again, pop-up ads were invented in 1997. Even though, together with pop-under ads, the user experience was very intrusive, they worked and Click through rate increased. However, soon after, popup blockers started to appear on browsers which restore the user experience.
Around the same time, some search pages had moved from Cost-Per-Impression (advertisers pay every time the ad is seen) to a Pay-Per-Click model, and offered automated auction/bidding, which allowed advertisers to bid exactly the amount they are willing to pay for a click. As bid winners were purely ranked on bid amount, the highest bidders were listed first, even above more relevant content. This lead to corrupt search results and bad user experience. Google, still a relatively new player in search, joined the advertising game in 2000 with a mission to improve the user experience. Google introduced AdWords, and sold cleaner, category-targeted, text-based ads opposed to banner ads.
In 2002 Google re-did AdWords, and added a new parameter to ad bidding, quality score. This meant that more relevant ads (ads with a higher click through rate), would be placed in front of higher paying, but less relevant, ads.
An open market for advertisers to choose from
The market to buy and sell advertisements had moved from direct deals between webpages and advertisers, to brokers, or ad agencies, that could sell audiences of multiple sites at one time. For advertisers to reach these tens, or hundreds of thousands of sites, they would still need to contact multiple ad agencies and create multiple contracts.
The third evolution came in 2009 with RTB (Real Time Bidding), which allows thousands of bids to happen in real time, before an ad is shown to a user. Every time a user comes across an ad on a website or platform, a request is sent via an ad exchange to multiple ad networks and advertisers. These advertisers automatically submit bids in real time to place their ads. This allowed for a more open and straight forward exchange when buying and selling ads and audiences.
Advertisements become better and more relevant for users
The last big evolution, used together with RTB, is what made digital advertising really stand out. Programmatic, or super targeted, advertising, where advertisers can pick and choose their customers, automatically. Facebook, who joined the advertising market in 2006, is seen as a targeted ads pioneer. They have lots of data about their users, and use this to sell very specific audiences for advertisers, who again can provide tailored and personal ads to user, an outcome that is beneficial for both the advertiser and the user.
For example, and advertiser could choose to only bid for ad placement during a certain time, for a user who is within a certain age, with specific interests, in a certain location, and even based on the users’ behavior (e.g. users who previously visited the advertisers’ product page).
Depending on the service advertised on, there are numerous ways of profiling users and creating a very precise audience for your ads.
Every modern digital advertisement platform can offer some, if not all, of the above capabilities. And most of them offer their tools, with which to create smart and programmatic ads, for free. And as advertisers only pay when their ads are seen (impression) or engaged with, combined with the massive potential audiences, this makes digital advertising a very tempting option for any advertiser.
A closer look at the most popular platforms today
Instead of going through all the popular advertisement platforms, I will focus on the two most popular digital advertisement platforms; Google, market leader in search, and Facebook, market leader in display advertisement. Google and Facebook are quite different when it comes to advertising, they target users on different platforms, and with different techniques.
Together Google and Facebook are predicted to make $106 billion (almost half of the world's digital ad spend) from advertising in 2017 (source: eMarketer).
Facebook knows its users, very well. All the information you have in your profile, the posts you like, companies you follow, where you spend your time (location tracking), interests you add etc., it tells Facebook something about you. This information is used to profile you, which advertisers can use when they want to target a specific audience with their ads.
On top of this, Facebook also offers its advertisers a piece of code (pixel) to add to their websites. This invisible pixel reports back to Facebook what users are doing on their website, even if they didn’t go through Facebook to reach it, which pages they visited, how long they spent on them, and for example what products they viewed. This information is sent back to Facebook and linked to your profile for further advertising use.
This is very useful for both advertisers and Facebook. Advertisers can create audiences based on who has been visiting their page, which products they looked at, if they purchased or not, etc. Facebook uses this to continuously optimize their advertising. When a pixel e.g. reports a product was purchased, Facebook can analyze the profile that bought the product, check what ads have been shown to this user and on what devices, and finally use this knowledge to further optimize their ad delivery. Facebook is continuously learning what works and what doesn’t in advertising, and applies this when optimizing and enhancing their ad delivery.
The pixel tracking, of course, relies on the user being signed into Facebook for it to work. However, Facebook also offers a way of tracking “offline” users. Advertisers can upload user data (e.g. email addresses of users who completed an in-store purchase) to Facebook, and run advertising campaigns on Facebook to these users. This information is also relevant when looking at ad performance, as a user might have seen the ad on Facebook, but later bought it in-store, or not logged into Facebook.
As Facebook strives to continuously optimize its ad delivery, the more data there is on ad performance, the better the ad delivery will be. This basically means, for users, the more active you are on Facebook, the better the ad optimizing works, and you get more relevant ads. For advertisers, the longer your ads run, the better Facebook can study the ad performance, and optimize it for perfect delivery.
To start with, it’s good to know that Google is not only hosting ads on their own services like Google search, Gmail and YouTube. They also sell ad space on their Display Network, which is a group of more than 2 million websites with an estimated reach of over 90% of Internet users worldwide. With this vast network, google has a very good reach both on the search and display market.
The search based advertising is very straight forward, when you search for something on Google, it tells Google what your need is, and ads targeting this demand are displayed. Advertisers could choose to advertise for example competing companies, relevant products or remind you of what you were looking for 5 days ago.
Display based advertising is similar to what Facebook offers, but Google uses additional methods of profiling users and creating audiences. If a user is signed into their Google account (Android, Chrome, YouTube, Gmail etc.) while browsing, ads relevant to the users’ profile can be displayed. The Google Account profile carries browser information, interests etc. and is built automatically based on the users’ online behavior. You can check the profile google has built about you, and correct it for more relevant ad delivery (http://www.google.com/ads/preferences/view).
As a second method, Google, like many others, uses cookies to track users’ online activities and to build a profile. Cookies are arbitrary pieces of data, sent by the webpage you are visiting, and stored on your computer by the web browser. The browser then sends them back to the server with every new page request, i.e. every time you go to a webpage, the page will request for information about your last visit, and can use this to enhance your browser experience.
Cookies are mainly used to identify the user, remember a users’ custom preferences and help complete tasks without having to re-enter information when browsing from a page to another. However, they can also be used to tell what webpages you have been visiting, if you have visited a page before, your site activities like shopping cart items etc.
When users search on Google, or visits websites part of the Display Network, cookies are being dropped, and read from the browser by partner advertisers. These cookies can tell the potential advertisers your recent searches, previous interactions with an ad, website visits, what ads you have seen before and any conversions that happened from an ad click, and based on this, advertisers can target their ads to match your profile.
Cookies have limitations compared to account targeting. Cookies are browser specific, and cannot track cross-device usage. Mobile devices limit cookie usage as well. Safari browser, for example, by default blocks 3rd party cookies altogether, and other browser drastically reduce the time how long cookies are stored on the device compared to how they are stored on desktop browsers.
This means that most traffic coming from a mobile phone, will be without cookie data, which again means that cookie-based tracking and ad targeting, is not possible. To tackle this, Google uses aggregated and anonymized data from users who have previously signed into Google services, i.e. Google uses conversion data behavior from visible users (signed in users) to estimate cross-device conversion for (partly) invisible users.
The future of digital advertising
With companies constantly coming up with new and improved ways of gathering user data, it will be very interesting to see how clever advertising in the future will get. With IoT growing, and the barriers between ‘social’ and ‘real’ getting smaller, we can expect all advertising getting more personal, more relevant, and more creative.
Collecting more data and utilizing it will continue be the trend for the future. There is no question about this. But as privacy is increasingly a concern, it’s all about finding the right balance. And as stated before, when most web users do not know where, and how, they are being tracked, there will be more legislation around the topic of user privacy.
For example, the EU ‘Cookie law’, which was taken into use in 2011 in all EU countries, forces website owners to give individuals rights to refuse the use of cookies that reduce their online privacy. In other words, you must ask users if they agree to most cookies and similar technologies (e.g. web beacons, Flash cookies, etc.) before the site starts to use them.
Another EU Regulation with even bigger effect is the GDPR (General Data Protection Regulation), enforceable from 25 May 2018. The EU data protection law applies to all foreign companies processing data of EU residents. The GDPR covers a lot of different data protection regulations, but a few that are relevant for advertising are that cookies are treated as personal data, inaction cannot be considered consent (meaning that doing nothing is not the same as ‘Agreeing’), and that a user has the right to be forgotten. This means that usage of cookies will become much more clearly opt-in and blocked until users take action, and that any individual can request for their data to be removed or deleted when there is no compelling reason for a business to continue processing that information.
Proper usage of data, well informed consumers, and clear options to opt in or out of being profiled and targeted, is key to finding a good balance between what data users agree to share and what advertisers are allowed to use. And even with a clear and simple choice to block any tracking, I don’t think most users will, or should, choose so. Modern digital advertising, at its best, should be beneficial for both consumers and advertisers. Users only get relevant ads, at the correct time and in the correct place. And advertisers do not waste ads and money, on displaying not relevant ads to the wrong audiences.
Kenneth Lindstedt