Change Or Die? Essence’s Co-Founder On Why The Ad Industry Needs To Re-Evaluate Its Priorities

ShebbeareEssence co-founder and chief product officer Andrew Shebbeare will discuss fraud, lack of transparency and misaligned incentives in the ad ecosystem at the May 24 CLEAN ADS I/O conference in New York.

Andrew Shebbeare says the ad industry is at a tipping point.

The acceleration of consumer ad blocking and uncertainty around viewability and fraud are symptomatic of serious issues challenging the ad ecosystem.

And it’s up to publishers, brands, agencies and ad tech vendors to collaborate and fix these problems.

Shebbeare, the co-founder and chief product officer of the agency Essence, which is Google’s digital agency of record and was acquired by WPP-owned GroupM last fall, thinks digital advertising has a lot to learn from economic theory.

The industry, he says, needs to ask itself a tough question: “Are we gradually destroying ourselves or is there a path to an efficient market where good performance is rewarded and we create better experiences for users and better monetization for publishers?”

Shebbeare – who holds a degree in economics and worked in finance as a business analyst for Capital One and a marketer for Lloyds Bank before his agency time – spoke with AdExchanger.

AdExchanger: What economics theories apply to advertising?

ANDREW SHEBBEARE: Ad blocking is a bit like polluting the planet or overfishing the oceans. It’s a little like what economists call the tragedy of the commons. Individual actors do what is independently rational for them according to their own self interests at the expense of the common good and the resource gets depleted, then everyone loses. 

The market for ad impressions is a lot like the market for used cars. Think of lemons, where the buyer of the used car knows a lot less about what’s inside it than the seller. Information asymmetry creates a real problem when there is a lack of transparency, or what we call in economics a moral hazard.

What happens?

When you block an ad, you take a publisher’s content without allowing them to get paid for it. That’s like downloading illegally from [torrenting site] Pirate Bay. That tends to happen because of poorly established property rights. Who owns ad impressions? Is it the publisher, browser owner, ad network or user? What’s the role of the exchange, trading desk and the role of the publisher? There are a lot of characteristics in the ad industry today [that parallel] markets that are not very efficient or they’re broken.

What is an efficient ad market?

A market that will lead to optimal outcomes for all of the participants. Some of those characteristics are no transaction costs, perfect information, no monopolies, easy entry and exit from the market and people need to know exactly what they want and they must have strong preferences. That is not characteristic of the ad market today. Transaction costs are very high and a lot of those costs are transferred to publishers today. There is a huge amount of fraud, really no alignment on how these things should be measured, and we are obviously approaching monopolies in a lot of dimensions, from both the buy and sell side.

What about the impact on buyers?

They don’t yet have enough good information to know whether they want ad impression A or B because the standards of measurement and understanding of “value” are not well developed. It’s a bit frightening where we’re in a bit of a spiral where users don’t want ads, the people who provide them have few incentives to drive efficiency in the market, and it creates this perception of the market eating itself.

I don’t want to paint a picture of doom, but what will it take for transaction costs to go down? Good competition, innovation, consolidation, intervention from standards bodies. It will require people to take responsibility for fraud, viewability and supply.

What about the role of large, walled-garden platforms?

Perfect information means we have to share more, develop open standards, probably work through some of the walled-garden issues we’re facing in the market, which is also near the monopoly point. It means advertisers have to be educated, have an active voice in the market and be prepared to pay for good behavior and sacrifice scale when they can’t be sure of quality. This isn’t media agencies’ fault, publishers’ or brands’ fault. It’s everyone’s fault.

What happens if the industry doesn’t fix itself?

In the worst-case scenario, what if we don’t fix it and everyone installs ad blockers and the market dries up? Will we go back to the world of product placement and everyone sees the same ad? Maybe we move into a world where everybody pays for content and micropayments save the day, and we subscribe in very bite-sized ways to premium content. And advertising will just become really expensive. Or, maybe it will become a world where Facebook and Google become so dominant that it is a completely different market dominated by a duopoly. And there have been examples of sustainable duopolies in history.

But it seems like the industry’s rallying to clean up. At least there’s this perception of a push toward quality, e.g., Facebook kicking out resellers from the LiveRail network. Is some of this cyclical?

I do think it’s a little bit cyclical and there is a lot going on behind those announcements. If I were being cynical, I would probably say Facebook had an active interest in the world thinking open exchanges were not a great place to spend money because their primary competitor is the primary operator of those environments. Though, I’m sure Facebook’s principle organization has research that is solid. What I’d take from all this is that it’s really complicated and when the industry makes broad-brush statements like, “Open exchanges are bad and PMPs are good,” it’s probably not right.

Has Essence, as a buying organization, had the same concerns with the open exchanges?

We have shifted over time between open exchange and PMP as our primary source of inventory, and we found we can be successful in the open exchange as well; it just requires a huge amount of work and for us to be careful. In any open market, if you are the least informed bidder in that auction, you will do worse. The market is far from perfect and there are high transaction costs, and a lot of technology intermediaries. I think it’s about being prepared to find the right inventory in the right places, and being sufficiently educated so as not to get burned in either.

The interview has been edited for clarity and length.

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1 Comment

  1. Mathieu Delarue

    There was an assumption made when content providers initially began attempting to monetize the web. As a result of some initial failed efforts to charge for content, led by the ad industry, content providers assumed that ad supported content would be the standard.

    This model worked for a while because we overlooked the minor intrusions on our senses. Now, we’re assaulted from every direction with advertising: videos in the cab, the plane and the gas pump; email; phone calls; television; streaming television; etc… It seems there isn’t a medium or a space that’s off limits for advertising and behavior/data collection, even ones for which we think we pay.

    I can only speak for myself and a few of my friends, but we’re tired of advertising. We see the need to step back from the precipice of unconscious consumerism. Consumerism, naturally, closely intertwined with marketing, or “creating demand.”

    There are still plenty that don’t feel this way. Some are unable to see a different reality and don’t consider the need to think of one. For my part, I’d rather watch an episode of a series on Amazon for $1.99 than endure the insufferable, ad supported source. Incidentally, streaming video ads, in self-defeating character, ignore the volume differential regulation established for television.

    To frame ad-blockers as a moral violation of some greater social contract is a bit much. What happens when a site refuses to load due to my blockers? Simple. I close the tab. Perhaps the quality of the content should be better. There are examples of quality content, whose creators offered me the option to pay in lieu of enduring another Outbrain menagerie.

    Ad-driven, private websites don’t neatly fit under the definition of “the commons.” There was no ad-driven social contract into which I entered. It was foisted upon me. Certainly, there is still plenty of community driven content out there. What an odd, manufactured idea: that viewing an ad has intrinsic value. The only reason I feel bad about the newspaper circulars that hit the recycle bin before I look at them is the waste of resources; probably the germ of this idea, that receipt has value.

    Closer to the idea of destroying the commons, is the community of marketers. On this point, I agree with you. A community whose members provide near meaningless content behind their ads, misleading headlines, click-bait, privacy intrusion and byzantine opt-out options.

    To establish a context in which advertisers have some right to our public and personal spaces only furthers to increase the dissonance between humans and advertisers. The relationship between consumers and advertisers may still be sound; as long as people continue to see no problem with the idea that their individual value is as a consumer.