Which Half Is Wasted?

The internet doesn’t understand the advertising business. Then again, neither do most advertisers.

Rick Webb
Rick Webb
Jul 25, 2017 · 7 min read

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Produced in partnership with NewcoShift.

After nearly 10 years of research and reading more than 150 economic works on the topic of advertising, I’ve come to understand that every value proposition of advertising has been severely degraded in the digital age. We’ve thrown out the social contract that made advertising moral, as more and more advertising money is spent on platforms rather than supporting news gathering. We’ve always had some version of this — advertising didn’t support just the news, but also Howdy Doody. The situation on the ground, however, is steadily worsening, and the news that once justified advertising is taking a smaller and smaller share of our ad dollars. There’s utility to platforms, of course, but the math has completely changed, and the industries involved — tech, advertising, and media — haven’t come to terms with it.

Like many people in the ad business, I’ve often wondered over the years about the morality of what we do. My economics courses taught me about “externalities” — events and phenomena outside an economic model that influence that model. I knew that externalities could be positive and negative. I was pretty sure economics viewed advertising as a positive externality, but we didn’t touch on advertising much in our econ classes. If you’ve worked in advertising for any amount of time, you’ve heard this old maxim: “Half the money I spend on advertising is wasted. I just don’t know which half.” I suspected the two were related and wanted to explore what the field of economics thought of that conundrum.

Back in 2009, I jotted down a note: “Blog post about economics and advertising.” Two thousand, maybe 3,000 words. I would bang it out in a weekend. I still have the outline for the post.

The next weekend, I started tackling it. Somewhere along the line, I realized this was going to be more than a blog post.

I realized I had learned, over the past decade, the craft of advertising and the process, but I still had no idea why we do the things the way we do, and I realized that neither did anyone else I was working with. Being a stickler for source documents and original information, I put aside writing the blog post. I decided some reading was in order. I started with the industry books — histories of advertising, handbooks for practicing the craft. Those took me only so far. I decided I would look at it from the economics side. I didn’t really know where to start. I went to Amazon and entered “the economics of advertising.” Every book that came up — there were three or so — was a 500-page tome written in the 1970s. Out of print. The kind of title used booksellers love to ream you for on Amazon because they know you probably have to buy it for a class. Sixty, seventy bucks each. I bit the bullet. I bought two. I read them, looked at the sources, and gathered older books. I proceeded until I had a pretty good picture of the working theories of advertising.

It took five years.

At first, I thought I was simply filling the gaps in my own knowledge of the craft. Eventually I realized that I wasn’t alone — and that the problem extended far beyond the ad industry.

In 2013, I was getting a drink with a media-related startup founder. He had a pretty cool startup, it was getting some good traction, and advertisers were starting to call him. He was a smart kid and had read a lot. But unfortunately, everything he had read was dictated by what was out there — predominantly books about startups, blog posts about startups, the business of startups. Because his startup had good traffic and an easy, interesting advertising opportunity, he was getting calls from advertisers, and I was trying to tell him to take the calls; take his cool little startup and sell those ads, stave off the VC money, control his own destiny. He had two callers: one from a law firm wanting to sponsor some of his legal content, and one from a company he’d never heard of called Starcom. He also had calls from VC firms. I explained to him that Starcom controlled something like 20 percent of every ad dollar spent in the United States and that this was a good thing.

I remember thinking that this was not the first time, since I had moved over to the startup world, that I had to explain to people who ran companies THAT MADE MONEY FROM ADVERTISING what a “media agency” was. A VC once told me he invested in a startup because they had Pepsi in their deck. I didn’t bother explaining to him that Pepsi was a notorious media experimenter—the company would try anything once, but that didn’t mean the startup was gonna get real ad money—and he should look for media agency clients, companies that spent ad dollars for living, with names like Starcom and “Group M.” Pepsi might spend a billion or two around the world on advertising in a year. But Starcom spends $19 billion. Most of the money spent in advertising passes through five media agencies that most of us have never heard of.

Advertising’s ramifications for the internet industry are not academic. We routinely extol the virtues of VCs for bravely funding the creation of the internet, when, in fact, ad dollars have done most of it. Venture capital outspent ad dollars in funding internet startups for the last time in 2001. Since then, ad revenue has funded the development of the internet at a rate of about three to one compared to VC. Ad spending has shaped the very form of the internet, and yet we barely discuss it. The vast majority of people I talk to in the ad industry have no idea about this.

I was two years into my reading at that point and had probably finished something like 40 or 50 books on the topic. I remembered my old blog post and thought it was time to start writing that book.

That took another three years.

The book is about done now. The works-cited list is more than 150 sources long — every book written on the topic, plus a hundred or so major studies, going back to the beginning of economics, the late 1600s.

Why am I doing this? What are the real-world ramifications?

First: So few people in the ad industry are aware of the massive amount of economic research that has been done on their trade, and the advertising is poorer as a result of practitioners not knowing the research. The divide between the empirical research on the topic and the practitioners of the topic has never been wider. Most of the billions spent on ad technology and research in the digital age has ignored some crucial truths about advertising. As a result, we have not eliminated waste—and we’ve potentially made matters worse. To wit…

Second: In all of the writing about advertising from the business world or the tech world, rarely is the distinction made between brand advertising and direct advertising. Think “just do it” versus “$10 off a camera if you use this affiliate code.” Turns out that the economics, mechanics, and the parts of the brain the message hits are completely different in these two advertising tactics. The economics world has known this since the 1930s and began studying the topic empirically in the 1960s. In the late 20th century, as behavioral economics came into the foreground, researchers confirmed that these two types of advertising are very different. Yet if you read any piece written today from the business or tech world, the distinction is almost completely invisible. We routinely see charts showing us the migration of ad dollars to the web, implying that television’s days are numbered, conveniently ignoring the fact that TV does brand advertising, and so far, the web is still crap at it. This is not academic — each model works very differently, and the understanding of this raises serious questions about Silicon Valley valuations and future potential growth.

Third: Historically, economists have viewed advertising as a positive externality, but it’s been a close call. The thing that pushed them over to put advertising into the positive column was that it funded our news gathering, providing society with useful information at low cost. But…

Finally, fourth: As ad platforms consume larger and larger portions of advertising spending, the proposition that advertising is a positive force in society, through funding the news, is rightly being questioned. Advertising historically has gotten a free pass from government regulation based on the economic consensus that it’s a positive externality, since it funds the news. Advertising, of course, has always funded both good and bad media. And platforms, of course, provide some utility — we can stay in touch with our friends, we can find out the news more quickly. But the “bad” media — reality TV, perhaps, or violent police procedurals — were of a different ilk than the negative externalities that come with platforms. Harassment, racism, fake news — these attendant negative externalities of the platforms vastly change the calculus regarding advertising’s net positive or negative impact. The negative effects of the platforms arguably outweigh the negative effects of Survivor in Paradise, once again calling into question whether advertising should be regulated. And as more money migrates from media to platforms, the problem will get worse.

So this is the book I set out to write. I call it Which Half Is Wasted, and in the coming weeks I’ll be exploring its themes here in advance of the book’s eventual publication, hopefully in 2018.

Thanks to John Battelle.

Rick Webb

Written by

Rick Webb

author, @agencythebook, @mannupbook. writing an ad economics book. reformed angel investor, record label owner, native alaskan. co-founded @barbariangroup.

Which Half Is Wasted?
Which Half Is Wasted?

About this Collection

Which Half Is Wasted?

The internet is fueled by advertising — it drives more than 90 percent of both Facebook and Google’s revenues. But how well do we really understand the advertising business, and the effects it has on what gets built online? Produced in partnership with shift.newco.co.

The internet is fueled by advertising — it drives more than 90 percent of both Facebook and Google’s revenues. But how well do we really understand the advertising business, and the effects it has on what gets built online? Produced in partnership with shift.newco.co.

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