The Advertising Glut Dooms Social Media Industry

A death spiral, except for a few big winners.

By Larry Kummer, Editor of Fabius Maximus, a multi-author website with a focus on geopolitics: 

The internet is a mirror in which we can see important aspects of America. Businesses funded by speculation (greed) struggle to survive in an era of few opportunities and falling investment, while high technology and rising inequality reshape America. The social media stocks are in this maelstrom, as virtual advertising space grows faster than their audience and advertisers dollars. Publishers grow desperate, try ever more intrusive ads. Few will survive.

The race for revenue on the internet

The evolution of the internet is best seen in terms of what pays for it: banner ads, then pop-up ads, then auto-run video ads, and now “integrating” the content with the advertisements (these tends often end by debasing the product). It is an evolution to increasingly intrusive ads, forcing people to either spend more of their time killing the ads — or installing ad blockers (which are in a Red Queen race with the developers of ad technology).

Don’t blame the managers of these companies. That’s as foolish as blaming airlines for the poor service that accompanies the cheap fares we demand. We don’t pay for most of the information and many of the services we get on the internet. As Andrew Lewis said: “If you’re not paying for something, you’re not the customer; you’re the product being sold.” So we have no grounds to complain.

The managers know the futility of this race they’re locked into, but they’re desperate.

Speculation

The San Francisco Bay area is a city of castles built on clouds, on the massive flow of dollars into companies large and small by greedy investors. A large proportion of its people, rich or just working, live on the money skimmed off from those investments — because many of these companies are not producing profits. It’s the real American dream machine; by comparison the entertainment products produced by Hollywood are as solid as gold bars.

Many of these companies will never produce profits. I’ve spoken before about the biotech bubble, where the grim math of R&D will doom most of these lavishly funded start-ups to some form of crash and burn. Others facets of the big bubble, like Tesla, have been widely discussed. But the structural weakness of the social media mania gets little attention.

Most social media companies — and more broadly, the larger industry of advertising supported internet companies — are doomed in their current form. There are already too many for the advertising industry to support, and venture capitalists continue to manufacture them — their output limited by investors’ willingness to buy their shares, not their actual business prospects.

Driven by the awareness that the clock is running — investors will eventually demand profits — every company seeks to increase their supply of advertising “space”, deepening the glut of ad space — making everybody worse off. Their costs are fixed, while the supply of virtual advertising space can increase faster than the size of their audience or their fuel of advertising revenue.

Hence the frantic search for new advertisement tools that offer higher margins, no matter what the effect on reader satisfaction. {This is why businesses create pricing cartels, or merge until the few survivors can coordinate without direct contact.}

I wonder if we have reached the point where the internet ad-supported business model breaks. First, the shift of traffic to mobile makes effective advertising far more difficult.

Second, some websites might have so loaded up with ads that readers rebel. I’ve stopped reading some websites due to the load of ads: slow to load, too many pop-ups and auto-plays, and the ads interfere with display on an iPad — such as Salon (I bought it up to get the link; my pc immediately jammed). If more people do this, the prospect for profits on the net might disappear for many companies.

In short it’s a death spiral. The few profitable firms (e.g., Facebook, Google) will not only thrive as their smaller competitors fade, but they’ll make some great acquisitions. These articles mark the struggle of the industry, sustained so far by the flow of money from dazzled investors (ignoring these companies financial statements).

Inequality

The assumption of the internet industry is that they can follow the path of the TV and newspaper/magazine industry to fortune. But times have changed. The revenue of these mass media rested on the prosperity of America’s large vibrant middle class — people who had the money for discretionary purchases and subscriptions.

Four decades of America’s productivity growth has gone into the pockets of the 1%, leaving the middle class a shadow of itself. The rise of pirated media reflects the middle class striving to maintain a lifestyle it can no longer afford, as do people’s reliance on free services and sources of information. These are signs of return to a 19th century-like society (e.g., servants steal).

This slow contraction of the middle class will reshape our society. Charities, community service clubs, and media — all of them rest on an economic foundation that is washing away. This forces them to seek patronage from the rich, another stage in their gathering all the threads of influence in America. But that population of the 1% is too small and doesn’t offer the revenue opportunities needed by the vast internet industry. By Larry Kummer, Editor of Fabius Maximus, a multi-author website with a focus on geopolitics. This article originally appeared here.

At first we thought it might have been a blip, a short-term thing. Read…  Americans’ Economic Confidence Gets Whacked

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  18 comments for “The Advertising Glut Dooms Social Media Industry

  1. Petunia says:

    Another aspect of internet advertising that is never discussed is how easy it is for readers to manipulate the advertising. There are many ways in which advertising can be manipulated on the internet to benefit a site or hurt a company. I rarely pay for content but I want the blogs I read to thrive. I often click on their ads because I know that generates income for the blogs I like. It’s my way of paying for the content with OPM. I have no intention of ever buying those products.

    You can also maliciously cost a company a lot of money through its internet advertising. If you wanted to attack XYZ you could go to their web site which automatically creates a tracking cookie to send you ads everywhere you go. Then you click on the ads everywhere without ever generating any sales for them. This can be considered a coordinated attack if done on a grand scale. You are generating an expense for them they cannot recover with a sale to you.

    • NotSoSure says:

      I am sure what you’ve mentioned has been factored into pricing of these ads i.e. impressions typically pay very little. The big money’s only when you click all the way through and make a purchase.

      In other words, you can click a thousand times and it will cost the companies very little.

      • Petunia says:

        My point was really that internet users are savvy enough to subvert the original intent of the advertiser and the ad seller as well. You make my point for me by knowing so much about the process. I can subvert the ability of a web site to generate more revenue by not clicking on their ad for a product and going to the product site instead. All the strategies are well known.

  2. OutSider says:

    Technology ….

    As more and more jobs are ” deleted ” by tech just another finger in the cauldron of swirling global deflation ebbing and flowing in and out of all markets.

    The interest rates, amortization, securitization deflation must have every banker always looking for the seat wondering when the music will stop again ….. That screeching sound is the fat lady singing mandarin this time around, the pitter pat of footsteps is the tsunami of hot money exiting stage left ……. The PCoB is in a bind. The hot money exits for one of two reasons #1 – RMB deposit rate + expected appreciation against US Dollars or it exits because of risk ie : risk of the financial system itself = destabilizing outflows as every 100 Billion of outflows = 5% or so of GDP …..

    • OutSider says:

      And the PBoC can only handle 1.5 – 1.8 Trillion before the fat lady get tossed off the ship. With the recent dumping of 500 Billion in treasuries over the last few months in conjunction with money velocity crash accelerating we should know within 12 week if the global credit crisis 2.0 has started. 2007 was the front end of a deflation hurricane, we may be exiting the calm waters of the center before the very ugly second half comes ashore ….

      And tech played its part draining capital / velocity as longer term liabilities counted more and more upon those no longer doing the cha-cha at the securitization party ….

  3. Vespa P200E says:

    I think this social media stuff will flame out. There is so much of Fakebooks and alike and millions of narcissistic idiots enamored by their own reality TV sharing like crazy but c’mon how long could this BS last till the schmucks finally realize that no one really gives a sxit about them and biggest time waster of this century?

    Sure the ad moneys are rushing into the social media but if anything it took away ad dollars from MSN, Yahoo, etc. and the advertisers may come to realize that return is not that good and with the recession at our door steps ad spending may be first to be cut. Oh yeah not to mention the bots all over the 3rd world liking and clicking away. Yep suckers will figure it out and question the payback.

    • Hal says:

      Vespa, there are too many people with nothing to do but post nonsense on FB. They do not buy anything via a FB ad. I have asked my adult kids and friends and they use FB to post pic of kids, which i think is crazy, and do group meet ups. They are addicted to FB in different ways buy ine day when profits are needed at the advertising companies they will realize they are not getting payback for the clicks or whatever and end this stupidity.

  4. gary says:

    OK, somebody just explain to me how Plenty Of Fish was raking in such huge amounts of money for real on a consistent basis (and it finally sold for $half-billion)

  5. Mark says:

    I think part of the reason why companies are looking to the internet for advertising is because the traditional forms of advertising IE: Newspapers Magazines TV Radio and Outdoor billboards are all dying a slow death. The part that makes me laugh the most is that social media will go the way of the doh doh bird as well.

    Im more then sure that in the next 10 years you will see the outright death of all Print Media. Who buys magazines anymore? Who want to pay 10 bucks for a magazine filled with Ads? Same with newspapers. Who wants to pay for a newspaper Sub anymore?

    Personally I Ignore all Ads and never click or buy from any of them. I can’t stand those google ones the most.

    And as a store owner. Why should I pay 2,500 – 5,000 dollars for a newspaper Ad or 10,000 for Radio spots when it generates only a fraction of what you spend for the Ad ! Waist of my money ! Heck I hate social media so much that I refuse to use it for my store ! Screw google fb twitter and the lot of them to hell and back. I built my store on reputation and word of mouth.

    Remember Yellow Pages ! Remember the SCAM they used to run ! Splitting the book into 4 different areas for the city and then charging you like 500 – 1,000 or more per month for each area ! It was a license to print money for yeeeeeeeeeeeeeeeeaaaars and now look at them ! On the verge of bankruptcy. I remember when I stopped my Ads with them and told them where to go back in 2005 lol Never used that crap again.

    Anyways my point is that corporations don’t have cash to throw at advertising anymore because Ads have become ridiculously expensive and don’t generate the return they used to. Why.. because the people just don’t care about Ads anymore and are becoming tapped out. Ads don’t work anymore.

    Someone hit the ” reset ” button !

    • Petunia says:

      As a consumer I either care more about price or quality. I would rather have both, a good price for good quality. Any retailer that delivers both or either will have customers finding them. Everyone loves talking about a bargain or a good supplier.

      I think advertising works best when introducing a new product. After the initial introduction it is a waste of money. Are you listening Coke and Pepsi.

      • Mark says:

        Yup, why I always have Sales going on and try to give consumers the best experience and deals around :)

  6. Hal says:

    As an aside, Apple announced Wednesday evening that its cutting 1 billion from capex. Thats kind of telling me that they NEED to cut cost to make numbers because the growth is no longer there.

    Thats going to happen to advertising when companies have to cut cost. Perhaps some companies will sponsor unemployment comp payments or welfare payments to get reach., kidding of course, but this economy is sliding fast. I was always taught to pay up for good growth, and quality earnings. Tell me where that is.

  7. Dave Mac says:

    Social Media is massively overrated. What true value does it create?

    Face Book will be the short-of-a-lifetime when it crashes. But when?

    I reckon late 2016 or early 2017.

    • Petunia says:

      The natural market for the data of social media are govts and intelligence gathering entities because they have an interest in who is out there and how they interact. Don’t expect the big social media companies to disappear because they won’t. They have plenty of customers for their data. Keep facebooking.

  8. ERG says:

    When there’s plenty of free money washing around, a new generation of suckers are born.

    All this amounts to is Dot Com Bubble v2.

    Soon to burst, just like DCB v1.

  9. Guido says:

    The whole premise of building profiles on people is overblown. This is because people evolve with time and they won’t tell you the reasons behind their moves.

    In some sense, gathering user data is like writing down the positions of the chess pieces every time a move is made. Does that tell you why a move was made? No. It will give you some data to do statistical analysis (may be build a frequency distribution) but not a whole lot. The number of possibilities is humongous and most of the possibilities are never visited. This is called the curse of dimensionality.

    Then there’s the user who becomes conservative once she makes money and becomes afraid of losing her job — she watches her steps in case her boss is looking to get rid of her. As a result, the data posted on Facebook becomes even more guarded. Will she ever give away her wish to leave it all and run away to Hawaii, especially if she has a job worth anything?

    This is also the reason social media is for wanna bes. Just look at LinkedIn — a place full of people from non ivy leagues hoping their careers will be rescued by somebody.

    It is against this background that advertisers go in hoping they’ll be able to get attention of the millenials and build a brand. If you ever have an issue with a product, don’t call their 800 numbers. Tweet and tag them with a sucks. Then watch them fall over themselves trying to save their brand simply because they have drunk the kook aid.

  10. Julian the Apostate says:

    While I’m sure the traditional print and broadcast media are being hurt by internet advertising, most of the losses are because they’ve stopped even pretending to be objective and have become propaganda mouthpieces, i.e., they have disconnected from what their audiences want to buy, because it does not fit the agenda. The readers and viewers go elsewhere or just tune out altogether.

  11. Chuck says:

    I never pay attention to the adds. Mostly a nuisance that keep me off a lot of sites.

Comments are closed.