The advertising business doesn’t work the way you think it does.

You figure you’ve pretty well got it – you watched Mad Men, right? Back in the 1960s, cigarette-smoking men from ad agencies would wine and dine with publishers and TV executives to get a commercial placed in prime time or an ad in the front of a magazine. So when you imagine the advertising business today, you figure it’s probably like that but kind of webby.

Let me tell you a bit about today’s advertising business. I learned one fact recently that I find absolutely fascinating. I’ll build up to it with some background info but if you want to skip past the boring parts, skim down and I’ll put the Fun Fact™ in boldface.

Advertising is automated today, and martini-drinking ad agency executives have been replaced by data analysts. The industry term is programmatic advertising, using complex technology, artificial intelligence, and human ingenuity to fill the ad spaces in Google search results and on web pages. Programmatic advertising has turned the ad business upside down in the last 5-7 years.

Basically, you’re being evaluated all the time by complex analysis systems. Advertisers decide on your value and bid to display advertisements on websites you visit.

Imagine that you browse to a web page to read the news. The owner of the website has designed the page so there’s a space for an ad at the top or off to the side.

This is the process that leads to that ad appearing in your browser.

  • The owner of the website tells one of the networks that handles ads – Google, most likely – that they have ad space available.
  • The advertising network analyzes your cookies to learn as much as possible about you, from your demographics to your interests. If you’re logged into Chrome, then Google has far more information about you to add to that evaluation. You’ll be examined for your behavior, engagement level, social engagement, location, and browsing habits.
  • The ad network starts an auction.
  • Advertisers submit bids to fill the ad space based on their desire to reach a certain type of audience at a certain time, usually within a certain context.
  • The ad network evaluates the user’s worth to each potential advertiser and assigns a value: how much would it be worth to each advertiser to have you – yes, you, not anyone else, not a group of people, just you – view their advertisement?
  • The ad network also scores the quality of the ads submitted in the auction. It evaluates the relevance of the ad; the click-through rate for that ad and similar ads, including historical data; and the quality of the landing page that you would see if you click on the ad. (If people reach the landing page and immediately leave it because the page sucks, it reflects poorly on the ad and the bid ranks lower.)
  • The ad network then picks a winner. Frequently, of course, it’s the highest bidder, but not always – the result will be swayed by the evaluation of the user and the ad quality.
  • With the winner picked, the winning ad is sent to the web page and displayed to you.

Ready for the fun fact?

The entire process – presentation of an ad space to be filled, evaluation of your cookies and personal data, the auction for the ad space, picking a winner, and assigning an ad to the space – happens in the fraction of a second between when you click and when the page appears.

Isn’t that great? It’s called “Real-Time Bidding” in the industry. It takes a few milliseconds, and it happens billions of times every day. It’s the advertising equivalent of high-frequency trading in the financial markets, where you are the thing being traded.

Real-Time Bidding is one type of programmatic advertising, so effective that it is becoming the dominant method of selling ads in 2020. Nearly 88% of display ads in the the US are forecast to be bought programmatically in 2021.

Google and Facebook collect more than half of the money spent on programmatic advertising. Other huge ad networks are run by Microsoft (Bing) and Amazon plus a few other less well-known names. The social networks – LinkedIn, Instagram, Reddit, Twitter, Snapchat – run their own ad networks.

Google’s ad business is responsible for most of its revenue and profits. Google’s ad network handles three types of ads: (1) ads displayed on search result pages; (2) display ads on millions of websites; and (3) video ads on YouTube. There is a lot of loose talk about Google and privacy, but note carefully that Google does not disclose any of your personal data either to advertisers or publishers in its ad network. It keeps its knowledge of your personal data to itself.

Google’s success is controversial and may lead to an antitrust action being filed by the Trump administration in the next few weeks as a campaign stunt. For what it’s worth, everything I’ve read leads me to think that advertisers choose Google because it delivers better results for them based on smarter algorithms and more data about us, rather than unfair or illegal business tactics.

Here’s one last thing to think about.

There are two common reactions to online ads. Most of us feel both of them.

  1. It’s creepy to see ads for something that I’m interested in/I’ve looked at/I’ve thought about. It’s an invasion of privacy.
  2. The ads are stupid – I keep seeing ads for something that I already bought. Why don’t they figure that out and stop bothering me?

Try to keep in mind that those are incompatible: “I wish they didn’t know as much about me” and “I wish they knew more about me.” The ads we see are frequently not well chosen despite all this brave talk about algorithms and artificial intelligence – and they can only get better if the ad networks know more about us.

Keep an eye out for the next brief word from a sponsor, brought to you at the speed of light . . .

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