Beyond targeted advertising

The online targeted advertising model has failed. With media companies desperate for solutions, what can take its place?

Advertising is in crisis. More than one third of online ad traffic is fraudulent, and the ads are so annoying that more than a quarter of users block them. Half of ads are never seen, and publishers take as little as 40% of the revenue from advertising placed on their sites.

Worse still, by encouraging filter bubbles and clickbait, targeted advertising is eroding our democracy.

We hope to invest in teams working on the business models that will support the next generation of media institutions. That means moving beyond traditional online advertising, and creating completely new kinds of platforms.

How targeted ads emerged

For most of the commercial internet’s existence, the website has been the prevailing form of online media. For decades, everything from newspapers to TV shows have been presented through a browser: a testament to the flexibility and power of the web as an open platform.

But there’s a problem. Monetization was never built into the internet. Back when newspaper revenues first began to decrease precipitously, Clay Shirky called it the unthinkable scenario:

The unthinkable scenario unfolded something like this: The ability to share content wouldn’t shrink, it would grow. Walled gardens would prove unpopular. Digital advertising would reduce inefficiencies, and therefore profits. Dislike of micropayments would prevent widespread use. People would resist being educated to act against their own desires. Old habits of advertisers and readers would not transfer online. Even ferocious litigation would be inadequate to constrain massive, sustained law-breaking.

A decade earlier, Stewart Brand said, “information wants to be free”. He was right, and traditional media companies were decimated.

The first banner ad, for AT&T in 1994

Still, publishers needed to make money; writers needed to make rent. In the early days of the web, sites could place a banner advertisement at the top of their content and be paid according to the number of people who saw it. Over time, as people started to ignore them, the price dropped sharply. In response, site owners moved to targeted advertising: users were shown ads based on their interests, and publishers were paid based on the number of times users clicked on them.

These were far more lucrative — but had unforeseen effects far beyond publisher bottom lines.

How targeted ads broke America

Firstly, in order to figure out what kinds of advertisements users were interested in, ad networks had to spy on them. Each web user was silently profiled by advertising networks as they browsed from site to site. These profiles were later used for illegal surveillance.

Secondly, some publishers realized they could optimize content to increase the number of page views — and therefore advertising clicks — they received. Rather than creating deep analysis or long-form journalism, publishers were incentivized to create shallow, sensationalist content that would attract more viewers. Some publishers went beyond this clickbait and created entirely fake news — content so optimized for ad clicks that it dispensed with truth — in order to attract viewers.

Finally, social media networks realized they could increase engagement with ads on their platform if they filtered the content that users could see.

Facebook’s algorithm knows what you like based on the videos you watch, people you talk to, and content you interact with. It then shows you more of the same. This creates something called “filter bubbles.” You begin to see only the content you like and agree with, while Facebook hides dissenting points of view.

44% of Americans get their news from Facebook, and aren’t aware that the information they’re receiving is incomplete. This news landscape, where users are presented information that enforces their existing point of view, has an effect on the conclusions we draw. Confirmation bias and advertising-induced sensationalism have always been a part of the media, but they are accentuated by personalization algorithms and fine-grained targeted ads.

Beyond advertising

Moving to a new financial model is difficult. It’s very difficult to create an “alternative Facebook” (although it hasn’t stopped hundreds of projects from trying). You can’t simply airdrop a new business model on an existing product.

For a product to see regular use, it must have become a habit for its users. Designers and growth hackers spend a lot of time thinking about how to make their products more habit-forming, informed by resources like Nir Eyal’s Hooked. Many individual apps, like Facebook’s, have become habits.

But broader technologies can be habits too: 3.2 billion people have made a habit of the web. Products built with the ad economy in mind have become central to the act of browsing: habitual web users are used to them being at the center of their activity. Breaking this habit is an incredibly difficult task.

Micropayments are one attempt at a new business model for publishers. Users pay a small amount — a micropayment — whenever they read an article. Services like Blendle have attempted to roll this out across publishers, with limited success.

Despite their praise for the service, [editors] acknowledge that Blendle isn’t yet a game-changer. Van der Meulen [publisher of the Dutch paper Vrij Nederland] says that, due to services like Spotify, consumers are primed for flat-rate subscription services, not micropayments. For Blendle to survive in the long-term, “it must be an all-you-can-read model, I think, like Netflix, like Spotify,” he says. “Micropayments are just the first step.”

Subscriptions may indeed prove to be a better model. Online services are certainly priming users to move to a subscription model. At the time of writing, Medium is preparing to launch subscriptions. Even Google, which brought targeted advertising to mainstream publishers, is attempting a subscription service with YouTube Red. Time will tell if they are successful.

On the other hand, entirely new platforms are an opportunity for new kinds of habits. New models like Amazon’s Alexa don’t carry the baggage of ingrained activity patterns, providing new opportunities for different financial models. As Clay Shirky said, nothing will work — but anything might. Now is the time for lots of experiments.

Applications for Matter close on April 3rd. If you’re building new kinds of revenue tools for publishers, you should apply today.

Matter is an SF & NYC-based startup accelerator and venture capital firm grounded in the principles of design thinking that supports early-stage media entrepreneurs and mission-aligned media institutions building scalable ventures that make society more informed, inclusive, and empathetic.

Our mission has never been more important than it is today. We are looking for scrappy entrepreneurs inspired to make real change. Our next cohort starts on June 5th. Apply now.

For regular updates, follow us on Facebook, Twitter, and Instagram, and subscribe to our mailing list.