The tectonic plates of the internet advertising economy shifted last week as Apple began to push out iOS 14.5 to over one billion devices worldwide. We’re also feeling frequent tremors as various proposals to address Google’s unilateral decision to ban all third-party cookies bubble-up in the industry lava. As we react to this industry tumult, it is important to keep one thing in mind: Pervasive user “tracking” has eroded the advertising opportunities of publishers large and small.
Tech inventory takeover
Just over six years ago, nearly half of the impressions across DCN members’ websites and apps, including both video and display, were sold directly by the publisher. When we receive final 2020 numbers next month, we expect that number will have dipped below 20% for the first time. The driving force here is data.
Third-party adtech firms have a competitive data advantage because they are able to track users without their knowledge across the web and apps. This pervasive audience-targeting, combined with the scale and ease of buying through these large third parties, has significantly shifted sales channels away from publishers and into the arms of data aggregators.
Tech financial takeover
Shifting to a reliance on third parties to sell 80% of publisher impressions didn’t need to be bad. Unfortunately, it is. Very bad indeed.
A majority of these ads are purchased based on microtargeted audiences — often using Apple’s IDFA or third-party cookies as a proxy for real people. In this process, publishers’ apps and websites are treated as interchangeable commodities. These third parties, Google being the largest, extract data and detach it from the inventory. This allows audiences to be targeted elsewhere on the web at the cheapest price available. That’s why advertising purchased directly from a publisher is sold at 5x the rate of inventory purchased through these third-party channels. Publishers are able to monetize the value of their brand, content and user relationships when selling the ads rather than being repackaged into a nameless audience bundle.
Two big winners: the two biggest “trackers”
In the two largest sales channels (Facebook and Google), premium publishers’ inventory must also compete against the two firms’ own inventory, and an insurmountable data advantage.
Between 2015 and 2019, this data advantage allowed the “duopoly” to capture 86% of the incremental U.S. digital advertising growth. Last year, the trend continued with the two taking 87% of the digital advertising market growth in the U.S.
Industry, regulators and, most importantly, the public, have grown to understand the core of the two companies’ business models relies on unbridled data collection. The numbers below clearly back this up. The bar chart on the left shows the change in sales channels of U.S. digital advertising from 2015 to 2019 and the percentage of the growth (right pie chart) captured by only two companies in 2020.
The privacy and data protection scale is tipping
There is little debate that users overwhelmingly choose privacy over tracking when they are asked which they prefer. The most famous privacy law to date, Europe’s General Data Protection Regulation (GDPR), has yet to fully bare its teeth. However, it is grounded in clear purpose limitations that minimize tracking and other uses of data that fall outside consumer expectations without very specific consent.
This inspired the most significant privacy law in, not coincidentally, the most populous U.S. state: California. Its latest incarnation (CPRA), which allows users to opt-out of tracking, is set to go into effect next year. It has even spawned the Global Privacy Control (GPC) to make this a simpler process which the Attorney General has recently endorsed as legally enforceable.
Meanwhile, Apple’s restricted use of its universal identifier IDFA, which has long been used for tracking, in the latest push of its iOS. Apple now mandates, for the first time, that apps ask their users to make a choice: They need to either ask the app not to track them or give explicit consent to track them. Unfortunately, this can create collateral damage even when an identifier is only being used by a service provider to the publisher that the user values and trusts.
Early reads on the data are that well over 90% of the users choose not to be tracked. So, Facebook had good reason to predict an earthquake coming its way since it’s not a service provider — but is the poster child of distrust. I can’t endorse a podcast more highly to distill the implications of this battle between Apple and Facebook than NYT The Daily. They elegantly illustrate that this is a high-stakes global war. And it’s patently obvious you wouldn’t want to line up on the side of Facebook in a battle over privacy.
But won’t this hurt ad prices and only make Google and Facebook stronger?
The two key arguments against data protection like Apple’s update are that 1) it will hurt ad prices and 2) make the duopoly even stronger. Indeed, third-party inventory is worth a lot more when it is coupled with third-party data. Unsurprisingly, adtech-funded research likes to tout this.
However, that perspective only looks at prices for a narrow type of targeting. There are very few empirical studies that examine the full marketplace. And these tend to show only modest benefit to publishers from unbridled third-party data. Publishers that have leaned into their first-party data ahead of the market are in a position of strength going forward. And, as the bar gets raised across the industry, they should see the increase in value from other more acceptable forms of targeting. Blunt technical solutions that fail to understand the nuance and trust of the publisher pose a risk to this opportunity.
In terms of Google and Facebook getting stronger, remember that they already have an insurmountable data advantage and their business results back it up. Clearly, Facebook wouldn’t have run national ad campaigns against Apple (even — ironically — threatening an antitrust lawsuit), if Apple shutting down IDFA tracking would have actually helped Facebook.
And no one actually believes that the Facebook behemoth is the champion of small business. They claim that personalized ads are the lifeblood of small business advertising and that offering consumers the option to forgo tracking would limit these businesses’ ability to effectively reach customers. Apple, however, points out that users are welcome to opt-in to data collection, thereby enabling personalized advertising. And let’s face it: In a privacy first digital advertising environment, those with first party data and trusted relationships with audiences will still reach them.
However, Facebook’s data dominance isn’t based upon a clear exchange of data for services. In fact, U.K. regulators issued a report (figure 2.3, page 50) showing that more than 50% of Google and Facebook’s data is collected when people aren’t actually intending to use a Google or Facebook service. This is the very definition of the kind of unbridled “tracking” that is so damaging to trust and the digital advertising business. That’s a critical data point — and one these companies aren’t crowing about in national ad campaigns.
Ok, yes, both companies have a significant amount of first-party data. However, shifts towards privacy pose a significant challenge to keeping this data fresh and enriching their interest profiles. This is spelled out in their 10Ks every time they file. Additionally, antitrust lawsuits focused on their data practices, along with new regulations like the Digital Markets Act in Europe, are squarely directed at them. Soon, they will appropriately put heightened data limitations on these powerful “gatekeepers.”
What to do if you’re a premium publisher
These changes are happening with or without us. The timeline, like all tectonic shifts, is unpredictable but the aftermath will be significant. However, publishers who understand the possibilities, see the emerging white space, invest in their direct consumer relationships, and are forthright about user expectations will have an advantage. Risks lie in allowing large tech platforms and lawmakers to define the terms and conversations impacting premium publishers.
I encourage publishers to lean into DCN to make sure we’re properly informed on your plans. We’re here to help you evaluate the risks and face unexpected challenges. DCN has technology supporters that are paving the way for publishers who need help. No doubt, there are elements of Apple’s move which can break core, and expected, functionality as they limit tracking.
Apple has used the definition of “tracking” developed years ago by a multistakeholder group, which included DCN and all sides of the industry. However, blunt technical enforcement always creates unintended consequences. We need to understand these issues so that we can help guide tech firms, lawmakers, and regulators to address consumer interests and the publishers who serve them day in and day out.
We feel the digital advertising landscape shifting. Yes, things will get broken. Some of those will not be missed, however. And, when the dust settles and we take stock of the reshaped landscape, we will see that the crumbling cookie and the fall of pervasive and invasive “tracking” will clear the way for our industry to build better solutions. These will be based upon quality experiences and transparent and in-context data collection. And this, in turn, will build a strong foundation for effective marketing and revenue that rewards companies that truly value their customers.