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In the early 2000s, I remember browsing the internet as something very top-notch and advanced. The internet was transitioning from Web 1.0 to Web 2.0, and this period was crucial in defining the business model behind the revenue. Should users pay to access content, or should content be free and supported by advertising?
My curiosity about the history of online advertising arose from a desire to understand the current revenue model of the internet and where it might be headed. This article explores the evolution of online advertising, its impact on the internet, and its future trajectory.
The Birth of Online Advertising
The early days of the World Wide Web introduced cookie technology, crucial for online advertising. Cookies were created in the mid 1990s to keep the shopping cart list of early e-commerce applications, ensuring that selections were retained until purchase. Cookie technology was first integrated into the Netscape browser and later into other browsers. As websites began incorporating third-party elements, third-party cookies came into existence. Initially, there were no restrictions imposed on these third-party cookies, which allowed early advertisers to gather and monitor users' online activities. Before the introduction of cookies, the internet was a private space, but their implementation made it subject to monitoring (1).
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| In 1994, cookie technology became part of the beta version of the Netscape browser. It was designed to keep track of transactions, like maintaining items in a shopping cart. Initially, cookies were accepted without notifying users. They are crucial for smooth online transactions. Despite of this, the use of third-party cookies allows data collection and aggregation, creating detailed profiles of internet users based on personal information and browsing habits. Some websites require both first-party and third-party cookies to be enabled for access. Without third-party cookies, these sites would need to add more features themselves and could miss out on creative services such as social networks and performance metrics offered by external parties. Therefore, this reliance on cookies needs further examination and regulation (1a). |
Early experts on internet privacy issues began expressing concerns about third-party cookies. These cookies had the potential to track users' activities, thus by accident contributing to the emergence of the internet advertising industry, which significantly influenced the direction of the internet. Internet advertising was perceived as more cost-effective than traditional methods because it eliminated printing costs and was viewed as an information superhighway with limitless potential (2).
The Dot-Com Bust and Recovery
A 2001 article in the New York Times mentioned that the dot-com era was thought to be over, viewing early internet entrepreneurs as failed rock stars who would be replaced by more conservative and smart entrepreneurs (3). Online advertising declined because many players did not survive this wave of changes. Nevertheless, it started to recover around 2004, with the emergence of Web 2.0, which facilitated the buying and selling of advertising on websites. As a result, advertisers in the USA spent $10 billion on websites in that year, accounting for about 14% of all advertising spend (4).
In the mid 2000s, there was much discussion about how to generate revenue from internet services in the Web 2.0 era. Emerging services like the early version of Facebook prompted debates on whether users should pay for online services. Some reasons for users wanting to pay included the desire for services to evolve and survive, the belief that it was the correct thing to do, and concerns that advertising revenue was not stable. Conversely, reasons for not paying included the tradition of free services, funding from the advertising industry, and reluctance to use credit cards online (5). Business recommendations at the time suggested that users willing to pay for content would not represent a sustainable revenue source unless the content was rich and special. Casual users or those seeking content infrequently could be charged with more pricing flexibility, such as a pay-per-view service (6).
The Rise of Programmatic Advertising
Research during the initial stage of Web 2.0 shaped the evolution of online advertising in the following years. Traditional offline media like radio, TV, printed press, and billboards initially saw online advertising as a complement to their strategies. Nonetheless, the impact was inevitable, as printed advertising markets blamed online advertising for decreased ad revenues. Online advertising, a transformative force in the industry, began with search and display advertising. This distinction highlights the different nature of advertising sold by search engines versus publishers.
Instead of buying ad space from each publisher one by one, innovations like programmatic advertising in the late 2000s made it easier for advertisers to connect with publishers using trading platforms. Programmatic advertising, a type of online advertising, simplified the process by automatically selecting the audience and placing the best-fitting ads from online ad spaces chosen through bidding. Despite this innovation, many people in the industry were slow to adopt programmatic advertising. This was because it needed new skills to understand the results and see if a campaign was successful. Many advertisers also said it felt like a "black box" because they didn't fully understand how it worked.
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| Traditional advertising involves considerable manual effort to secure ad space and negotiate placements, which can be daunting given the growing demand in digital marketing. Programmatic advertising automates this process, enabling advertisers to manage ad placements in real-time through instantaneous buying of ad inventory. This approach offers enhanced insights and gathers data from multiple publishers, providing advertisers with clear visibility into campaign performance. Automation includes tools like Data Management Platforms (DMPs), which create customer profiles based on tastes, habits, and preferences stored as data cookies. Supply Side Platforms (SSPs) manage available ad space on advertising platforms, adjusting based on user channels. Demand Side Platforms (DSPs) connect publishers and advertisers, evaluating precise ad pricing through auction bidding. While programmatic advertising makes operations smoother, marketers may struggle with understanding the technical details needed to manage campaigns effectively and evaluate their performance (6a). |
While these challenges persist, the landscape of online advertising is also being influenced by regulations such as the European GDPR, which may decisively change the industry's outlook. The full implications of the GDPR are yet to be fully understood by the market. Concerns have arisen regarding the legality of tools used for data sharing, such as analytics platforms. Still, advancements towards compliance with GDPR regulations are being made across the industry, which includes updates to analytics technologies to ensure alignment with these new standards (7).
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| In 2023, the European Union issued substantial fines under GDPR rules to major tech firms for privacy breaches. Meta was fined €1.2 billion for moving large amounts of EU user data to the US. Additionally, Meta was fined €390 million for pushing users to agree to their data being used for personalised ads. TikTok was fined €350 million for mishandling children's accounts, which defaulted to public settings and allowed comments without proper protections. Moreover, TikTok was fined €14.5 million for processing data of children under 13 without parental consent and failing to disclose how children's data would be used. These fines show the EU's commitment to enforcing strict data protection rules across the tech industry (7a). |
Ad-Free Services and User Preferences
As of 2024, there is skepticism about whether customers are willing to pay for ad-free services. Some changes in social media, such as recent moves towards ad-free feeds, represent a new trend that needs further study. Streaming services offering unique content have begun lowering subscription fees. Consumers willing to receive ads instead of paying a subscription often prefer ads tailored to their interests. This raises important questions about security and privacy, as tracking user preferences extends beyond traditional limits. Additionally, it prompts us to reconsider the effectiveness of defined target audiences for advertising and whether they successfully engage users (8).
The Challenge of Targeting Audiences
We live in a world where advertising is everywhere: social networks, mobile notifications, streaming services, mailboxes, etc. Advertising specialists create target audiences, but in the era of abundant online advertising, ad skipping behaviour may indicate that audience identification is becoming more challenging. An Austrian experiment asked an agency to design broad-, narrow-, and no-targeting strategies in a fictitious Facebook campaign. The results illustrated the importance of targeting feasibility. Targeting is better than no targeting, but excessively narrow targeting can lead to higher costs and lower reach, making it unprofitable. This suggests that fulfilling users' desires for custom and tailored advertising can be profitable but inevitably involves targeting some wrong people. The Austrian experiment also showed an inverse correlation between reach and click-through rate (CTR), indicating that maximising both objectives simultaneously is not possible.
| Notes |
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| The recent introduction of Apple's tracking transparency framework, which requires user consent for third-party cookies, has decreased the quality of data for creating audiences on this platform. While this poses a challenge for targeting audiences, it is positive news for user privacy and security (8a). |
The online advertising industry is complex and difficult to analyse from an academic perspective. That said, the professionalism within the sector provides opportunities to enhance the quality of advertising and its impact on audiences without compromising the industry. Understanding current challenges, such as the annoyance factor, is crucial. Aggressive online marketing techniques involving repetition and intrusiveness can negatively affect the advertised product and brand. Factors to consider, regardless of user age, include the lack of personalisation, ads occupying at least 50% of the screen, fixed-size or non-skippable ads, and pop-up ads. Native advertising, which is sometimes not recognised as ads, creates a less intrusive experience and leads to less annoyance (9).
The Role of Artificial Intelligence
Given the widespread use of artificial intelligence, an interesting question arises: Can AI solve the current online advertising challenges? The emerging AI industry, projected to be a $13 trillion ecosystem by 2030, will inevitably transform all digital and non-digital industries. In online advertising, AI advancements are expected to enhance data analysis, copywriting, video production, and the creation of recyclable advertising concepts. Recyclable advertising can adapt to different contexts, platforms, or devices, changing aspects of publicity to better target audiences. In Internet 3.0, which includes the Internet of Things, devices that understand our needs could suggest highly focused advertising. Yet, this prompts questions about the boundaries of advertising and its potential to integrate into our lives without being intrusive or annoying, all while adhering to ethical and regulatory standards (10).
Conclusions
The early online advertising industry has quickly developed into a smarter industry with specialised and advanced tools from tech giants like Google and Meta, shaping the advertising landscape. Even so, issues in the industry are leading to regulatory consequences and changes in how applications will use online advertising in the future. More research is needed on the impacts of advertising on the public and the outcomes of these issues, particularly concerning ad skipping, the accuracy of advertising proposals, and the perceived value of free applications balanced with viewing advertisements. The effects of regulation and legal cases will soon become visible.
Sources
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