Online Advertising Explained: Part 1: Why we should love online advertising

It sounds strange to say, but one of my passions is online advertising. Upon first glance this may seem like a very superficial interest: after all, the words “online advertising” summons images of pop-up ads and  the desire to punch a monkey. However, over the course of the next few posts I will argue that online advertising is slowly revolutionizing how businesses and consumers interact in a way that is mutually beneficial. The online world provides advertisers with the opportunity to develop deeper insights into who buys their products in order to optimize how they market their products and services. Consumers, for their part, are slowly seeing ads that are more tailored, relevant and useful, as well as being given more control over what ads they see. Though there are risks, specifically with regards to privacy (I’ll get to that) as well as the creepiness factor (I’ll get to that too), but as I’ll explain, the opportunity to radically change commerce is too good to pass up.

Before moving forward, the first question I have to address is why is online advertising useful? As consumers of online content, we easily forget first that everything has a cost, and second that the tools and innovations we enjoy are not public services but businesses that need to generate revenues to survive, grow, innovate, and to dazzle us by revealing small glimpses into the future.

To this point, I recently saw a meme on Facebook berating Mark Zuckerberg for monetizing poeple’s private data. Such is the sense of entitlement that is unfortunately created by the freemium model. Mark Zuckerberg never would have been able to grow Facebook past the Harvard crowd he initially targeted had he not had the opportunity to develop a revenue stream at some point and thus attract investors. Furthermore, Facebook is not a public service: it s a private (soon to be public) company whose sole responsibility is to maximize its value and enrich its shareholders. Even if Facebook becomes a fundamental tool in promoting freedom of speech throughout the world and is used to help spawn protests that bring down dictatorships, nothing changes the face that Facebook is, in the end, a heartless, soulless Delaware-registered corporation. Finally, Mark Zuckerberg can only monetize the private data we give him. If you are uncomfortable with a corporation using your data for financial gain, you probably shouldn’t volunteer that information in the first place.

Because we don’t see the physical infrastructure required to enable Facebook’s global operations, nor do we understand the engineering feat that is involved in allowing hundreds of millions (soon billions!) of people to share information in real-time, we are left to assume that it’s a simple website, no different than the WordPress baking blog we created last year and then abandoned. (btw: if you’re looking for a good baking blog, check out this one)

Given this, we either have two options to pay for the service we enjoy: we can either pay subscription fees, or we can suffer online ads and allow our personal data to become our currency. The more data we share about ourselves, the more valuable we become to advertisers. The more valuable we become to advertisers, the more they are willing to pay, thus increasing the margins and hence revenue of our online services. With that new revenue companies can afford to invest in their products and services, making them more rich, scalable and sometimes delivering the wow factor we all enjoy. I don’t know about you, but I for one prefer the free model, so I therefore knowingly and willingly volunteer my data without paying much attention to the ads served to me.

All of this is to say that, if you like free online content, you have to be willing to pay a price for it, as the content can’t simply create itself. The biggest benefit, in my view, is that the online world helps democratize the means of production by creating the most equal playing field in the history of capitalism. In the offline world, for example, barriers of entry are high. If you want to compete against massive chains you quickly run into the problem of needing capital, real-estate, product, logistics, etc. In the offline world, though, McDonald’s finds it difficult to monopolize every city’s most trafficked street corner, since our walking patterns are determined more by virality than by the static and pre-determined layout of a city. On the internet, we never have to see a Starbucks or Walmart if we don’t want to. On the internet, that mom and pop cowboy boots shop that might have shut down on Main Street now has access to billions of potential clients. Though competition still thrives, the online world makes it easier for the little guy not only to compete but to win.

From my time in the industry I can point to hundreds of examples of individuals who managed to turn their hobbies into full-time jobs and sometimes successful enterprises through advertising. My favourite though, has to be Tim Carter from Tim Carter started a website to share home improvement tips. He quickly developed a following on the internet and began advertising on his site. When YouTube came along he started producing videos and thus increasing his relevancy to his now loyal followers. Eventually his site got big enough that he could hire a staff to run it and create more content. Though already an entrepreneur in the offline world, Tim eventually became a pioneer in the online world.

Did his users notice the ads on his site? Though some will, most wont: in fact, the industry average for display (image ads) is .1%. Just to be clear, that is zero point one percent. If one thousand people visit, only one person single solitary needs to click on an ad for that site to achieve industry parity. .1% therefore enables all of the online content you see and enjoy across the internet. 0.1%!!! (note, it’s actually a bit more complicated, as some advertisers pay per impression or view of an ad, but more on that later).

Why am I passionate about online advertising? First and foremost, I appreciate the fact that after years of only having one playing field in which the Goliaths dominated, we now have another playing field in which the Davids of the world are more often the rule rather than the exception. We have moved from a world of scarcity to a world of abundance, and this in turn is creating a seismic shift on how businesses operate and commerce happens. If nothing else, it makes now an exciting time to be alive.

Part #2: The Google v. Facebook Model: How the Titans of the Internet Make Money

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About Matthew Carpenter-Arevalo

A former Google and Twitter manager, Matthew Carpenter-Arévalo is the founder and CEO of Céntrico Digital, a managed marketing services company.

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