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Subprime Attention Crisis by Tim Hwang (2020) (read in 2021)

Published by marco on

Updated by marco on

Standard disclaimer[1]

This is a short book about the digital advertising business, including its history, its present, and possible futures. The history is that the advertising business has always struggled with the essential fact that they are selling a largely unquantifiable product. There are feelings about the effectiveness of advertising, but little evidence for the effectiveness of a particular ad. Effectiveness is measured in two ways: directly contributing to a sale (e.g. rebates, sales, etc.), or general brand-name buildup, which leads to familiarity. Basically: the short game and the long game.

Even in the old days, there were a lot of steps in between putting up a billboard along a highway and noticing an uptick in sales months later. How much did the billboard contribute? It’s hard to say because there is no way to control for other factors. The online world is similar, but differs in an important way: the sellers of ad space claim that they can very precisely and accurately identify who looked at which advertisement for how long. This is the core claim that Hwang does a good job of dissecting and refuting.

Digital advertising is dominated by a few large firms with hordes of brokers and side markets and private markets. There is a lot of what Hwang calls opacity in the market. This occlusion makes it difficult for buyers to accurately determine the quality—and ensuing value—of the product they’re buying as well as preventing them from having any way to determine whether they’re getting a good price for it. On top of this problem is that digital advertising has been so successful for so long—its claims of efficacy largely unexamined by the buyers—that traditional advertising has not only suffered, but largely no longer exists. That means that even more money flows to digital advertising, raising prices even more. This, despite an almost complete lack of ability to verify claims of quality on the part of buyers.

The claims of quality are increasingly unbelievable because of a few other large factors: widespread fraud, a known reduction in advertising efficacy in younger generations, and a drastic increase in ad- and tracker-blocking for almost all users. Video advertising is touted as a savior, but almost all users skip ads as soon as they possibly can and a non-insignificant number of them use ad-blockers to eliminate them entirely.

Hwang argues that there is a huge bubble growing in this industry, with drastically inflated prices for an increasingly shoddy and unreliable product. He spends quite some time drawing a very apt comparison to the housing bubble of the 2000s.

“In the mortgage crisis, the complexity of the market in exotic financial instruments made it challenging to see that the underlying mortgages were extremely likely to default. If buyers had known that AAA-rated mortgage-backed securities contained so much bad debt, it would have been challenging to get anyone to buy the assets.”
Page 62

Unfortunately, he’s too generous in his general formulation: keeps stating things like this as if the perceived complexity was accidental. The scam was deliberate. People lied about the garbage they were selling. A lot of people believed it. Others knew that it was bullshit but knew that others wouldn’t and that they could sell to them. That’s how a Ponzi scheme works.

One of the main reasons that this con job has longer legs than it would otherwise have is that a large amount of the opacity has been achieved through technology. And people who don’t understand anything about technology are absolutely willing to believe nearly anything about technology.

So, when they hear that digital advertising is not only online but also automatically brokered in nearly completely automated markets that instantaneously find the exact right ad to show for every single specific request based on the location of the ad-space, a giant profile of the user making the request, and dozens of bidders, each with their own highly tuned profile of what they’re willing to buy and for how much, and that a request lands, bidding begins and ends, a sale is made and registered, and the ad is delivered within a few dozen milliseconds, then they can only marvel at the glory of it all and just be thankful that they’re allowed to partake at all. Shut up and take my money, indeed.

“This highly automated arrangement has allowed online advertising exchanges to deliver mind-bogglingly large quantities of inventory night and day, unceasingly. As in the financial markets, algorithmic trading has become the rule, rather than the exception.”
Page 63

But much of the ad-space being sold is fake—either the user isn’t real or the device is in a farm somewhere, or both—or the price has been artificially inflated by fake bidders, or some other combination of scams that always appears whenever there are too many fools with too much money. Much of the money goes right into the pockets of the usual suspects. That’s why they’re largely unconcerned about policing the ever-increasing unsavory elements that prey on their ostensible customers: they get paid either way.

“[…] advertisers face the unenviable choice of buying ads on the unverifiable assurances of the major platforms or giving up the huge audiences these companies command. In this sense, the highly concentrated market of online advertising itself increases opacity in the marketplace.”
Page 72

The problems for the rest of us are manifold. First of all, the design of the Internet that we use now largely serves the purpose of delivering ads and feeding this money-making machine. The tail is very much wagging the dog. The purpose of disseminating information has very much taken a back seat to figuring out how to charge people for information. And the primary model is to make people consume advertising in order to get access to the information they want.

“The rise of programmatic advertising was not just a continuation of the commercialization of the web that was underway in the 1990s but also a process that actively shaped the rules and practices of how attention would be traded online.”
Page 40

Second of all, because the Internet relies so heavily on it, any perturbation—like a crash or popping of the bubble—will have a drastic effect on the Internet and its users. The rich guys running this scam will, as usual, be just fine. They’ll probably get richer. The rest of us will be scrambling to pay for access to an Internet that no longer knows how to survive.


[1] Disclaimer: these are notes I took while reading this book. They include citations I found interesting or enlightening or particularly well-written. In some cases, I’ve pointed out which of these applies to which citation; in others, I have not. Any benefit you gain from reading these notes is purely incidental to the purpose they serve of reminding me of what I once read. Please see Wikipedia for a summary if I’ve failed to provide one sufficient for your purposes. If my notes serve to trigger an interest in this book, then I’m happy for you.

Citations

“What we discover, when we get there, is less a picture of modern, data-driven wizards of consumer persuasion, and more a murky story of perverse incentives, outright fraud, and a web economy on the brink.”
Page 8
“Today, online advertising is more Wall Street than local bookfair. The exchange of attention is facilitated through a massive global system of digital marketplaces. Attention is not just for sale online: it has been automated and streamlined in ways that we often fail to appreciate.”
Page 13
“The jargon of programmatic advertising evokes a vision of the Wall Street of the 1980s. “Trade desks” buy and sell “inventory” on “exchanges.” You might imagine something out of movies like The Wolf of Wall Street and Trading Places: big, cavernous rooms packed with shouting traders in colorful vests. But this vision of how business is done is long out-of-date. The reality resembles the ultra-quantitative, high-frequency trading of Michael Lewis’s Flash Boys more than it does the predigital, smoke-filled rooms of Mad Men.”
Page 17
“The modern online advertising ecosystem is a mind-bending, globe-spanning infrastructure designed to deliver billions of advertisements at split-second speeds every minute of every day. What you see at the end point—a banner advertisement that you may instantly forget, or a preroll video that you click to skip as quickly as you can—is only the tiniest piece of an incredibly complex system that is otherwise invisible as you move through the internet.”
Page 18
“Publishers sell “inventory”: the opportunity for the buyer to display its message to someone who is paying attention to the publisher. The buyers vary: they include large companies buying advertising to promote their products and marketing agencies working on their behalf, as well as what are known as agency trading desks—specialized companies focused on navigating the programmatic advertising ecosystem.”
Page 19
“The inventory must be bid upon and the actual advertisement delivered in the split-second moment between when you click to load something online and the time that the website or content on an app is finally loaded. The entire process of putting out a request for bids, making the bids, evaluating the bids, and delivering the advertisement takes place in under a hundred milliseconds—about a quarter of the time it takes you to blink.1 This happens millions and millions of times across the internet every second, without ceasing and largely without hiccups.”
Page 20
“These are known as demand-side platforms (DSPs) or supply-side platforms (SSPs). DSPs service the buyers, providing tools to specify certain parameters around their bidding and specify the audiences they would like to target. SSPs provide a suite of tools that are a mirror image of this for publishers, enabling sellers to specify auction rules, set price floors, and control the kinds of advertisers able to gain access to their inventory.”
Page 20
“As with the Nasdaq and the New York Stock Exchange, the buying and selling of advertising inventory does not take place all in one location. There exists a dense, networked set of ad exchanges that facilitate the meeting of supply and demand in this marketplace.”
Page 21
“This served to make a downturn in the mortgage market one that placed intense pressure on other parts of the economy at the same time.”
Page 22

The utterly foreseeable and inevitable downturn. These systems are not built to last. They must last just long enough to extract rent. The betting parlor in The Sting wasn’t meant to last either.

“[…] monetized through advertising into advertising businesses. It’s easy to forget that products like email were originally operated as fee-based businesses in which various features like storage and spam filtering were monetized as a subscription.5 Services like Gmail transformed this, using the advertising model to make email free to use and monetizing it through the sale of user attention.”
Page 23
“It’s easy to forget that products like email were originally operated as fee-based businesses in which various features like storage and spam filtering were monetized as a subscription.5 Services like Gmail transformed this, using the advertising model to make email free to use and monetizing it through the sale of user attention.”
Page 23
“[…] the internet has been actively designed at each stage in its history. An ever-compounding set of choices has resulted in the particular experience that we have of it today. This is true of the selection of advertising as a primary money machine for funding the web. It is also true of the precise way that we set these advertising marketplaces up. To that end, we need to say why the programmatic advertising ecosystem has ended up bearing such a close resemblance to the structure of the financial markets.”
Page 33
“The rise of programmatic advertising was not just a continuation of the commercialization of the web that was underway in the 1990s but also a process that actively shaped the rules and practices of how attention would be traded online.”
Page 40
“The efforts of companies like GoTo and AOL served to bundle user attention online and extract money from this attention through advertising. As a result, what was formerly a sphere of nonprofit and public research was transformed into a sphere of for-profit and private enterprise.”
Page 42
“The transformation of attention into something monetizable is, of course, not a new phenomenon. Predigital advertising was engaged in the buying and selling of attention through billboards, newspaper ads, and television spots just as modern-day advertisers pay to grab attention online. The infrastructure of online advertising did not invent the commercialization of attention.”
Page 42
“What is different about the present-day online advertising system is the extent to which it has enabled the bundling of a multitude of tiny moments of attention into discrete, liquid assets that can then be bought and sold frictionlessly in a global marketplace.”
Page 42
“Attention—a varied, heterogeneous, hard-to-define thing—underwent a similar process of commodification over the course of the 2000s, culminating in the programmatic marketplace.”
Page 48
“[…] the Interactive Advertising Bureau, or IAB), a private consortium dedicated to developing the standards that enable the online advertising market to function.39 In 2004, the IAB published its “Ad Impression Measurement Guidelines,” an initial set of foundational standards by which an ad is considered “delivered” to a consumer by the industry.”
Page 49
“[…] players from having a clear idea of what was going on.50 Past financial crises in markets around the world have shown that opaque government balance sheets and finances can also trigger doubt that escalates into panic.”
Page 55
“Past financial crises in markets around the world have shown that opaque government balance sheets and finances can also trigger doubt that escalates into panic.”
Page 55

Actually most crises are a transition from irrational to rational.

“Opacity allowed these toxic assets to trade at prices far above what they were actually worth.”
Page 56

Also an overarching willingness to believe that some other idiot would be left holding the bag.

“Opacity isn’t dangerous only because it can cause errors in valuation. It also allows the active inflation of a market despite the fundamental shakiness of the thing being bought and sold.”
Page 56
“In the mortgage crisis, the complexity of the market in exotic financial instruments made it challenging to see that the underlying mortgages were extremely likely to default. If buyers had known that AAA-rated mortgage-backed securities contained so much bad debt, it would have been challenging to get anyone to buy the assets.”
Page 62

He keeps stating this like the perceived complexity was accidental. The scam was deliberate. People lied about the garbage they were selling. A lot of people believed it. Others knew that it was bullshit but knew that others wouldn’t and that they could sell to them. That’s how a Ponzi scheme works.

“This highly automated arrangement has allowed online advertising exchanges to deliver mind-bogglingly large quantities of inventory night and day, unceasingly. As in the financial markets, algorithmic trading has become the rule, rather than the exception.”
Page 63
““Dark pools” are a major phenomenon in the financial markets, accounting for some 14 percent of all equity volume traded in the United States.18 These are, in effect, private stock markets run by investment banks and other financial institutions about which no public information is available. These structures ostensibly serve to allow buyers and sellers to execute large-scale transactions without triggering reactive fluctuations in price on public exchanges like the Nasdaq.”
Page 66
“Dark pools are controversial in the financial sector because the opacity they create provides opportunities for abuse. When the public markets no longer reflect the supply and demand of all players, the prices shown on these exchanges will not reflect the actual value of the security. Dark pools enable practices like “front-running,” in which high-frequency trading firms leverage their insider knowledge of these private marketplaces to profit off traders with slower access to information.”
Page 66
“PMPs are a growing segment of the transactions taking place in online advertising. In 2018, 45 percent of all the money spent in real-time bidding auctions took place within the confines of a PMP. Of the $19 billion that are projected to enter into the programmatic ad space between 2018 and 2020, the majority will go toward PMPs and other private arrangements.”
Page 67
“[…] the companies that brought about disintermediation have themselves become intermediaries in the advertising space. Google, Facebook, and major ad exchanges have huge sway over the rules of buying and selling ads because of their relative size and the high level of consolidation in the marketplace.”
Page 69
“[…] advertisers face the unenviable choice of buying ads on the unverifiable assurances of the major platforms or giving up the huge audiences these companies command. In this sense, the highly concentrated market of online advertising itself increases opacity in the marketplace.”
Page 72
“This divergence between the asset being bought—ad inventory—and the asset underlying it that defines its value—attention—directly parallels what happened to collateralized debt obligations (CDOs) during the 2007–2008 crisis.”
Page 76
“When a demand-side platform (DSP) is programmed to seek out opportunities to reach a demographic like “males 18 to 24 living in the United States,” it tells us whom the advertising will ideally reach, but not whether the people who actually see the ad will be persuaded, or even interested. This divergence between the asset being bought—ad inventory—and the asset underlying it that defines its value—attention—directly parallels what happened to collateralized debt obligations (CDOs) during the 2007–2008 crisis.”
Page 76

“We can think about any unit of advertising—a banner ad on a website or a billboard on the side of a highway—as a rough proxy for the collection of eyeballs that see it. In the same way that we might peel back a CDO to learn what mortgages it actually contains, we can peel back an ad and assess the quality of the attention that it captures.

“When we do this, a twofold problem emerges. First, the value of the attention “packaged” by online advertising is declining. Online advertising is increasingly ignored—or actively resisted—by the public at large. Second, the “attention” that ads do receive is increasingly garbage—the product of a massive, fraudulent economy designed to extract money from advertisers.”

Page 76
“The vaporous nature of brand advertising means that the goalposts are perpetually moving: the objective of the advertiser may not be to drive any behavioral change that is actually measurable in any sensible time frame. It becomes hard to refute the effectiveness of advertising when the bar is set so low. But one thing is certain even in the brand advertising context: if the ad is never delivered in the first place, there is no way that it can be effective. Industry trends suggest that this is precisely what is happening in the programmatic ecosystem.”
Page 80
“But it turns out that mobile is where ad blocking has grown the most in the past few years. Ad blocker use on mobile devices grew by 40 percent to 380 million devices between 2015 and 2016. Fifty-nine percent of the smartphones in India implement ad blocking.15”
Page 82
“Undermined by visibility problems, indifference, and ad blocking, online advertising overall is increasingly subprime. It fails to truly capture attention or influence consumer behavior. And it gets worse. As the quality of real attention on offer declines, fraudsters continuously work to inflate the value of the attention inventory being sold.”
Page 83
“Eighty-seven percent of all mobile devices on offer in the programmatic advertising markets in the United States in fall 2016 were fraudulent, meaning that they were either not real phones at all, or they were phones running automated scripts, unseen by any actual members of the public.”
Page 85
“Domain spoofing is another popular scam, in which inventory on the programmatic marketplace is made to look like space on a high-value website when it, in fact, is not. Unwitting ad buyers pay top dollar for these opportunities, not realizing that their ads appear somewhere else entirely.”
Page 85
“The perverse effect of ad fraud in the short and medium term is that it actually inflates the purported value of the global marketplace for digital advertising. Fake traffic driven by click farms and botnets makes ads look better and more effective than they actually are.”
Page 87
“The movement of consumers to digital platforms makes it riskier and less attractive for ad buyers to buy into anything but digital advertising. The shift of advertising dollars onto online platforms accelerates the deterioration and disappearance of competing outlets for distributing ads. The disappearance of those competing outlets, in turn, accelerates the flow of money onto online platforms. Increasingly, all roads lead to the programmatic advertising economy.”
Page 99
“The increase in mortgage failures cast doubt on the purported value of these assets, eventually triggering a widespread panic.”
Page 103

Panic is misused here. The jig was up. People started rationally evaluating fairy tales and all got out. That’s not irrational. What happened before was irrational.

“The cumulative effect of these undisclosed margins on price is massive. One study by The Guardian suggests that some 70 percent of the money spent by buyers is consumed by the ad tech platform, with the publisher retaining the remainder.”
Page 109

“In Seeing Like a State, James C. Scott explores a helpful notion of what he terms “legibility.” In order to administrate at scale, governments and large bureaucracies need to be able to see the world effectively. The result is that the world is actively shaped in order to enable administration.

“To set up a system of taxation, for instance, it is necessary to create a system of fixed identities so that the government can track over time which people have paid their taxes. Establishing a legible system of fixed identities may necessitate cultural changes, like introducing the concept of a last name to cultures that previously did not have one.”

Page 115
“The next Facebook or Google, to the extent that it is also driven by advertising, will need to structure attention in a way that makes its attention inventory salable in the broader marketplace. This means that securitization may be a one-way street: decisions made in the formative stage of the web limit what is possible in the future.”
Page 117
“Society has only constructed online communities within the context of a web structured by online advertising, and so no norms and practices currently exist for using a space like SSM 3000.”
Page 118

Untrue. NNTP and other communities do it without ads.

“[…] the purpose of mandated disclosure under such a regulation would be to ensure that buyers of online advertising have access to high-quality information about what it is they are buying in the first place. The decision on whether it is worth the price will be up to them.”
Page 136
“Experts also felt that they had conclusively solved the problems of the past. Economists of the era expressed confidence that they had finally discovered the keys to ensuring stable economic growth and had effectively eliminated the risk of a future great recession. In 2003, the economist Robert Lucas told the American Economic Association that the “central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades” by economists”
Page 139

Same thing now with MMT. Money is free. Ok. But you’re shoveling it into a grossly inequitable system, exacerbating inequality instead of actually doing something useful. Massively inefficient.