Hey Everyone I’m Amy James the co-inventor of Open Index Protocol. Welcome back to the What Kind of Internet Do You Want? series. Please hit that like button & subscribe to the channel and lets get started! Do you want to pay for content without spending money. Or if you are a creator do you want to give away your content for free but still be able to make money without using ads or sponsored content? In this video we are going to talk about how profoundly broken the ad model of the web is, and how web 3 offers new solutions.
00:37 - So first let’s talk about what is wrong with the advertising model on the web today - its the primary revenue model for the web today, its the model we are up against in trying to fix things, and it is very, very, very broken. One of the inventors of the pop-up ad in the early days of the web has called advertising the internet’s “original sin. ” There is a fantastic book about this problem called the “subprime attention crisis” that says “its impossible to think about the future of the web without thinking about the future of advertising.
” As you can tell from the title, the book centers around the analogy of how the financial markets and the 2008 collapse are similar to current online advertising markets. The main thesis of the book is that “the divergence between the asset being bought— ad inventory— and the asset underlying it that defines its value — attention — directly parallels what happened to collateralized debt obligations during the 2007⁄2008 crisis. ” I’m a big fan of analogies, so much so that if necessary I will kind of stretch one to make it work if necessary Amy: and this is precisely the issue that we’re talking about, because even though I know a lot about tech, I really don’t like going into all of my little settings and adjusting all that stuff and finding that thing and oh my gosh they updated something and now I have to look at it again - I would much rather proxy that to someone I trust - its - my favorite analogy for this is cutting my hair, cuz I could cut my own hair, like it’s possible, uhm but I would prefer to outsource that service to someone I trust Michael: you guys, what do you do about your hair by the way? Crowd laughs but the analogy between the financial markets & online advertising markets is SPOT ON.
Maybe it’s even more than an analogy… maybe the ad model is more like an outgrowth of the financial markets… the roots of connection go deep.
02:40 - Most of the advertising marketplaces that are used today were created by people who had previous careers as brokers and traders in the financial industry, so they are REALLY connected. And purchasing ad space is generally done with real-time bidding software, which is similar to high frequency trading. Here is a quote from the subprime attention crisis book “one of the most incredible aspects of the RTB system is that the entire process takes place in real time.
The advertisements you see online are not predetermined. At the moment you click the link and load up the page a single from the ad server triggers an instantaneous auction to determine which ad will be delivered. The highest bidder get to load its ad on the website and into your eyeballs. This entire process happens at the speed of light. The inventory must be bid upon and the actual advertisement delivered in the split second moment between when you click to load something online and the time that the website or content on a app is fully loaded.
The entire process of putting out a request for bids, making the bids, evaluating the bids & delivering the advertisement takes place in under a hundred milliseconds - about a quarter of the time it takes you to blink. And this happens millions and millions of times across the internet every second” Advertising in digital media generated an estimated $273. 3 Billion in global revenue in 2018. Industry analysts estimate the the online advertising market will grow to almost double, $427.
3 billion by the year 2022. Marketers love machine-learning/AI campaigns & ‘data driven advertising” because it looks great in analytics dashboards and attribution models, but its really just theatre - they aren’t accurate and research has even shown that they don’t increase sales revenue. Plus most of the customer data that advertisers are selling is terribly inaccurate. On the low end these datasets feature inaccuracies for about 10% of customers, with the worst having nearly 85% of customer data wrong.
05:10 - The perverse incentives & outright fraud In this system have given us a web economy that is on the brink. In the book, Hwang puts the level of fraud into everyday terms so its easier to wrap your head around it. He says that if we imagine a grocery store with the level of inventory fraud that exists in the programmatic marketplace, 1 out of every 5 products would be fake, you’d return home after grocery shopping to find that 1 out of 5 boxes contain nothing.
05:11 - So the fraud basically breaks down into two categories: fake attention & fake inventory.
05:16 - The fake attention is the things we’ve all seen in the news: click farms of people, automated scripts for clicks, that kind of thing. In 2014 google released a report suggesting that 56. 1 percent of all ads displayed on the internet are never seen by a human. The size of this problem is truly jaw dropping, and fairly terrifying when you consider the implications for the web economy. A study conducted by adobe in 2018 found that about 28% of website traffic showed non-human signals indicating that it originated in automated scripts or in click farms.
One study predicted that the advertising industry would lose $19 billion to click fraud in 2018 - a loss of about $51 million per day. Some estimate its even higher with claims that $1 of every $3 spent on digital advertising is lost to click fraud. Fraud accounts for 22% of video spend, and 20% of nonmotile video traffic is driven by bots. And the problem is even worse with video ads than display ads, with one study finding that fraud was twice as common in video traffic as in display.
Meanwhile 87% of all mobile devices on in the programmatic advertising markets in the US in fall 2016 were fraudulent — meaning they were either not real phones or they were phones running automated scripts, but either way the ads were unseen by any potential customers. EIGHTY SEVEN PERCENT.
07:17 - Ok quick side bar - you know that popular idea that bitcoin energy consumption is wasteful - the ideas is wrong by the way, bitcoin actually incentivizes efficiency, but that is a topic for another video - well if wasteful energy and resource consumption you care about, then you should be concerned about the extreme amount of waste in the digital distribution market. The walled garden model is incredibly wasteful to begin with - I covered this in a talk at the 2 Bitcoin Conference, we’ll link the video to that talk below if you want to check it out - but in a nutshell, competing companies are all storing and distributing unnecessarily redundant copies, and the architecture of the current distribution system requires massive waste - but advertising FRAUD adds a whole new level to this waste.
All these bots “watching” these videos, are consuming unnecessary resources & wasting a tremendous amount of energy.
08:35 - And then the fake inventory relies on domain spoofing and basically selling ad space that doesn’t exist (add financial times example).
08:36 - Another way that it is similar to the 2008 crisis is that the agencies involved in buying and selling the ads have a conflict of interest.
08:46 - In the run up to the financial collapse, from 2003 to 2005, as a percentage of all mortgages, sub prime mortgages rose from 8 percent to 20 percent. Similarly, ad fraud is expected to double in the coming years, projected to reach $44 billion by 2022 which is about 9% of the overall digital ad spend.
08:46 - Arbitrage is a major component of marketing agencies revenue streams, but it places what is best for the agency at odds with the advertiser they are supposed to be representing. What they do is buy the ad space for a lower price and sell it to their clients at a markup. It seems reasonable and benign, but because of the opacity of the advertising marketplace, it has become almost unintentionally predatory. Similar to how the ratings agencies had conflicting interests in the 2008 sub prime mortgage crisis to give triple A ratings to high risk loans, marketing agencies are incentivized to give figurative triple A ratings to sell this low-value ad inventory because it directly affects their bottom line.
And these arbitrage sales often makes up a HUGE percentage of the agencies revenue.
09:51 - Reliance on advertising is at the heart of what is wrong with the internet today. Hwang said in his book that “Deep surveillance-based profiling and bias toward inflammatory content that are endemic online are natural outcomes of an advertising-based business model” and forecasted the looming danger saying “the internet we have, for better or worse, is yoked to the structure and prospects of the advertising economy. If this system of advertising is brittle, then the internet as we know it is brittle.
10:31 - Reading that hit me like a ton of bricks - I mean I obviously knew we are undergoing a revolution on the internet, the transition from web 2 to web 3 will include changes to the foundational architecture of the web as we know it - I hadn’t really thought about how potentially catastrophic it could be for the internet advertising bubble to pop.
10:57 - But looking at inflation of ad value REALLY drives it home - the click through rate has changed by almost 10,000 X - in 1994 banner ads had a click through rate of 44%. Today, a comparable banner ad gets a click-through rate of. 46% At the end of the book, Hwang suggests that the fix to the problem may actually be more like 1929 than 2008…. Although the system has the same kinds of technical issues that caused the 2008 collapse - a real time bidding system, marketplace opacity, bad incentives and falling asset values - the panic in 1929 was because there was no way to know what asset value could be trusted and what couldn’t, and the solution was to introduce transparency through disclosure regulation.
I agree and disagree - I’m all for transparency, but I’m skeptical that new regulation is the best path… I tend to prefer technical solutions over regulation when possible, and I believe these problems an be fixed using blockchain and other decentralized technologies as we build Web 3.
12:34 - Given that kids today don’t know what the save icon means or how to burn CDs - I feel like I should take a moment to remind us all that products like email were originally fee-based businesses - services like spam filtering and storage we’re typically subscription based. But then “free” services like gmail changed this by using the advertising model to make the email service free to use by monetizing the service with advertising sales.
13:04 - Around here we like to say that history might not repeat exactly but that it most certainly rhymes - and we see these cyclical patterns everywhere - in the history of the country, in the financial industry, in the music industry, and of course in the advertising industry. One of the cycles we are seeing repeat in the advertising industry right now is the sponsored content model. Think back to the advertising on TV in the 50’s and 60’s, they had commercials but they also had sponsored content - you remember? “this program brought to you by” Announcer: Leave it to beaver has been brought to you by Ralston Purina, makers of “the eager eater” dog food, Purina dog chow Beaver: Aaaand how.
13:52 - Amy: We’re now seeing a new cycle of the sponsored content model with YouTube and other influencers. You’ve no doubt seen them before, they look something like this… Before we go any further I’d like to say a big thank you to Grant for the Web for sponsoring todays video. Grant for the web is a one hundred million dollar fund to boost open, fair and inclusive standards and innovation in Web Monetization. It was funded by Coil in partnership with Mozilla & Creative Commons.
We’ve been honored to be part of grant for the web’s first cohort of awardees and highly recommend working with them if you are working on a monetization project for web 3.
14:40 - We are seeing the rise of sponsored post popularity for two main reasons: safety for brands and income for creators. Even among the most well-resourced companies in the world, brand safety has remained a persistent problem. Who remembers the adpocaplypse? Working directly with creators rather than through the opaque commodity ad markets gives brands more control over where their ads are placed. And creators love sponsored content because it pays them so much more money - for example, YouTube pay varies by genre and country and other factors, but the average is around $2-8 per 1000 views, where as although the rate for a sponsored post can also vary dramatically, its typically at least 5 - 10x more, in 2017 the internet creators guild recommended that median price for a sponsored video is about 3 cents per view which is $30 per 1000 views.
15:53 - The pricing for sponsored posts is not cut and dry - these deals can be put together in all kinds of way - compensation with free product, payment based on the number of views the video gets, an affiliate program so that the creator gets a percentage of sales they inspire, etc - and the deal could have a combination of both an affiliate rate and a flat payment or something like that.
16:13 - So while sponsored post style advertising definitely has advantages, it also has some disadvantages. Compared to using a commodified ad service, the creator has significantly higher administrative work pitching, managing & billing sponsored posts. But I think there is a much more significant structural limitation to this model - because even if a creator were to scale their business to have every single post or video be sponsored and hire administrative support to help manage it, there is still a limit on their income because they can only do so many sponsored posts in a year.
Assuming the sponsored post deal is a simple flat fee, if a video goes viral the creator doesn’t get any additional financial benefit from that post. The incentive model for the creator doesn’t encourage creating content that will make money based on view count or long-tail revenue, it is about only that one transaction — meaning that this model puts much more incentive on creating rapidly than creating quality. And while there is certainly nothing wrong with a fast content creation process, an incentive model that only works for that one style leaves a lot of artists in the cold.
17:47 - Whereas with a commodified ad - the number of people that see my video directly affects how much money I will make. Which opens up a variety of monetization strategies for me as a creator - perhaps I focus on high impact evergreen content that will get a huge number of views and continue to generate tail revenue, but I only release once per month or per quarter. Basically the way I see it, the sponsored post model can scale up to a point, but the commodified ad model can scale more and is more flexible — however right now the commodified ad model isn’t scaling as well as it should because its incentives are bad and its becoming more and more fraudulent so its scaling on a rocky substructure.
But it can be fixed! Just because the ways that ads have been commodified currently is bad, doesn’t mean that commodified ads are bad. What if commodified content could be monetized with transparency between parties & have additional monetization options?! The solution, and I know this will come as big shock, is blockchain. By using crypto to distribute & sell the content, a whole world of options opens up to both applications and end users. By participating in the system - maybe you have some spare hard drive space and pin some IPFS content, or maybe you use a decentralized id system like solid voluntarily exchange some of your user data with a marketer - there are a lot of ways you can participate in and contribute value to these systems, and you can exchange the value you provide for content.
So you aren’t paying for it directly out of your paycheck, you are paying for it by letting a program run on your computer. Or you are paying for it by voluntarily sharing some anonymized demographic information with a marketer, or watching an ad in exchange for tokens that you can use to watch the content — the key is that its voluntary and you have control, rather than just giving away your personal info all the time without you really knowing what information they are collecting about you as we do in the current system.
Did you hear about the court case where ??? I struggled how to name this video because you aren’t paying for it, you aren’t stealing it, but you also aren’t getting the content for free exactly - however you aren’t getting content for free in the current system anyway! - Using these new tools feels like you are getting the content for free because you’re just like running a program in the background on your computer… You don’t have to do any extra work, or spend extra dollars from your paycheck - so its not strictly free, I guess the direct cost is the cost of having to install the program, but after that its functional free :) And it isn’t just for end users, platforms can also integrate this into their services to stand out in the market and give their creators and users the benefit of these features, while simultaneously reducing overhead costs for the platform.
They can also integrate ad aggregators that use tokens, and DID systems like solid and metame to give their users the option to get content for “free” by watching ads or sharing customer data — really the point is that these new systems can match all the features available on the web as it is today, and they can unlock some really cool new features that weren’t previously possible. Also, technology like web torrent and JS-IPFS can be used by platforms to help them harness the power of their user base to fight against censorship if they are having trouble with something like cloud flare or Amazon web services, but that is a can of worms for another video.
21:39 - The bottom line is that transparency is a prerequisite for market stability. The current advertising market is opaque and corrupt and threatens the web as we know it.
21:53 - But the good news is that web 3 is being built now by nerds like us all over the world, and by using blockchain, other decentralized technology and the knowledge that has been gained from the previous 30 years of building the internet, I believe the web can be, not just fixed, but truly realize its full potential. It’s an exciting time to be a nerd.
22:16 - If you want to talk with me more about how you can get content without paying for it or stealing it or if your platform or creator how you can give content away for free but still make money - hit me up on twitter or instagram @AmyofAlexandria and Follow the channel @openindexproto.
22:33 - And don’t forget to smash the like button, subscribe to the channel and share this video! Thanks for watching and I’ll see ya next time :).