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Public link anyone?

ikeboy 9y ago
Subscribe Schumpeter Something doesn’t ad up about America’s advertising market Stockmarket investors are wrong to expect an enormous surge in advertising revenues Print edition | Business Jan 18th 2018 IMAGINE a world in which you are manipulated by intelligent advertisements from dusk until dawn. Your phone and TV screens flash constantly with commercials that know your desires before you imagine them. Driverless cars bombard you with personalised ads once their doors lock and if you try to escape by putting on a virtual-reality headset, all you see are synthetic billboards. Your digital assistant chirps away non-stop, systematically distorting the information it gives you in order to direct you towards products that advertisers have paid it to promote. Jaron Lanier, a Silicon Valley thinker who was an adviser on “Minority Report”, a bleak sci-fi film, worries that this could be the future. He calls it a world of ubiquitous “digital spying”. A few platform firms, he fears, will control what consumers see and hear and other companies will have to bid away their profits (by buying ads) to gain access to them. Advertising will be a tax that strangles the rest of the economy, like medieval levies on land. Latest updates A severe case of “truth decay” DEMOCRACY IN AMERICA Brexit presents new opportunities for organised crime BRITAIN Britain’s statisticians are at war like never before BRITAIN See all updates It may sound outlandish, but this dystopia is increasingly what stockmarket investors are banking on. The total market value of a basket of a dozen American firms that depend on ad revenue, or are devising their strategies around it, has risen by 126% to $2.1trn over the past five years. The part of America’s economy that is ad-centric has become systemically important, with a market value that is larger than the banking industry. The biggest firms are Facebook and Alphabet (Google’s parent), which rely on advertising for, respectively, 97% and 88% of their sales. But the chunky valuations of America’s giant TV broadcasters imply that their ad revenues will fall very slowly, or not at all. Startups that rely on advertising, such Snap, are floating their shares at prices that suggest huge growth. Large deals, too, are being justified by potential ad revenues. Microsoft’s $26bn acquisition of LinkedIn in 2016 was partly premised on “monetising” its user base through adverts. The main reason AT&T says it wants to buy Time Warner for $109bn is to create a digital ad platform linking AT&T’s data to Time Warner’s TV content. The immense sums being bet on advertising raise a question: how much of it can America take? A back-of-the-envelope calculation by Schumpeter suggests that stock prices currently imply that American advertising revenues will rise from 1% of GDP today, to as much as 1.8% of GDP by 2027—a massive jump. Since 1980 the average has been 1.3%, according to Jonathan Barnard of Zenith, a media agency, and in the past few years the advertising market relative to GDP has been shrinking. There are reasons why it might go on a tear, points out Rob Norman of GroupM, another media agency. In the old days adverts in Time magazine or on billboards in Times Square were big-ticket items that only giant firms could afford. But tech platforms have done a brilliant job of persuading smaller companies to spend money targeting customers. Facebook has 6m advertisers, equivalent to a fifth of all American small firms. Adverts could become even more effective at identifying customers and enticing them to spend money, using troves of data that have been gathered to anticipate their needs. As commerce shifts online, firms will cut back on conventional marketing (for example, the fees that consumer goods and food firms pay to Walmart to ensure products are displayed prominently on its shelves), freeing up budgets to spend more on digital ads. Yet there are two logical limits to the size of the advertising market. First, the irritation factor, or how much consumers can absorb without being put off. In the analogue era the rule of thumb was that ads could comprise no more than 33-50% of TV or radio programming, or of a magazine’s pages, says Rishad Tobaccowala, of Publicis, an advertising firm. The digital world is already showing signs of saturation. More people are using ad-blocking software. Tech brands that eschew bombarding customers with ads, such as Apple and Netflix, are wildly popular. The drive to lift user “engagement” on social-media platforms by showing sensational content, in turn boosting the number of ads that can be sold, has prompted a backlash. On January 11th Facebook said it would show users fewer posts from “businesses, brands and media”. Time spent online by the typical American is growing at about 10% a year, less than the 15-20% ad-sales growth that many digital firms expect. The second limit on the size of the advertising market is how much cash all other firms, in aggregate, have at their disposal to spend on ads. In theory they could spend more and more until their overall returns on capital drop below the cost of capital, compromising their financial viability. Remarkably, expectations for ad revenues are now so bullish that they imply that this boundary will indeed be tested. Commercial breaking-point Imagine if advertising spending really did rise to 1.8% of GDP in America by 2027. Most firms’ costs would have to rise, cutting total corporate profits (excluding those of ad platforms) from about 6.5% to 5.7% of GDP, the kind of drop normally associated with a recession. Alternatively, imagine if the firms in the S&P 500 index (excluding ad platforms) bore all the additional cost of the advertising boom. Their combined return on capital would drop from the present 10% to 8%, at or just below their cost of capital. America Inc would go from being the world’s greatest profit machine to flirting with Japanese-style financial-zombie status. That does not seem realistic. More probably, hopes for a new age of advertising nirvana are too optimistic. Perhaps the ad sales of conventional media firms (which are about half of the total, with TV dominating) will drop fast rather than merely stagnate. Or perhaps digital firms will struggle to increase ad sales at compound annual rates of 15-20% or a decade, as their valuations imply. Expectations for both groups are surely too high. In the advertising world, and on Wall Street, something does not ad up. This article appeared in the Business section of the print edition under the headline "Mad men" You’ve seen the news, now discover the story Get incisive analysis on the issues that matter. Whether you read each issue cover to cover, listen to the audio edition, or scan the headlines on your phone, time with The Economist is always well spent. Enjoy 12 weeks’ access for $12 Print edition | Business Jan 18th 2018 Reuse this content About The Economist Editors’ picks Banyan Asia is taking the lead in promoting free trade Asian voters know open markets have lifted billions of them out of poverty ASIA #OscarsSoRainbow The rise and fall of the award-winning white-saviour film PROSPERO From the single market to the black market Brexit presents new opportunities for organised crime BRITAIN The Economist explains Why the genome of wheat is so massive THE ECONOMIST EXPLAINS Subscribe: 12 weeks for $12 or sign up to enjoy 3 articles free Get full access to The Economist via print, online and our apps or sign up to enjoy 3 articles free. Subscribe: 12 weeks for $12 Sign up: 3 articles per week Tell us what you think of Economist.com Leave feedback Need assistance with your subscription? Contact us Subscribe Contact us Help Keep updated Sign up to get more from The Economist Get 3 free articles per week, daily newsletters and more. Email address Sign up About The Economist Advertise Reprints Careers Media Centre Terms of Use Privacy Cookies Accessibility Modern Slavery Statement Copyright © The Economist Newspaper Limited 2018. All rights reserved.
- jamestimmins 9y ago
  "Copyright © The Economist Newspaper Limited 2018. All rights reserved."
rm_-rf_slash 9y ago
Just read it in private browsing.
clusmore 9y ago
https://outline.com/7R7kuH https://outline.com/7R7kuH
labster 9y ago
If you click reader mode really fast, the JS deleting the article doesn't run.
lern_too_spel 9y ago
Pay for it. It's the price of not having the article plastered with ads and clickbait.
- BareNakedCoder 9y ago
  Yes, pay for it. It's well worth it. I've been a subscriber for many years and consider it on my Top 10 list of things I would miss most if I were ever stranded on a deserted island.

Public link anyone?

Subscribe Schumpeter Something doesn’t ad up about America’s advertising market Stockmarket investors are wrong to expect an enormous surge in advertising revenues Print edition | Business Jan 18th 2018 IMAGINE a world in which you are manipulated by intelligent advertisements from dusk until dawn. Your phone and TV screens flash constantly with commercials that know your desires before you imagine them. Driverless cars bombard you with personalised ads once their doors lock and if you try to escape by putting on a virtual-reality headset, all you see are synthetic billboards. Your digital assistant chirps away non-stop, systematically distorting the information it gives you in order to direct you towards products that advertisers have paid it to promote. Jaron Lanier, a Silicon Valley thinker who was an adviser on “Minority Report”, a bleak sci-fi film, worries that this could be the future. He calls it a world of ubiquitous “digital spying”. A few platform firms, he fears, will control what consumers see and hear and other companies will have to bid away their profits (by buying ads) to gain access to them. Advertising will be a tax that strangles the rest of the economy, like medieval levies on land. Latest updates A severe case of “truth decay” DEMOCRACY IN AMERICA Brexit presents new opportunities for organised crime BRITAIN Britain’s statisticians are at war like never before BRITAIN See all updates It may sound outlandish, but this dystopia is increasingly what stockmarket investors are banking on. The total market value of a basket of a dozen American firms that depend on ad revenue, or are devising their strategies around it, has risen by 126% to $2.1trn over the past five years. The part of America’s economy that is ad-centric has become systemically important, with a market value that is larger than the banking industry. The biggest firms are Facebook and Alphabet (Google’s parent), which rely on advertising for, respectively, 97% and 88% of their sales. But the chunky valuations of America’s giant TV broadcasters imply that their ad revenues will fall very slowly, or not at all. Startups that rely on advertising, such Snap, are floating their shares at prices that suggest huge growth. Large deals, too, are being justified by potential ad revenues. Microsoft’s $26bn acquisition of LinkedIn in 2016 was partly premised on “monetising” its user base through adverts. The main reason AT&T says it wants to buy Time Warner for $109bn is to create a digital ad platform linking AT&T’s data to Time Warner’s TV content. The immense sums being bet on advertising raise a question: how much of it can America take? A back-of-the-envelope calculation by Schumpeter suggests that stock prices currently imply that American advertising revenues will rise from 1% of GDP today, to as much as 1.8% of GDP by 2027—a massive jump. Since 1980 the average has been 1.3%, according to Jonathan Barnard of Zenith, a media agency, and in the past few years the advertising market relative to GDP has been shrinking. There are reasons why it might go on a tear, points out Rob Norman of GroupM, another media agency. In the old days adverts in Time magazine or on billboards in Times Square were big-ticket items that only giant firms could afford. But tech platforms have done a brilliant job of persuading smaller companies to spend money targeting customers. Facebook has 6m advertisers, equivalent to a fifth of all American small firms. Adverts could become even more effective at identifying customers and enticing them to spend money, using troves of data that have been gathered to anticipate their needs. As commerce shifts online, firms will cut back on conventional marketing (for example, the fees that consumer goods and food firms pay to Walmart to ensure products are displayed prominently on its shelves), freeing up budgets to spend more on digital ads. Yet there are two logical limits to the size of the advertising market. First, the irritation factor, or how much consumers can absorb without being put off. In the analogue era the rule of thumb was that ads could comprise no more than 33-50% of TV or radio programming, or of a magazine’s pages, says Rishad Tobaccowala, of Publicis, an advertising firm. The digital world is already showing signs of saturation. More people are using ad-blocking software. Tech brands that eschew bombarding customers with ads, such as Apple and Netflix, are wildly popular. The drive to lift user “engagement” on social-media platforms by showing sensational content, in turn boosting the number of ads that can be sold, has prompted a backlash. On January 11th Facebook said it would show users fewer posts from “businesses, brands and media”. Time spent online by the typical American is growing at about 10% a year, less than the 15-20% ad-sales growth that many digital firms expect. The second limit on the size of the advertising market is how much cash all other firms, in aggregate, have at their disposal to spend on ads. In theory they could spend more and more until their overall returns on capital drop below the cost of capital, compromising their financial viability. Remarkably, expectations for ad revenues are now so bullish that they imply that this boundary will indeed be tested. Commercial breaking-point Imagine if advertising spending really did rise to 1.8% of GDP in America by 2027. Most firms’ costs would have to rise, cutting total corporate profits (excluding those of ad platforms) from about 6.5% to 5.7% of GDP, the kind of drop normally associated with a recession. Alternatively, imagine if the firms in the S&P 500 index (excluding ad platforms) bore all the additional cost of the advertising boom. Their combined return on capital would drop from the present 10% to 8%, at or just below their cost of capital. America Inc would go from being the world’s greatest profit machine to flirting with Japanese-style financial-zombie status. That does not seem realistic. More probably, hopes for a new age of advertising nirvana are too optimistic. Perhaps the ad sales of conventional media firms (which are about half of the total, with TV dominating) will drop fast rather than merely stagnate. Or perhaps digital firms will struggle to increase ad sales at compound annual rates of 15-20% or a decade, as their valuations imply. Expectations for both groups are surely too high. In the advertising world, and on Wall Street, something does not ad up. This article appeared in the Business section of the print edition under the headline "Mad men" You’ve seen the news, now discover the story Get incisive analysis on the issues that matter. Whether you read each issue cover to cover, listen to the audio edition, or scan the headlines on your phone, time with The Economist is always well spent. Enjoy 12 weeks’ access for $12 Print edition | Business Jan 18th 2018 Reuse this content About The Economist Editors’ picks Banyan Asia is taking the lead in promoting free trade Asian voters know open markets have lifted billions of them out of poverty ASIA #OscarsSoRainbow The rise and fall of the award-winning white-saviour film PROSPERO From the single market to the black market Brexit presents new opportunities for organised crime BRITAIN The Economist explains Why the genome of wheat is so massive THE ECONOMIST EXPLAINS Subscribe: 12 weeks for $12 or sign up to enjoy 3 articles free Get full access to The Economist via print, online and our apps or sign up to enjoy 3 articles free. Subscribe: 12 weeks for $12 Sign up: 3 articles per week Tell us what you think of Economist.com Leave feedback Need assistance with your subscription? Contact us Subscribe Contact us Help Keep updated Sign up to get more from The Economist Get 3 free articles per week, daily newsletters and more. Email address Sign up About The Economist Advertise Reprints Careers Media Centre Terms of Use Privacy Cookies Accessibility Modern Slavery Statement Copyright © The Economist Newspaper Limited 2018. All rights reserved.

jamestimmins 9y ago
"Copyright © The Economist Newspaper Limited 2018. All rights reserved."

rm_-rf_slash 9y ago

Just read it in private browsing.

clusmore 9y ago

https://outline.com/7R7kuH https://outline.com/7R7kuH

labster 9y ago

If you click reader mode really fast, the JS deleting the article doesn't run.

lern_too_spel 9y ago

Pay for it. It's the price of not having the article plastered with ads and clickbait.

BareNakedCoder 9y ago
Yes, pay for it. It's well worth it. I've been a subscriber for many years and consider it on my Top 10 list of things I would miss most if I were ever stranded on a deserted island.