Paper: The Future of the Ad-Supported Internet Ecosystem

2019-03-07 - 5 minutes read

Instead of charging their users directly, popular social media sites – such as Facebook, Twitter, and Youtube – are supported by ads. This ad-supported method has enabled them to grow rapidly, to the point where the aforementioned social networks have 2.23 billion monthly average users (MAUs), 1.9 MAUs, and 335 million MAUs, respectively, according to a Buffer report.

Despite the fact that ads have helped power this growth, a limited amount of ad money, ad blockers, privacy policies, ad fraud, brand risk, and the increase of intermediaries are threatening this system. These factors harm ad growth by potentially reducing the efficacy and economic value of the ad inventory and by creating a hostile or risky environment for advertisers. For example, while predictions are extremely varied, ad blockers cause an estimated tens of billions of dollars revenue loss globally. These factors have led people to worry if ads are a sustainable system that can continue to keep these networks afloat. While these are recognized threats, we don’t know how they will impact ad-supported companies or how the companies themselves will respond to threats like privacy breaches and offensive content.

This is the backdrop in which Natalie Klym and David Clark investigated the current advertising ecosystem and the future of this system.

On a whole, digital ad spend is growing worldwide and even surpassed TV ad spend as of 2017. E-Marketer predicts that global digital ad spend will increase up to $375.80 by 2021. This includes not only social media sites, but also sites like Google and Amazon. However, while digital ad spend is continuing to grow on a global scale, its rate of growth is slowing. Total ad spend is also showing signs of slowed growth.

The most immediate issue faced by ad-supported Internet businesses is the loss of ad revenue to the few dominant players. The majority of ad revenue is generated by only a few companies, which threatens new and smaller sites. For example, in 2017 Google and Facebook had a combined 49% of the global market share of digital ad revenue (see figure 10 in the full paper). And IAB reports that together, Facebook and Google accounted for 90% of the U.S. digital ad growth in 2017. Klym and Clark found that Google and Facebook are taking ad dollars away from more traditional ad sellers, such as content publishers. And now online retail aggregators are serving as a new source of competition.

Alternatives to Ad-Supported Internet Revenue

If ad-based revenue schemes are at risk, what other options do these platforms have to make money? Well, some platforms are already raising money in different ways: Twitter licenses public data to marketers and developers and Snapchat and Facebook sell hardware.

Other alternatives include having users pay for access to a higher tier or the entire service, offering subscription models, micropayments, donations, and even a taxpayer-supported version of social media, as proposed by MIT professor Ethan Zuckerman.

Could these alternate methods work? It’s possible that, similar to how users are already paying for ad-free pay TV services and platforms like Netflix, they will pay for the same benefit in other services. Further, the negative aspects of ad-based services, such as their disincentive to deter fake news and sensationalized content, influence some users to reject ad-based models. On the other hand, some users believe that they should be the ones paid, as they serve as data laborers.

Klym and Clark end their paper by taking a look into the future of the digital ad-supported economy, which they note is expanding both in terms of ad spend and in increasing the boundaries of what can be used for advertisement.