We're Still Waiting For Internet Ad Spend To Catch Up to the Web -- Let's Not Make The Same Mistake With Mobile

By Erin Griffith , written on September 13, 2012

From The News Desk

Let's go back to 2005. Google had just gone public and the world was agog, staring at the riches from what may be one of the best business models we've ever seen: paid search.

It was the same model created by Overture, which was bought by Yahoo. Under pressure to perform, Yahoo -- then run by Terry Semel -- had one answer for anyone who asked how the purple giant stayed relevant in this new Google-centric age. Yahoo execs would saunter into analyst meetings, board meetings and press briefings, plug their laptops into the projection system and, like a bat signal, they'd throw up the chart. 

The chart showed that the percentage of time we were spending online was increasing hugely, but the percentage of ad dollars wasn't close to catching up yet. "This will obviously correct over time," the Yahoo executive would say, and Yahoo was the biggest trove of eyeballs on the Web, hence Yahoo would benefit. Ta da! There was no problem. It was just a matter of time -- if everyone would wait a few years, it would happen on its own.

So we waited.

And waited.

And nearly a decade later, and we're still waiting. In fact, in corners of the Valley, you still hear the same sad, hopeful argument.

It's time we faced it: Digital ad spend is nowhere close to reflecting the amount of time we spend online. Move to Plan B, Internet economy, because this one just isn't happening on its own.

That's because there was a fundamental flaw in the Silicon Valley premise that anyone on Madison Avenue could explain: Attention doesn't equal a good advertising opportunity. That has never been the case in the offline world, so it's perplexing that the brightest minds in Silicon Valley would think all eyeballs are equal. Since when did an hour with a magazine get priced on the same scale as a 3 second drive-by of a billboard?

Businesses built on this premise should beware. Take a lesson from so many Web 2.0 startups that operated with the delusion that reach might equal a viable business. Slide, which investors valued at $500 million in 2008, boasted the fifth largest "reach" in the Web. There was a vague assumption that the advertisers would beat down the company's door, begging Slide to take their money. It sold to Google two years later for less than half the value and has since been shuttered. (And in the disappointing widget economy that many hoped reach would equal revenues, Slide made out better than most.)

Consider this: Search advertising is a $14.7 billion business.* It's the largest segment of digital advertising, soaking up 47 percent of last year's digital ad spend in the US. And yet, search only represents four percent of our time spent online, Quantcast CEO Konrad Feldman said at Federated Media's Signal: Chicago conference.

That discrepancy -- half of all spending but 4 percent of time spent -- occurs because search is simply the most effective form of online advertising. It provides direct ROI, which was the real beauty of advertising on the Web to begin with. Someone searching for a product likely has intention to buy said product. Paid search results pay off. Matching buyers and sellers is the most simple form of advertising there is. The faster it happens, the better, actually.

Now consider Exhibit B: Display ads are the second-largest sub-sector of digital advertising, eating up $11 billion worth of online ad dollars a year, or 34 percent of spending. These show up where we're dedicating our attention online -- around content and communication tools. And yet, they are insanely ineffective. Truly no one clicks on display ads, no matter what form they take. Banners, interstitials, screen takeovers, pre-rolls, pop-ups -- whatever it is, it's all just dressing up a dud. Click-through rates are less than .1 percent, half of which are probably accidents. Why again do we keep thinking brands will throw more money at this if we just wait long enough?

The very simple takeaway is that attention does not automatically translate to a solid advertising opportunity. The complex takeaway is that display advertising faces a different type of challenge. Display ads are almost always an unwanted interruption. And we're good at tuning those out online, whereas we don't have the option in the classic, pre-TiVo offline world. When was the last time you looked in the general direction of a banner?

But more importantly, sellers of display ads are not necessarily trying to offer direct ROI, meaning an ad that translates directly to a sale -- you know, what the Internet with its unique traceability is so good at. Rather, they are hoping to move up the funnel into the more expensive category of ads focused on fuzzy but valuable things like branding and awareness.

There's a fundamental disconnect here that simply doesn't play in Silicon Valley's favor: The Web was revolutionary for advertising because it is so measurable. Brand advertising in the rest of the world -- television, magazines, outdoor -- is so expensive because it is not. Put another way: An emphasis on numbers is what made paid search soar. But it is precisely what helped keep Yahoo's pretty chart from turning into reality.

Yahoo's loss has been Twitter and Facebook's gain...sort of. Most good brand advertisers know by now that online, the best branding they can do is produce engaging "in-stream" content on social networks. And yet, display ads infuriatingly persist.

Wake up, Silicon Valley: The second-biggest chunk of the digital advertising industry does not work. What's worse, it's the category that's bolstering pretty much every online media company except Google.

Now we have the latest frontier in digital advertising, mobile, and with it comes an unsettling feeling of deja vu. Once again, everyone expects time spent will automatically translate to an unparalleled advertising opportunity. Go to any tech conference. You will literally hear the exact same argument. It's as if Terry Semel is back, only younger and wearing a hoodie.

Last year Razorfish Head of Mobile Paul Gelb told me mobile ad spend would soon overtake television. Tuesday Mark Zuckerberg touted the size of Facebook's mobile advertising opportunity. The company's user base is quickly moving to mobile -- Zuckerberg himself rarely visits Facebook on the Web, he said. For each "person who's using Facebook on mobile, there's more engagement, and they're spending more time," he said, adding ,"We think we'll make a lot more money than on the desktop." Benchmark Capital Partner Matt Cohler was equally as breathless about the future of mobile ads. Smartphone content is more intimate and focused than the web. It's similar to TV, he argued.

Mobile is certainly winning the attention war. Smartphone adoption is the fastest in history. Mobile devices are more popular than computers. Time spent on mobile is on track to outpace all other forms of media. And in many emerging markets, mobile is the only way users have every encountered the Web.

But from an ad spend perspective, not so much. Last year the category brought in around $1.6 billion in ad revenue; this year it's expected to be closer to $3 billion. That's not going to come close to TV's $70-some billion, particularly if the ad units continue to look like smaller versions of the crappy display ads everyone already knows and hates.

For mobile to live up to the massive market opportunity that Gelb, Zuckerberg, Cohler, and every other ad-supported mobile startup assumes it will become, there needs to be real, Overture-style innovation. It's the industry's shot at a do over. Sitting back, showing some pretty graphs, and hoping the market takes care of itself didn't cut it last time, and it won't on the mobile browser either.

[Image via Rolling Stone]