Are ads on Facebook, Google, and other platforms, worth it?
Earlier this year, Procter & Gamble announced it cut its digital advertising budget by $200 million after putting pressure on social media companies to be more transparent when it came to the reach of the ads they were selling.
“Transparency shined a spotlight on reality and we learned valuable lessons which are driving profound change,” said Marc Pritchard, P&G’s chief brand officer, according to a Reuters’ article.
Companies spend huge sums on digital advertising. Proctor & Gamble spent roughly one-third of its $7 billion advertising budget on digital advertising last year.
Most public companies spend hundreds of millions on digital advertising, and it’s not often an area of focus for boards.
But a key director role is to perform oversight for the shareholders on how capital is spent. Typically we think of long-term capital allocation for investments, as well as annual operating budget spend, as a key part of the boards’ oversight.
The large tech platforms have been in the headlines a lot lately, with embers of Congress, antitrust experts and the American public increasingly calling for regulation and antitrust enforcement against them. The rising chorus raises concerns about harms to consumers, competitors, news publishers and citizens, but has paid less attention to corporate advertisers.
Google and Facebook dominate the $88 billion digital advertising market, accounting for 90% of digital advertising growth in 2017 according to Pivotal Research analyst Brian Weiser.
The two tech giants have gobbled up ad dollars, as ad fraud ballooned. Digital ad fraud amounted to $7.4 billion in 2017 and is projected to rise to $10.9 billion by 2021, according to a recent letter sent by U.S. Sen. Mark R. Warner to the Federal Trade Commission. Lacking robust competition in their respective spheres, Facebook and Google face few consequences for rampant ad fraud enabled by their platforms.
Boards of directors are responsible for ensuring that corporate budgets maximize shareholder value, but how can board members ensure that the huge sums spent to advertise through Facebook and Google are getting the returns for shareholders that these platforms “self report?”
Facebook and Google have escaped U.S. antitrust enforcement
Google and Facebook have been largely immune to U.S. antitrust enforcement. Modern courts ordinarily require antitrust plaintiffs to prove a price increase or output reduction. Antitrust case law judges anticompetitive conduct and acquisitions through the lens of the “consumer welfare standard” and considers price to be the main measure of consumer welfare. Such a standard has shielded Facebook and Google because the platforms are seemingly “free” — consumers pay with their data, not with money.
Yet Facebook and Google are far from free for advertisers. Rather than solely focusing on the consumer side of the multisided markets of social media and internet search, antitrust enforcers also need to look at competitive harms on the multibillion dollar advertising side.
Rampant digital advertising fraud
One indicator that corporations are over-paying for advertising through Facebook and Google is the extent of digital ad fraud. The $7.4 billion ad fraud figure quoted in Senator Warner’s letter, though not limited to fraud enabled by the tech giants, amounts to an enormous overpayment by advertisers.
The letter came on the heels of a Buzzfeed exposé of a multimillion dollar fraudulent scheme using Android apps. “The revelation of this scheme shows just how deeply fraud is embedded in the digital advertising ecosystem, the vast sums being stolen from brands, and the overall failure of the industry to stop it,” according to the article.
Although Warner wrote there was no evidence that Google had direct knowledge of the scheme, he emphasized that Google’s ad network and ad exchanges were implicated. Google controls the vertical stack of the online ecosystem, due largely to its acquisitions of DoubleClick and AdMob. “At the very least, it seems that across a number of its products Google may have engaged in willful blindness, all while profiting from this fraudulent activity,” said the letter.
Facebook, for its part, has admitted to a series of measurement errors in recent years. According to Weiser, Facebook’s audience tool promises advertisers they can reach 41 million 18- to 24-year-olds in the United States, 10 million more than actually live in the country.
Facebook was sued in 2016 by online marketing agency Crowd Siren for inflating its video view metrics, and after reviewing Facebook’s internal documents through discovery, Crowd Siren recently added fraud claims and requested punitive damages. Its amended complaint argues that Facebook knew about the error for a year without telling advertisers, and that Facebook overestimated time spent watching video by as much as 900%, not the 60% to 80% figure Facebook had reported. Facebook denies the allegations.
Facebook and Google have suffered few consequences from rampant fraud in part because they lack competitive constraints. Competition presses firms to do better, but Google and Facebook’s ability to track users’ behavior across the web creates entry barriers for competition. Both antitrust enforcement and data protection rules that limit Facebook and Google’s ability to track users on others’ web properties — like Europe’s General Data Protection Regulation — could open up competition.
Transparency and independent verification are necessary
Blind trust in Facebook and Google is both imprudent and inconsistent with the board’s enterprise risk management business practices that require independent verification. Boards need to ensure corporate advertising budgets are getting the right results for shareholders.
In television advertising, advertisers do not merely rely on a networks’ audience measurement; Nielsen also provides independent measurement, which is then audited by the Media Ratings Council (MRC). But ad dollars continue to move from television to digital, with mobile ad spending expected to surpass television advertising this year.
In 2017, Facebook and Google’s YouTube agreed to be audited by the MRC, but the audit is still ongoing. MRC auditing is a step in the right direction, but it does not go far enough. The State of Digital Advertising 2018 report by Marin Software, which surveyed over 500 B2C advertising professionals, found that 44% of advertisers “feel that the increasing dominance of Google and Facebook will impact their business above all other trends or challenges in 2018.”
As long as advertisers are beholden to Facebook and Google’s own self-reported data, their ability to detect fraud and ensure that ad budgets are well spent will be limited.
Board members should demand transparency and third-party verification of advertising data spend. There’s often hundreds of millions of dollars spent on digital advertising in order to eliminate fraud and waste from ad budgets. Boards may want to consider asking management to challenge Facebook and Google to use a third party independent verification that they give real access and transparency into their closed systems.
In this digital age, boards need new, independent verification systems to be sure their companies are getting true value digital spend for the shareholders.