Google and Facebook are dominating the online advertising market and have created an ecosystem with network effects difficult to break. As the tech giants accumulate user data their targeting becomes ever more refined and vain user impressions are reduced. Yet their business models build on foundational inefficiency, and give rise to the precarious externality of privacy invasion.
Online advertising has finally brought traceability to an industry that has long been tapping in the dark, unsure of its real impact. Today however, click and conversion rates give away the amount of traffic an ad generates and lets advertisers measure precisely if their ads are prompting the desired behavior. As a result, advertisers are poised to assign increasing shares of their advertising spend towards the placement and creation of digital ads. In turn social media platforms and search engines reap higher revenues through highly effective targeting, driving them towards the collection and analysis of user data. This optimization mechanism, however, sweeps not only concerns over privacy under the rug, it also hides the underlying ineffectiveness of the advertising model.
Under the current paradigm, online publishers provide an indirect link to advertisers’ products and services, rather than optimizing for their value proposition towards users. In theory, a rational user should be willing to spend more on Google and Facebook products, than they are willing to pay for the goods and services they end up purchasing as a consequence of being targeted by advertisers on said platforms. The user ultimately finances the middleman, the digital advertising industry. Were one to eliminate this entire trade of middlemen, by deploying a pay to play model similar to Netflix or Spotify, Google and Facebook could cash in on the full value consumers perceive their services to be worth. Meanwhile the incentive of the two advertising giants would shift from getting to know their users to the maximum extent through big data and AI towards providing the highest perceived value to users. One could of course argue that the customization, enabled through the study of user behavior and preferences, would still be valuable to users, it would however become difficult to rationalize the level of private data collected on users. In practice of course, Facebook and Google have opted to offer their services for free, to foster quick and widespread adoption. Nonetheless the average revenue generated per user for Google and Facebook (around two dollars per month), begs to ask the question whether users would prefer to pay directly for their internet search activity and social media usage.
As users become more educated on the current practices in ad targeting and concerns over privacy are enhanced, we may well reach a turning point where Google and Facebook see their incentive structure altered to favor a new revenue model. To enhance the probability of this outcome, regulators would be well served to nudge the data giants towards pay for play models. Yet users have to do their part in upping the bar on their willingness to purchase internet services in order to protect their data.