Technology Is Radically Changing The Advertising Business - And The Consequences Are Profound

The EconomistA FEW MONTHS ago Progressive, an insurance company, ran a video ad on Facebook featuring a grown man who acts like a baby and is carried around in a sling. The ad urged youngsters to "act your age" by renouncing their parents' car insurance and buying their own.

When Facebook employees chuckled about it during a meeting, David Fischer, the firm's 41-year-old head of marketing, wondered why he had never seen it. He was too old, his colleagues said. Progressive was trying to appeal to young drivers, so it served up the ad only to them.

In 1963 David Ogilvy, the father of Madison Avenue and author of a classic business book, "Confessions of an Advertising Man", wrote: "An advertisement is like a radar sweep, constantly hunting new prospects as they come into the market. Get a good radar, and keep it sweeping."

Half a century later advertisers are at last taking him at his word.

Behavioural profiling has gone viral across the internet, enabling firms to reach users with specific messages based on their location, interests, browsing history and demographic group. Ads can now follow users from site to site: a customer who looks online for flights to Frankfurt will be inundated with German holiday offers.

Conversant, a digital-marketing firm, uses an algorithm to deliver around 800,000 variations of an ad to its big clients' prospective customers to make it as irresistible as possible. Kraft, a food company, monitors online opinions on its brands in an office which it calls "the looking glass".

Extreme personalisation in advertising has been slow to come, except in search advertising, where Google, Yahoo and other engines have been serving up ads tailored to users' interests for years. But now it has arrived in earnest. According to one poll by Adobe, a software company, most marketers say they have seen more change in the past two years than in the previous 50.

In the classic advertising model, firms used to place ads with media that brought together the audiences they were after. They would go for business executives in the Wall Street Journal, for example, or youngsters on MTV. But now advertisers no longer have to rely on media as proxies for consumers, because they have more tools and data to target precisely the people they want to reach.

The world wide web turned 25 in March, and the first banner ad on it ran 20 years ago, but until a few years ago advertising on the internet did not add up to much. That has changed. Last year online advertising made up about a quarter of the $500 billion global advertising business, and it is rising fast. Some of the 21st century's most powerful companies, including Google, emerged on the back of it.

Companies that used to flourish in pre-digital advertising have struggled to keep up. "Media used to be based on scarce distribution," says Dave Morgan, an internet veteran and the boss of Simulmedia, a television-advertising company. By contrast, online advertising space is unlimited and prices are low, so making money is not as easy as it was in the offline world, even for digital natives such as Yahoo.

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All the same, new entrants continue to join the fray, enticed by the big opportunities they see as well as by the falling cost of starting digital-media businesses. According to eMarketer, a research firm, Americans spend over 12 hours a day consuming media (sometimes concurrently), and digital media account for around half of that total.

Digital advertising is being buoyed by three important trends. The first is the rise of mobile devices, such as smartphones and tablets, which began when Apple introduced the iPhone in 2007. Now more than 1.7 billion people (around 20% of the world's population) use smartphones.

Mobile devices, which are intimately connected to their owners, have changed the way in which people travel the internet. Users now prefer apps (self-contained programmes on smartphones) to websites' home pages, and in America they are spending less time on desktop computers. "It took 150 years for the newspaper industry to contract," says Meredith Kopit Levien, head of advertising for the New York Times. "The desktop industry will contract because of mobile in a tenth of that time."

The second, related trend is the rise of social networks such as Facebook, Twitter and Pinterest, which have become an important navigation system for people looking for content across the web. "The convergence of social and mobile has given an addressable audience online that's 100 times bigger than ever before," says Jonah Peretti, the founder of BuzzFeed, an online news and entertainment site.

Social networks hold rich data about their users, who volunteer lots of information about themselves. Facebook and Twitter can also see where else people go online, which can help them sell their users' attention to advertisers.

The third big development has been the rise of real-time bidding, or "programmatic buying", a new system for targeting consumers precisely and swiftly with online adverts. Publishers, advertisers and intermediaries can now bid for digital ads electronically and direct them to specific consumers at lightning speed.

Jonathan Nelson of Omnicom Group, a large advertising company, says his firm has the chance to bid for around 10m online advertising "impressions" (ads seen by a user) every second. Real-time bidding will spread further as more screens, such as televisions and billboards, become connected to the internet.

The lines between established media businesses are becoming blurred. Richard Edelman, the boss of Edelman, a public-relations firm, describes the media and advertising business as a "mosh pit". Media companies are producing more content on behalf of advertisers, dubbed "native advertising".

At the same time some advertisers have taken to hiring their own journalists to produce stories, websites and videos. The new advertising-technology (ad-tech) industry is making inroads into the business of traditional advertising agencies. Publicis, a big advertising group, is becoming "much more an internet company than an advertising group", says its boss, Maurice Lévy.

Look at me

Jeff Goodby, the boss of Goodby Silverstein & Partners, an advertising agency, finds that clients' biggest question is whether people will even notice their ads. Consumers are dividing their time among many screens, and ever fewer of them are watching TV programmes live.

Even so, television advertising has kept its dominance for now because it is one of the few ways to reach a wide audience, especially during live shows and sporting events. But advertisers worry that they could fragment their brands by having to come up with lots of different ads to reach consumers across many media, says Keith Weed, chief marketing officer of Unilever, the world's second-largest advertiser.

This special report will show that technology is profoundly changing the dynamics of advertising. Building on the vast amount of data produced by consumers' digital lives, it is giving more power to media companies that have a direct relationship with their customers and can track them across different devices. An entire industry has sprung up around targeted ads. Third-party tracking companies gather information on browsing habits and online purchases, often invisibly.

"A site is not one company any more. A site is tens of hundreds of companies all knowing where you are and what you're looking at," says Chris Babel of TRUSTe, a firm that provides privacy services. Nikesh Arora, formerly chief business officer at Google and now vice-chairman of Softbank, a Japanese media company, says a race is on to have the best data and become the "intelligence broker".

Consumers may gain from advertising tailored to their particular needs, and so far most of them seem content to accept the ensuing loss of privacy. But companies are sensitive to the potential costs of overstepping the mark. As the head of one British advertising firm puts it: "Once people realise what's happening, I can't imagine there won't be pushback."

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