body.has-navbar-fixed-top { padding-top: 4.5rem; }

The theory of Peak Advertising and the Future of the Web

date Jan 14, 2019
authors Tim Hwang and Adi Kamdar
reading time 4 mins
category paper

Key message

To those designing platforms and using those platforms, the issue is: what kind of Internet do we want to have?

Why is advertising important for the Web today?

Advertising is the critical financial engine of the Internet. Despite numerous innovations over the past few decades, advertising remains by far the most dominant model supporting an entire ecosystem of professional content creators online.

Declining trend of advertising

Worryingly, advertising is not well. Though companies supported by advertising still dominate the landscape and capture the popular imagination, cracks are beginning to show in the very financial foundations of the web. Despite the best efforts of an industry, advertising is becoming less and less effective online.

1994 to 2011

Consider the long-term trend: when the first banner advertisement emerged online in 1994, it reported a (now) staggering clickthrough rate of 78%. By 2011, the average Facebook advertisement clickthrough rate sat dramatically lower at 0.05%.

Disadvantages of a falling advertising revenue

The theory of Peak Advertising relies on a simple proposition: online advertising will continuously decline in effectiveness going into the future, to the extent that it makes existing models unsustainable.

Internet generation does not like advertising

This experiment suggests that there may be a generational gap in receptiveness to advertising online. Ironically, the generation most identified as the “Internet generation” are some of its worst supporters from a purely financial point of view.

Using ad blocks are high

We can expect that the proportion of users blocking ads will continue to increase over time. It is nearly costless for users to implement. Indeed, Chrome and Firefox—which continue to gain in market share— are precisely those browsers whose users most frequently install ad blocking software.

Click fraud causes advertising decline

Click fraud is a “type of fraud that occurs on the Internet in pay per click online advertising when a person, automated script or computer program imitates a legitimate user of a web browser clicking on an ad, for the purpose of generating a charge per click without having actual interest in the target of the ad’s link.” This distorts the data available about the effectiveness of advertising and promotional activity, and imposes costs on advertising buyers that purchase placement without any benefit.

Attention resource

The reason for this is simple: advertisers compete over the limited resource of attention online. Each has incentives to deliver as many advertisements to the user as possible, without causing the user to abandon the site in annoyance. However, as the number of ads increase across all channels, advertisers effectively fight over ever smaller slices of user attention, potentially culminating in users ignoring advertising messaging altogether.

Internet is already an oligopoly

To that end, Peak Advertising will drive the formation of highly monopolistic or oligopolistic market structures for advertising, since only the largest companies will have the scale of advertising inventory necessary to remain profitable. Smaller companies that are especially reliant on advertising will have difficulty remaining profitable and will face incentives to sell to companies with larger aggregate volume to sell.

Encroaching user privacy

As the effectiveness of advertising declines along with its price, advertising vendors will continually need to collect more and new data about their users in order to simply run in place and maintain the value of the inventory they are providing.

How platforms might deal with data collection

Platforms attempting to engage in increased data gathering on their users also face the risks of consumer blowback. Platforms, naturally, will attempt to have their cake and eat it too. They may simply conceal increased data collection policies from users, or attempt to frame the increased collection as itself an attractive feature.

Countering ad-blockers

“Native advertising”—sponsored content made to look like editorial content, or content from other users—is more difficult for ad blockers to detect because it is not often delivered through an easily identifiable pattern of code.

Lesson from history?

But, perhaps this is where the homage to the theory of Peak Oil is most apt. It is possible, in a world of dwindling fossil fuel supplies, that innovation may produce an entirely alternative source of power that avoids catastrophe and permits current consumption patterns to continue.

Possible implications

In the alternative, someone might innovate an entirely different business that provides margins and revenue flow comparable or better than advertising. It is likely that such a transition would require significant changes in how we experience the web. Go with the models that we know: an Internet where the most massive companies ran on subscriptions, for example, would grow significantly slower, be more subject to user demands, and would likely feature smaller user bases than the ones that we see today. This avoids the obvious issue, too, that not all existing businesses would be able to transition successfully in time, particularly those that have built the most successful businesses on advertising.