Online Advertising: Will Consumers or Regulators Revolt?

Guild Investment Management |

Believe it or not, the first iPhone was released in June, 2007 -- only a little more than seven years ago. That release happened a decade or so into the manic transformation of advertising as it went online -- and in those seven years, online advertising has seen further breakneck change as consumers have moved their activities to mobile devices. It is truly “creative destruction” on steroids.

Digital advertising now comprises about a quarter of the $500 billion advertising business worldwide. Many of the great internet giants -- Google (GOOG) , Facebook (FB) , and Yahoo (YHOO) , for example -- have built their empires on digital advertising. But those are simply the names we know. The online advertising ecosystem is bewilderingly complex, linking together hundreds of tech firms all in a race to gather and interpret data about consumers -- seeking to serve ads to those consumers that will produce more return for their corporate clients.


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“The Right Person, the Right Message, the Right Time”

Whether on desktop or on mobile, digital advertising represents a radical departure from advertising in older media because of the precision it allows in targeting its audience. Some of the firms depicted in the graphic above -- the middlemen in the digital advertising system who are largely invisible to consumers -- use extensive tracking systems to compile profiles of individual consumers, covering 50 to 100 parameters based on information they collect from their browsing and online shopping habits.

These detailed profiles, in conjunction with real-time, algorithmic bidding for ad space (bidding that occurs as a webpage loads in your browser), has permitted advertising effectiveness to improve dramatically -- increasing an ad’s return to its purchaser by 30 to 50 percent, according to some analysts.

The whole system represents a dream come true for advertisers. Compared to this world of precision, mass print and TV advertising must seem to them like a vision of the Stone Age. However, any consumer reading about the level of detail of advertisers’ profiles must wonder: do they know all this about me personally? For now, the overt answer is “no.”

Could Privacy Concerns Come to the Fore?

Participants in the digital advertising industry maintain that none of the collated data are tied to any known realworld individual: they are “anonymized.” An insurer cannot now buy a data set that would tell them that John Smith of Hometown, USA has been doing extensive web searches about diabetes or HIV.

However, many computer scientists point out that the wall is very thin which prevents this kind of triangulation, especially as mobile use overtakes desktop use, and beacons are able to follow individuals’ smartphones to serve them ads.

The legal parameters surrounding the use and individualization of these data are very far from settled. While Europe seems to be taking a more conservative tack, the U.S. has not followed suit. It remains to be seen what effects European online privacy regulations will have on digital advertising and e-commerce. For now, we simply note that companies such as GOOG and FB are dependent for the lion’s share of their revenue on an ecosystem which is vulnerable to public sentiment and regulatory stringency.

There are signs of potential regulatory activity, although public concern has not reached a disruptive level -- and it may never.

As impressed as we have been, for example, with GOOG’s far-sighted entrepreneurial vision, we note that its “moonshots” are not yet producing revenue -- and GOOG remains, fundamentally, a digital advertising firm. This does not sway us one way or another on GOOG’s stock, but it is one element of our analysis of this and other companies that are heavily reliant on digital advertising.

Investment implications: The rapid growth of the digital advertising ecosystem has driven value for digital ad buyers, and driven revenues for big firms such as GOOG, FB, and YHOO. Although we remain long-term optimistic about these companies, we continue to monitor their dependence on ad revenue, especially watching the developing regulatory and public opinion environments.


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


Symbol Name Price Change % Volume
FB Facebook Inc. 133.28 1.21 0.92 17,470,227
GOOG Alphabet Inc. 813.11 13.74 1.72 1,697,514
YHOO Yahoo! Inc. 42.59 0.42 1.00 4,346,851


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