Value Ad-ded: Benefits of The Interest-Based Advertising Model
The Internet is filled with amazing services that perform all kinds of functions. Daily, we engage in social media, e-commerce, content aggregation, multimedia consumption, communication, and more. The services we enjoy operate under a range of business models; however, one of the more popular approaches is to offer a service or content for free and to sell advertisements.
This model is highly beneficial to the Internet economy. The Internet Advertising Bureau (IAB) reported that in 2018, the total U.S. Internet advertising revenue reached $107.5 billion. And in the first half of 2019 alone Internet advertising revenue reached $57.9 billion. Consumers also benefit greatly from the availability of free online services supported by advertising. A study from Erik Brynjolfsson, Avinash Collis, and Felix Eggers found that consumers place substantial monetary values on the availability of free online services. The study found that on average consumers would seek to be paid $48 to give up Facebook for one month, and $1,173 to give up video streaming services like YouTube, $8,414 to give up email, and $17,530 to stop using search engines for a year.
Targeted, or interest-based, advertising is a process by which advertisements are shown to users based off of the data they provide to Internet services. With this method, advertisers can target individual users on a service based off of their interests rather than say all users of a service. This form of advertising allows firms to offer their services to consumers often without the barrier of price and consumers receive the benefits of both the free services and the interest-based advertisements for sharing their data. Users interacting with interest-based advertising receive information and offers concerning products they might want to purchase, news they might want to follow, events they might enjoy, and more.
A foundational paper from Howard Beales, The Value of Behavioral Targeting, summarizes the benefits of interest-based advertising. In his paper, Beales makes three conclusions:
- Advertising using interest-based ads is more successful than standard, non-interest-based advertising.
- Advertising rates are higher when firms employ interest-based advertising.
- A majority of advertising revenue is spent acquiring inventory from publishers, making interest-based advertising an important source of revenue for online content and service providers and ad networks.
Plainly put, we’re more likely to engage with an interest-based ad from a service built off our own data than an ad we can see has nothing to do with our interests; interest-based advertising is more effective than standard advertising. Beales explains that the cost to run an ad is higher when engaging in interest-based advertising and as such, advertisers spend a greater amount of money acquiring ad space and because the ads advertisers create are interest-based by factoring in users’ data when showing the ad, the success of the advertisements and revenue from advertising is greater as well. Everyone in the ecosystem benefits when engaging in interest-based advertising; Publishers benefit from consumers sharing their data and charging more for ads, advertisers benefit by each ad being more effective at reaching its relevant audience, and consumers benefit from being able to use these Internet services for free and seeing ads more germane to their interests.
A recent paper from Veronica Marotta, Vibhanshu Abhishek, and Alessandro Acquisti, Online Tracking and Publishers’ Revenues: An Empirical Analysis, argues that publishers’ revenue in the advertising ecosystem and the actual effects of interest-based advertising are overstated. A previous Disco post titled How Ad Dollars Are Spent, discusses the paper’s first assertion. The post outlines that “Google distributes 70% of its network revenues back to publishers who host its targeted ads, and has plans to exceed that percentage with new subscription tools. Estimates place Facebook in a similar range.” Additionally, this paper ignores the measured positive effects that interest-based advertising provides to consumers, advertisers, and services that Beales outlines in his work.
Beales’ conclusions on the positives of interest-based advertising are bolstered by the IAB Studies and a recent Harvard study by Tami Kim, Kate Barasz and Leslie K. John, Why Am I Seeing This Ad? The Effect of Ad Transparency on Ad Effectiveness, which outline both the success and evolution of the advertising market. The study goes into detail concerning the nature of data collection for interest-based advertising, emphasizing the importance of transparency in advertising. One of the study’s key conclusions is that interest-based advertising is more effective when consumers trust a service. This is supported by the 2019 IAB study, which noted that transparency in advertising is on the rise.
Facebook recently debuted their “Off-Facebook Activity” feature, one example of a service that is building trust and transparency to empower users and to improve the efficacy of interest-based advertising. This feature allows users to monitor and manage information that businesses and organizations share with Facebook about users’ interactions with them and Facebook then uses to create more relevant and trusted interest-based advertising. Firms acting like Facebook build trust between services and their users, which encourages consumer control and a trustworthy advertising ecosystem writ-large.
As both the Beales and Harvard Studies show, interest-based advertising is an effective form of advertising that benefits all parties in the ecosystem. Consumers enjoy free services and receive advertisements that are tailored to their own desires or interests. Advertisers benefit by each ad being more effective at driving whatever conversion is being sought. And Internet services benefit from consumers sharing data and charging advertisers to run ads on their services. Without the ad supported system, many services might lean more on the subscription model to prosper and create paywalls which could fracture the Internet ecosystem. Finally, the Brynjolfsson study details the value consumers attribute to many Internet services and a broad switch to a model that relies more heavily on paywalls or subscriptions could, depending on their financial security, deprive many individuals of utilizing services regarded as necessary today.