The Online Advertising Bubble

How many times have you searched for some site or publication and been returned two links to the same thing: a paid link at the top and then the unpaid link just below it?

Economist Steve Tadelis noticed the same thing, and he started asking online ad experts about it. They told him, our data shows that search advertising works. He asked to see the data. They told him about their secret, proprietary algorithms. He kept asking to see the data. When he finally did, he thought it was bogus, just graphs showing that the more firms spent on advertising, the higher their sales.

At one point he served as a consultant to eBay, and he tried to persuade them to stop buying ads and see what would happen. They told him sales would fall dramatically and refused. Then, for unrelated reasons, eBay got into a dispute with Microsoft and decided to cancel all their adds on Microsoft's search engines. The advertising team braced for sales to fall by at least 5 percent. But that didn't happen:

The experiment continued for another eight weeks. What was the effect of pulling the ads? Almost none. For every dollar eBay spent on search advertising, they lost roughly 63 cents, according to Tadelis’s calculations.

To Tadelis this means most of the money spent on online advertising is wasted, and he fully expects the $273 billion online advertising business to collapse; he calls it the new tech bubble.

I suspect that "collapse" may be too strong a word, but it would not surprise me at all to see the ad revenues at Google and Facebook fall just like those for magazines have. After all the whole field is supposed to be data driven, and the data increasingly shows that people buying online ads are massively overpaying.