DRAFTFCBlog: The Digital Ad Bubble?

Posted by Andrew Eifler, Media Supervisor, Draftfcb New York

I’ve been doing a lot of reading lately about the financial bubble/bust of 2008. Most authors I’ve read agree that one of the major forces that led to the meltdown was the creation and sale of exotic financial instruments that were very hard, or in some cases, impossible to value. Similarly, reflecting back on the technology bubble of 1998, one of the driving forces for the crash was people buying and selling stock in companies that had little or no cash flow. Citing both these cases, I think it’s safe to say that there are two telltale signs that indicate an industry is headed for some challenging times:

1. Everyone foresees unlimited growth potential
2. People are buying and selling things (assets/products) without knowing how much they are worth

Now, it’s not my intention to be the person on the street corner heralding the end of the world with a cardboard sign, but I do think it’s important to take a step back every once in a while and see where things are headed. For me – the area of interest is digital advertising.

Advertising, as a category, is tricky – it’s hard to value. Unlike financial instruments, the value of any ad (TV, print, or digital) can vary depending on who buys it and which product is being advertised. There is no underlying “asset” (as there would be with a financial security), but rather, what you pay for is the opportunity for people to see your message with the hope that it will affect their behavior. With a financial security, the discounted value of all future cash flows is the same no matter who owns it, but the intrinsic value of each advertisement can be different for every advertiser.

Additionally, as technology evolves, we now find ourselves in an increasingly fragmented advertising landscape. Advertising opportunities are no longer limited to TV, Print, Radio, and Online Banner Ads, but there are now digital advertising opportunities everywhere. Everyday publishers are thinking up new and untested forms of digital advertising, which they then try to sell to advertisers. Some of the more recent examples are iPhone ads, iPad ads, and social media ads. How could these new advertising products possibly be appraised and accurately priced in alignment with their long term value? It’s nearly impossible! But still, even without knowing how much they are worth, advertisers are buying these new digital ad products and encouraging publishers to continue creating increasingly exotic advertising opportunities.

Looking at the digital ad industry, one could argue that both of the signs are now true – 1) Everyone foresees unlimited growth potential (and publishers are investing heavily to pursue new advertising technology) and 2) people are buying and selling “new media” advertising products with no way of knowing how much they are worth.

I’m not saying that we’re on the precipice of disaster, but I do think it’s important to keep these things in mind – because another thing that all bubbles have in common is that just before the crash, no one sees it coming...DRAFTFCBlog