The World Where Wall Street Has More Integrity than Advertising
Everyone’s new favorite flavor of haterade appears to be thrown at the ad fraud epidemic that we face today. Jack Marshall of the WSJ wrote a great piece today on how the new pitch in advertising is becoming the “fraud free” ad sale.
While the majority of the ad industry is on its heels, fighting to say that what they’ve been selling for years isn’t a bunch of snake oil: the reality is the nature of incentives in a business priced on volume trend toward a desire to introduce more volume (real or fake) into the ecosystem.
The good news is that there is a case study from which we can learn. Advertising isn’t the only business to face this dilemma. Wall Street traders have felt that incentive structure from the very beginning of the enablement of securities trading.
The Wall Street Story
Let’s take the example: Imagine I’m a Wall Street broker in 1921, getting paid for every share of General Electric that I sell. My incentive structure is such that I want to sell as many shares of GE as possible. The honorable thing to do is purchase stock certificates from an existing shareholder and then sell those stock certificates to my clients.
But what does the incentive structure merit? The incentive structure merits that I fabricate stock certificates that may or may not be accurate (read: counterfeit).
As a result of these new counterfeit stock certificates, the market price of General Electric starts to decline. Why? Because the risk of an investor owning a counterfeit certificate increases, so that drives the price down.
This is exactly what is happening in the advertising community today. Investors, in this case advertisers, want to purchase the attention of the consumer. Publishers (and via them, ad networks) are the Wall Street brokers, getting paid for every impression that is delivered, whether it’s “real” or not. The incentive structures are not yet aligned to protect the investor in the way that they have been on Wall Street.
The Inevitable Solution
While the integrity of Wall Street continues to be questioned, they have pretty easily solved the counterfeit transaction problem. The answer? The introduction of the clearing house.
The purpose of a clearing house is to reduce the risk of two clearing parties (a buyer and a seller) failing to honor their settlement obligations. In the United States, for stock transactions, this is housed within the DTCC. What happens in the DTCC: they make sure that both sides hold up to what they agree to.
On the side of the seller: the DTCC validates that the item up for sale is in fact owned on behalf of that seller, and is within the price margin that is deemed worthy via an independent price valuation. On the side of the buyer: the DTCC validates that the payment is trustworthy and the money will change hands upon transaction.
Third party ad servers like DoubleClick have tried to offer the verification of “realness” through the introduction of spam filtering. That is only going part of the way. We need a world where the seller and buyer can insert both of their obligations and have them verified and validated. Nobody likes to get screwed, and we need independent valuations of ad rates to drive equality.
On the other side: an assurance that the publisher will receive the money within the originally promised terms from the buyer is equally important. The cost of doing business as a publisher requires timely cash flows to ensure the right measures are being integrated into the business.
As we look to the future, the inevitable solution isn’t to rely on sellers and buyers to agree on integrity, it’s to insert a third party clearing house who has obligations to both the buyer and the seller. Companies like Moat are well positioned to capture this, but the road to high integrity advertising transactions is yet to be sufficiently paved.
