Advertising revenue models are back – and riskier than ever

advertising model
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Over ten years ago, advertising was really a hot business model. Then it became a hated business model. Is advertising becoming a viable business model again? Netflix and Uber think so. The question is whether consumers – even those on tighter budgets – will feel the same way.

Ad business models have always worked for companies like Google and Facebook, who very much live on advertising revenues. Indeed, their entire business is built around it. When both companies showed how well their advertising model worked, many online and mobile businesses became very excited about advertising. They planned that advertising would be their main revenue stream.

This excitement wasn’t limited to web sites and online services copying the Google / Facebook model of placing ads in front of consumers. For example, there were stories about how low-cost airlines could offer free flights and push targeted ads to passengers during the flight. Similarly, other brick-and-mortar businesses developed ideas to know their customers in order to push personalize ads to them.

The problem with advertising models

However, the ad-based revenue model had several problems. First, online ad prices are really low, so it requires millions or even hundreds of millions of visitors to make decent money from them.

Second, more ad-driven businesses meant more ads that consumers have shoved at them. Advertisers were skeptical about the value of having ads everywhere, especially online ads which can be quite annoying to people (see: websites cluttered with pop-up ads or YouTube pre-roll ads, etc).

Thirdly, people have become more wary about where they want to expose their data and how it is used.

Meanwhile, during the last ten years, people have also started to spend more on digital services such as streaming services, newspapers and other content. Many services also wanted to offer a better user experience without ads, or at least limit ads to ones that are more stylish. Investors have also made it clear to startups that they should not count advertising alone as a reliable revenue source.

Make advertising great again

But this year, we have seen moves by companies looking to embrace advertising models again. Earlier this year, Netflix talked about its plans to create an ad-sponsored tier. Recently, Uber has disclosed its advertising business plans. Basically, the current trend in the market seems to be oriented around boosting revenue, especially when there is pressure to keep prices lower.

Why now? Well, in the case of Netflix, its ad-supported plan is a response to news earlier this year that its subscriber numbers declined. Even though its subscriber numbers appear to be growing again, the slump made Netflix aware of the reality of subscription services. Consumers only have so much money to spend, and with inflation pushing food and energy prices up, people naturally look for places to save money.

At the same time, streaming services need to invest a lot of money producing their own original content. Netflix wants to keep subscriber prices lower and remain more competitive by getting additional revenue from ads.

Uber’s decision to go into the advertising business follows similar decisions from DoorDash and Lyft. All of these companies are looking for new and higher-margin revenue streams. The idea isn’t to just offer online and mobile ads; they are also planning ad screens on car rooftops and seatbacks. At least in principle, those ads could also be targeted, e.g. based on the location and the person in the back seat.

The risks of targeted advertising

Targeted ads for ride-hailing companies is a risky proposition. For one thing, the experience of many taxi companies tells us that their passengers hate in-car advertising. Also, using personal data for targeted ads is controversial now that people have started to understand the relevant privacy issues.

On the other hand, these companies also recognize that Apple’s new privacy settings – which make it much harder to collect data from phones and use it for advertising – may work in their favor and open new opportunities. Google’s third-party cookie bans might have a similar impact, as this makes it harder for other parties besides Apple and Google to target you with ads.

Advertisers have been interested in targeted ads for years – partly on the assumption that consumers would welcome advertising as long as it’s relevant to them. But this seems not to always be the case. On Facebook, for example, people often mainly wonder why some ads are targeted specifically to them. Others find it creepy when they see an ad related to something they just posted.

On the other hand, I recently talked with IBM’s data services guy, who tried to convince me that he loves targeted ads because (as an Englishman) he only wants to get football and rugby-related ads. Even so, it was hard to tell if he was really speaking as a consumer or as an IBM data services guy.

What do consumers really want?

Could it be that the advertising model is really becoming more important again? We can say that data analytics and ad creation have come a long way, so it could make it possible to create some more innovative advertising models too.

At the same time, many experiences with online advertising demonstrate that it is still a volume business – targeting alone doesn’t make it much better. Besides, targeting can also be logistically complex, especially real personalization or even micro-targeting. These are rarely profitable, so it’s better to look for large volumes with some main-segment ads.

A lot of this comes down to what consumers really want and what they’ll put up with. When people have tighter budgets, they are probably more tolerant of ads if that helps them to save money. But it is important to remember that it’s not only about better data analytics and targeting. Rather, it is also about creating good ads and being original. In the advertising business, it is always important to really influence people and even get people to love ads.

Meanwhile, consumers are also demanding better privacy, better control of their own data and even user-held data models. This is the demand that Apple is responding to in its privacy improvements.

Short term vs long term

There are probably some short-term opportunities for new players to offer targeted ads. But it’s still hard to see if a longer-term strategy would pay off. When people start seeing ads based on their taxi trips, food orders, and content-watching history, many may start looking for ways to do those things privately.

People do love excellent advertising (see: the Super Bowl sports broadcast in the US, where ads are actually part of the entertainment). And most people also want to learn about new products.

Still, if they start to feel that some boring promotion is being pushed on them based on their very personal data when they just want to get a ride somewhere and sit in a taxi in peace, it will backfire. There are opportunities for good new ad solutions, but there are also a lot of opportunities for services where people can keep their own data private.

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