Déjà vu: Bursting the Digital Bubble

By Doug Wood

Andrey VP/Shutterstock.com

 

Economist Hyman P. Minsky's views on boom to bust in Stabilizing an Unstable Economy are often cited as a roadmap for market evolution. His progression theory begins with displacement and then moves to boom, euphoria, profit taking, and finally, panic. For purposes of this article, I cull Minsky's five mile markers down to a few and go back to the 17th Century as a precursor of the digital collapse just around the corner.

In 1634, a tulip bulb was one of the most desired commodities one could buy. Prices rose year after year and a single tulip bulb could change hands many times in just one day. Public auctions drove prices even higher. Speculators made fortunes.

Then suddenly in 1637, the bottom fell out of the tulip market. Prices dropped like a stone until they hit bottom and fortunes were lost; lives were ruined — all due to a flower bulb.

While the demise seemed sudden, it actually required a number of steps to progress from boom to burst to bust.

First, the market needed a new and desired commodity. No one had ever seen tulips in Holland before the first one arrived from Mediterranean traders around 1554. The desire to have a bulb or two spread and the mania — the boom — began. At first, prices remained stable because the supply could satisfy the ever-growing demand. But demand eventually outstripped supply and prices soared.

Digital has been the "new commodity" on the block for some time, but could demand outstrip supply in digital? Or is digital supply scalable at any demand level? After all, in 1995 there were estimated to be 16 million internet consumers who by 2017 reportedly grew to more than 3.8 billion (roughly half of the world's entire population). So why will this market not continue to grow and satisfy demand with what seems an inexhaustible supply?

Consider recent market shifts where demand for quality over quantity is rising as marketers are justifiably concerned about non-human and sourced traffic, brand safety, walled gardens, digital fraud, viewability, measurability, and more, all making the addiction to digital less desirable. If this is true, the supply in such a market is not scalable. Premium sites and real people (who have the wherewithal to purchase goods and services) are not endless commodities. Marketers are beginning to wake up to reality. In truth, the supply of quality sites free of fraud and visited by real humans is limited and the demand for them increasing.

Second, there needs to be a commodity with a perceived value in a sustainable market. To the 17th century buyers intent on planting gardens, the tulip was worth the price paid. Initially supply could keep pace with demand and buyers had leverage. It was a free, sustainable market where consumers had a say.

In digital, a combination of minimal criminal intrusion in the mid-1990s, coupled with blissful ignorance of the growing problem through the past decade, fueled a belief that reaching so many eyeballs at such a low CPM had great, sustainable value. As the market investment grew by billions year after year, advertisers were happily awash in eyeballs and the digital supply chain ecstatically awash in cash. It was a marketing nirvana.

Consider, however, how both the demand and sell sides of digital are dominated by a handful of players whose interests, at their core, may not be to eradicate the thieves and con artists infecting digital but to keep the markets non-transparent while creating a perception that whatever steps they've taken will bring the market to an "acceptable level" of fraud. In August, Google reportedly refunded millions to buyers victimized by fraudulent sites linked to searches. But is Google doing anything to solve the problem? Better yet, when will Google allow independent audits to verify the legitimacy of its traffic? The same questions can be posed to Facebook. Until such transparency is embraced, is such a market, indeed, sustainable? In decades past, would brands have accepted such a model in network television or national print?

Third, as the boom ensues and frenzy grows, the door opens to speculation and greed. Unlike tulip bulb buyers who intended to plant the seeds they purchased, tulip bulb speculators had no interest in taking delivery or planting a single one of them. Their goal was to drive up costs, buy and sell over and over again, and skim a few cents on each trade.

Unlike the rising costs of tulips in 1637, digital drives down CPMs and gets greater reach for less cost. So why is there any analogy to tulip bulbs and ill-gotten profits for speculators? The answer is pretty simple: illusory volume coupled with blissful ignorance.

The fiction in digital is that driving down CPMs is a good deal. As many are realizing, it's not. In reality, the only way cheaper CPMs happen is to resort to sourced traffic and all the fraud within it. So in truth, as a brand spends more in total costs to achieve ever more efficient CPMs, its true costs for legitimate, human traffic skyrocket. For the speculator, that's fine. The ever-increasing spend lines their pockets with profits. According to Statista, U.S. marketers spent nearly $60 billion on digital advertising in 2015. That spending is expected to exceed $113 billion in 2020. Nice deal.

As Ron Pullem, CEO of Ocean Rainbow Consulting, puts it, "This year advertisers are actively reassessing the true value of a digital brand exposure 'managed' through the opaque interface of ATDs, DSPs, and walled gardens. If recent digital budget cuts reported in the press are any indication, then the true value of digital has been down-graded and confidence is on the wane."

To further complicate the ecosystem, the ever-expanding subterranean world of incentivized/sourced traffic, bot fraud, and re-brokered human click farms fosters an illusion of abundant supply. This illusion is reinforced by a duopoly in digital media and an oligopoly in media buyers nurturing and obscuring this subterranean world.

So will digital face the fate of the tulip or will it defy the Minsky conundrum?

A warning the digital bubble may be about to burst occurred in 2016 when the Association of National Advertisers (ANA) released an investigative report by K2 Intelligence alleging a litany of non-transparent schemes by media buying agencies and hidden profits in media sales, particularly digital. This was followed in 2017 by a second warning — an ANA report confirming significant dilution of a brand's investment in programmatic buying amid refusals by major demand-side participants to be transparent as they allegedly siphon more and more dollars before a brand's investment reaches a publisher.

Last month, shortly after some major advertisers announced significant cuts in digital spending, WPP reported its financial performance will likely be flat for the first time in memory. Among the holding companies, WPP has been a bellwether for the future, managing the marketplace with brilliant finesse. While the goliath had a number of reasons to explain the decline, few can argue the growing doubts about the integrity of the digital marketplace and the lack of controls to address abuse is a major part of the problem.

But perhaps WPP's performance isn't the tipping point. We may have to wait until May 2018 when new European regulations mandate unprecedented limitations on how marketers use online data. Randall Rothenberg, president and CEO of the Interactive Advertising Bureau, describing the new rules, wrote the regulations will "strip European publishers of the right to monetize their content through advertising, eviscerating the basic business model that has supported journalism for more than 200 years." How many times have we seen misguided government regulation destroy innovation?

A marketer's role is to drive the top line — and, by extension, the bottom line. That bottom line is the ultimate measure of ROI and the worth of every media platform. It isn't working in digital.

Yet at the same time, Digiday reported last month that Tremor Video sold its demand-side platform to Taptica for $50 million, Singtel-owned Amobee acquired demand-side platform Turn for $310 million in February, and Sizmek announced in July that it would buy DSP Rocket Fuel for $145 million. A lot of money is trading hands as consolidation and specialization grab hold. Is a consolidated model sustainable? For how long?

While all of this paints a rosy picture for a few players, sooner or later someone will wake up and realize quality supply is diminishing. Volume will slow and CPMs (or whatever cost measurement one uses) will rise. The market will consolidate and profits for the middlemen will drop. That is not to say a programmatic market will not survive. After all, there's still room for tulips as there will be for programmatic. Just not the provocative and profitable party it is today.

And last but not least, we have the holy grail that has perplexed marketers since traveling salesmen first sold elixirs — return on investment.

For tulips the tipping point came down to the realization that there were plenty of other pretty flowers that cost a lot less and left the gardener with the same sense of calm. So the beautiful allure of tulips simply didn't justify the costs. Has this realization occurred in digital?

As Robert Liodice, CEO at the ANA puts it, "Marketers have truly been mesmerized by the 'shiny crystal.' But like the Grand Wizard of Oz, it is proving to be a pedestrian media that has done little to influence brand or business growth. So while true costs, criminal behavior measurability, viewability, and more are all very appropriate factors in media buying, the bottom line is the bottom line — there is no growth."

Think about the mad rush to digital we've witnessed for the past 10 years and compare it to real growth. The evidence that digital is a dismal failure for marketers is overwhelming despite the billions upon billions plowed into the media:

  • In the 2016 Fortune 500 listing, 259 out of 500 companies showed declining revenues; 239 had declining after tax profits.
  • In 2015, retail sales declined 2.3 percent and declined by 7.3 percent in 2016.

It begs the question: Is this ecosystem nothing more than a Ponzi scheme that lines the pockets of those who ply their trade in the chasm that lies between the advertiser and the publisher?

Eventually, as advertisers awaken to the reality that all the promises about digital and programmatic are pipedreams, there will no longer be enough buyers to sustain an unregulated and bloated market. The current model will collapse. After all, a marketer's role is to drive the top line — and, by extension, the bottom line. That bottom line is the ultimate measure of ROI and the worth of every media platform. It isn't working in digital. Period.

Pop!

Memo to the programmatic and digital evangelists, speculators, and profiteers:

The bubble is bursting. The boom is over. Enjoy the tulips.

 


Douglas J. Wood is a partner with Reed Smith LLP, a global law firm, and is general counsel to the Association of National Advertisers.