Author Mark Richards
Both Amazon and Facebook have just announced huge jumps in their third-quarter profits. In Facebook’s case, this is down to rapidly increasing advertising revenues. But what does the success of these two companies say about the future of advertising? And does it have sinister implications for our privacy?
In the old days, advertising was very simple. You developed a product and went along to Madison Avenue. You consulted Don Draper – he put his cigarette and his secretary to one side for a few minutes and came up with a catchy slogan. The artwork was done and your ad targeted with laser precision: it went up on a billboard at the side of the interstate and everyone who drove past saw it. Hopefully…
Life has moved on and this week saw Facebook announce soaring profits in the third quarter of the year (July to September) as it brought in more than $10bn in advertising revenue. Profits for the three months rose to £4.7bn (£3.5bn), which is up 80% on a year ago. Much of that revenue comes from small and medium-sized businesses, which make up the bulk of Facebook’s 6m active advertisers. Facebook’s advertisers are not Marlboro or Lucky Strike buying a slogan and a billboard off Mr Draper: they are small businesses, writing their own ads and – in many cases – working from home.
Meanwhile Amazon boss Jeff Bezos once again leapfrogged Bill Gates to become the richest man in the world, as Amazon shares surged as its sales for the third quarter of the year rose 34% compared to the same period last year. Sales were $43.7bn (£33.5bn) compared to $32.7bn in 2016. And if you are wondering how much $43.7bn is – it is equivalent to the economy of Slovenia.
Advertising on Facebook
Let us concentrate on Facebook – a company that generates more advertising revenue than most major TV networks.
Why do small and medium businesses advertise in such huge numbers with the company? And why are the projections that ever more businesses will join them, even as Facebook cheerfully admits it will be putting ad prices up?
In the early days, people had a business page on Facebook. ‘No, no, we don’t need to advertise. We have a Facebook page. Bert’s penny-farthings.’ Sadly, Facebook business pages have pretty much gone the way of Bert’s penny-farthings. ‘Organic reach’ as it is known is dying out, with estimates suggesting that less than 1% of a business’s ‘fans’ actually see the updates the business posts.
So businesses need to advertise – and the first thing that attracts them to Facebook is the sheer scale of the numbers. Facebook has 2.07bn active users – strip out 10% of that figure for duplicate accounts and you still have around a quarter of the world’s population using Facebook.
More than 1.5bn people log into Facebook every month, with more than a billion now logging in every day. With those people spending ever-increasing amounts of time on social media – studies suggest that the average American now spends up to 2 hours a day on social networks – there is plenty of time for advertising to connect.
Secondly, advertising on Facebook is cheap – and scalable. You do not have to commit to a billboard or a TV slot. Businesses can set their own budget and ‘dip a toe in the water’ with a spend of $50 getting an advertising message in front of 5,000 to 10,000 people. After that, it is scalable: the ad doesn’t work? Scrap it. It does work? Spend more money and increase its reach.
But the real reason advertising on a platform like Facebook is so attractive is the specific targeting. Businesses can target users with Facebook ads by location, demographics, age, gender, interests, behaviour and connections. You can also build a ‘lookalike’ audience, replicating a target audience you already have.
The power of Amazon
It is much the same story with Amazon. Once a bookstore, Amazon is now arguably the world’s most effective search engine. It is also trusted. A study by marketing technology company Kenshoo found that 72% of people visit Amazon before making a purchase if they want to research specific products online. And why wouldn’t they? The search engine is fast, it’s accurate – and the product listings page has everything a shopper could want to know: price, descriptions, pictures and reviews. Even if you do not buy the product from Amazon, you have researched it – and the Mighty ’Zon has quietly stored the information away, ready to make recommendations next time you visit the site.
Amazon knows everything you have bought since you opened your account. It also knows everything you have thought about buying. This is not Don Draper taking a stab at who he thinks the audience is, based on research done with a clipboard in the middle of a shopping centre. This is advertising targeted specifically at you, your demographic, your buying history and even your thoughts. If Amazon and Facebook ever merge then believing in privacy will be like believing that the Earth is flat.
Have you looked at anything online recently? Of course, you have. And what did you notice seconds later? That ads for whatever it was you had looked at were stalking you round the internet. The first time it happened to me (it was for work shirts, honestly) I found it quite unnerving: now it is an accepted part of being online – but it still leaves me feeling that Big Brother is watching me. That feeling is only going to increase…
What does the future look like?
The buzzwords are ‘machine learning’ and ‘deep learning’ or – as a recent article in Forbes put it – ‘algorithms will do the heavy lifting.’ However good you think your insight is, it is nowhere near as good as the Amazon or Facebook algorithm – and it is only going to go on improving. My desire for work shirts has been noted – and will never be forgotten.
Over the next ten years, advertising will move from communicating to predicting. Content and advertising will be so intertwined that we will not be able to tell which is which. As brands learn more and more about you, your emotional commitment to them will strengthen (a recent study by neuroscientist Paul Zak claimed that three out of eight people already love their favourite brand more than they love their spouse).
Advertisers will know exactly how much we like their brands because our pulses (via our smartwatches) will tell them. And with that chilling thought, I will leave you to enjoy the weekend. Just remember to take your watch off before you log on to Facebook…