441. Does Advertising Actually Work? (Part 2: Digital)


In our previous episode we learned that more than two hundred fifty billion dollars a year spent in the us on advertising globally. The figures nearly six hundred billion dollars. That's more than half a trillion dollars on advertising. Because of the digital revolution. Television advertising has lost some of its privacy but tv still accounts for roughly a third of ads spending in the us. The super bowl alone brings in more than three hundred million dollars and how effective is all that. Tv advertising mean how good is it actually selling the products it is telling you to buy the conventional wisdom says it's gotta be affected. Why else would companies spend so much money on it. But the data well the data tell a different story. Here's what we heard last week from anna tuchman. She is a marketing professor at northwestern university and she recently co authored a massive study on the efficacy of tv advertising. This means that doubling the amount of advertising would lead to about a one percent increase in sales so. Your research argues that. Tv advertising is about fifteen to twenty times less effective than the conventional wisdom says. Yes that's right. There are not surprisingly objections to this research especially from the marketing industry. For instance they will point to the brand building aspect of advertising. It's not just about short-term sales they'll say or the game theory aspect that is if you don't advertise your product and your rivals do. Where does that leave you. Still any company that spends even thousands of dollars on tv ads. Much less millions or billions would have to be sobered by anna. Tuchman findings was tv advertising. Always so inefficient or did it lose. Its lustre recently with the arrival of digital giants like google and facebook. We don't know the answer. That question but we do know is that people are spending more time online than ever before and the digital advertising holds the promise of matching advertisers precisely to the people who want their products at the end of the day. Everything around marketing strategy is around segmentation. That's the former chief. Marketing officer of unilever keith weed. More relevant to our to the audience the more interested. They'll be in your message on the more interested in your message. The more likely to buy a product and thanks to the cookies on your phone or computer such a cute name for such a powerful tracking device you are constantly telling the companies who installed those cookies. Exactly what you are interested in you. Also tell them where you live what you wear and listen to eat. What kind of people you hang out with. Which god if any hugh believe in which political party you hate less than the other yes. The thinking advertising has changed radically with the arrival of digital and data. The internet has made it almost too easy to sell to us and sell to us. They do last year. Advertisers spent one hundred and twenty three billion dollars on internet ads in the us. It's just less than half the total ad spending across all media. That's how facebook and bet the parent company. Google have become two of the most valuable companies in the world. More than eighty percent of google's revenue comes from advertising or the ninety eight percent of facebook's revenue comes from advertising with so many advertisers spending so many billions they must be getting a healthy return on their investment right so digital advertising must be effective right Today freakonomics radio a hard look at the hard to find evidence around digital advertising. Oh adds definitely work. But we can't tell you how or why or give you any evidence for it from stitcher and productions. This is freakonomics radio. The podcast that explores the hidden side of everything. Here's your host stephen. Duffner steve to dallas is a professor at haas school of business as of california berkeley. Yes and i teach and do research in a lot of his research is on the economics of the internet. Back in two thousand eleven. He started doing some work with ebay. I was asked to hire and lead a team. Economists and work with a variety of the businesses within ebay. The hiring of prominent academic economists is a long standing practice at tech firms. How varian also from berkeley worked for years as chief economist at google john list from the university of chicago has done similar work. I at uber and now at lift. So here was steve to dallas at ebay and at one point one of the directors. They're realized that as economists know something about metrics which is the statistics of measuring economic activity. And they wanted to see if we could vet a consultant that they recently hired a consulting firm to do quantitative marketing analytics. And help ebay figure out how to spend their scarce marketing dollars. Let me just say that. Scarce here is relative term that the time ebay was spending about a billion dollars a year and a variety of marketing activities. Okay so it makes sense that ebay would wanna know how effectively that money was being spent more than half of it was going toward internet ads and this outside consulting firm was going to analyze the efficacy of those ads and the goal was to speak with this consulting company and see if they're going to use solid and vetted ways of measuring these returns to advertising to be fair measuring the efficacy of advertising. Can be really hard last week. My freakonomics friend and co author. Steve told us about trying to help a big box. Retailer measure the efficacy of their tv ads. One issue that they really only advertise three times a year for father's day black friday and christmas. And so you of course have a correlation between your advertising tv. And when you're selling things but it's not necessarily or even primarily because of the ad it's because the company knows when the big selling days are and they target the ads around it so he's not the causal part the sales that wouldn't have happened absent advertising. It's just a really hard problem. But within that firm levitt found the executives were convinced it was the ads the caused the sales. Steve terrell again. This is the kind of wrong analysis that many people end up falling into when they are not that can chien-shan about the difference between causation and correlation. To dell's knew this would be hard problem for ebay as well. And that's what these outside consultants were supposed to figure out. So i got an a call with them. Very quickly was able to confirm that what they're doing was quite wrong. Just you know consulting firms. Also like to higher academic economists to do this kind of work. So you can maybe see where this is going to. Dallas is listening intently on the call which was on a landline which will make sense. In a second and went to della suggested that the consultants proposed methodology would not be able to untangle correlation and causation. They responded using a whole bunch of jargon especially the term proprietary transformation functions proprietary meaning. That's our secret. Transformation functions meaning who knows to della said he still didn't understand how these consultants were going to measure the thing that needed to be measured the marginal effect of the ads that ebay was spending millions on then The head of the company replied by saying that to do the marginal measurement. They're going to use legrand's multipliers. Well i paused for a second. Because i know at lagrange multipliers are. I used to teach this stuff. And i couldn't understand what they're trying to do here. And that's when the dime dropped they are trying to jargon me so i replied by saying well we all know that the lagrange multipliers measure the shadow values of constraints in an optimization problem. So would really help me if you explain to me. What is your objective function. And what are you constraints after a short pause and this is where i have to take my hat off to the founder of the consulting company. He merely responded with the only and best answer he could give. Which was steve. Are you driving now. Because i can't hear you you're breaking up to dallas. Took his concerns back to his bosses at ebay. He proposed different way to understand the impact of the online ads. Ebay was buying. He offered to run some randomized experiments to researcher. That's the gold standard and there was not any buying but coincidentally but coincidentally one of the advertising and marketing teams wanted to renegotiate a deal with yahu and microsoft network namely the bing search engine that is ebay wanted to renegotiate the terms under which they bought search ads on being and before doing that. They ceased all payments for brand keyword advertising. That's because ebay was trying to create some leverage heading into their renegotiation. Okay but now. We need a primer on keyword advertising. And how you actually buy online ads right so just like you could imagine the auction for a piece of art at sotheby's where the auctioneer puts up this picasso and says how much people are willing to pay and then give it to the highest bidder. Something similar is happening. Every time someone searches for anything on google or yahoo or being or any other search engine and you have companies that are bidding on different kinds of keywords companies. That want to advertise online. Come up with a list of words that they think will give them the best chance of connecting with people who are searching for what the companies are selling these could be branded keywords like ebay or verizon or non branded keywords like stiletto heels cable. Tv if i'm in the insurance industry and someone is searching car insurance on google i wanna be there but i don't want to be there when someone is searching for philophical unless maybe you've got a specialty line of philosophy insurance and wants someone types car insurance. The second they click enter. All these computers are basically running these auctions instantaneously. This is done with the aid of sophisticated. Algorithms they allocated to the winner. And that's how the ad pops up went to dallas was working for ebay. The company was in the practice of buying brand keyword. Which meant that if you did an online search for ebay the top result before all the organic search results was a paid ad four ebay. The federal trade commission requires such adds to be clearly labeled as ads. Although some of the labeling is pretty subtle go do a google search for something like best running shoes. And you'll see what i mean anyway. These paid ebay adds that to dallas is talking about now. This is what the consulting company said had the highest bang for the buck. Which of course made no sense from a common sense perspective. Because i'm already searching for ebay. I know exactly where i wanna go. So the fact that the ad intercepts me and i click on it is just coincidental and it. Cannibalize is what would have been a free. Click on the organic search so when ebay in planning to renegotiate their deal with being turned off their brand keyword advertising mad gave us with call the natural experiment. This is what economists dream about a change in a variable that affords a real opportunity to separate correlation from causation. We could measure visits and we measure purchases and we could see whether there was any drop in clicks and purchases and not surprisingly all the research that was taken away from. The ads just ended up coming for free through the organic search because right below the ad was the free linked to ebay. Once we had those results. I went to the chief financial officer of ebay north america and showed him the analysis to which he responded. Okay you guys. Were right what we do next. And that gave us the open door to design more sophisticated experiments to dallas wound up running to experiments along with fellow. Economists thomas blake and chris nocco the first one essentially mirrored the natural experiment. They turned off all brand keyword search ads. Which means that if someone searches for ebay ebay will start an ad the conjecture that we have which i can't see any other conjecture is that if there is no competition for keyword ebay then once you remove that add the organic search is going to be the first thing that people see and that means that they're going to go to ebay directly without having ebay pay any fees to the search engine for the advertising and that is precisely what they found surprise surprise other researchers have found even more pronounced results imagine that an ebay competitor like amazon enters an ad auction for the keyword ebay and wins at auction. This means that when you search for ebay. The top blink. You'll get is an amazon link. In such cases researchers found most people just ignore the amazon link and move on directly to ebay which means brand keyword advertising. Whether it's your brand or someone else's is a waste of money exactly imagine you're a restaurant owner. And you want a handout coupons. In order to get people to come to your restaurant and if you want to measure the returns on that coupon you really need to know how many people would come without the coupon. Because here's the thing for every person who would have come anyway. You're losing money. The analogy in my view of brand keyword advertising is handing out the coupons inside the restaurant the second experiment to dallas and his colleagues ran used non branded keywords. Just the names of things that people might be looking to buy online like guitar. Were boots or picture frame. Yes so for non branded search. We actually had no idea what the results are going to be. Because here if i am searching for example studio microphone. I'm sure that on ebay. I might fine of variety of used ones. But if i'm not thinking about ebay and i just search for studio microphone if ebay doesn't pay an ad they might not even show up on the first page. And by the way the automated machines at ebay doing the online bidding. They had a basic library of close to a hundred million different combinations of keywords because ebay has practically everything you could imagine for sale on the site so we really had no idea what the returns for the non branded searches would be. Experimentally designed used a border strategy. That's the same method we heard about in our earlier episode on tv advertising. This takes advantage of what are called. Dma's or designated market areas. What most of us think of as media markets it turns out that most people living on one side of a market border are socio economically and demographically similar to the people living on the other side when two similar populations are served different ads. Which happens all the time you can isolate the impact of the advertising on their actual purchases. There are two hundred ten. Dma's in the us and we took a third of these delays and we turned off all paid search advertising. This was an extremely blunt experiment. Where we're saying what would happen if we didn't advertise at all and to our surprise the impact on average was pretty much zero. Did you catch that. They turned off all their keyword search ads. Then measured sales and the impact on average was pretty much zero. What was ebays existing belief about paid search advertising. The company believed that roughly five percent of sales were driven by paid search advertising. Meaning that they believe that if he would pull the plug on advertising sales would drop by five percent. What we found was that sales dropped by about half a percent so that's an order of magnitude less and it was not statistically different from zero but maybe it's still worth it to gain even half a percent now. We have to know what the advertising costs and measure the return on investment when you did the return on investment for every dollar that ebay spins ebay. Believe that for every dollar. They're spending they're getting roughly a dollar and a half back meaning fifty cents of net profits and what we showed that on average. They're losing more than sixty cents on every dollar. So how did these results go over. Well the president of ebay. Who later became the ceo. He cut the paid search marketing budget. Immediately one hundred million dollars a year. So what happened next. You might think what with capitalism being the hyper competitive market optimizing perfect information ecosystem. It's supposed to be you might think that other companies once they learned about this ebay research would cut their online ad spending or at least commission their own research to test the theories. So did they excellent question. There was a lot of chatter online after our experiments became public. Suggesting that folks at ebay don't know what they're doing and paid search. Advertising works wonderfully if you know how to do it. But of course that was backed with no data and no analysis in other words the digital ad community did not rush to replicate the results now given the opportunity to save millions of dollars that the ebay research showed was being wasted. Why wouldn't other companies at least poke their own data little harder. Well i think there are many reasons. Let's start with the way in which this industry is structured. You could think of four different actors. Here there's the customer which is the company or the person who wants to advertise in order to get business and then you have three players sitting on the other side of this market. One is the publishers that would be google. That would be the new york times or any other place where the ad appears in front of people the other are the people who create ads and then finally Smaller part of the industry are these analytics. Companies that like that company ebay hired are trying to help companies spend this money and if you think of all these three players on the other side of the fence. No-one there has an incentive to basically open this pandora's box even within the company. That's buying the ads. The incentives can be complicated. Steve levitt again. If you think about it no chief marketing officer is ever going to say hey. I don't know maybe ads don't work. It's not doing and see what happens. Don't get me wrong. I'm not implying that advertising doesn't work. I'm implying that we don't have a very good idea about how well it works. Steve to dallas agrees. The potential for digital advertising would seem especially large given its ability to micro target consumers and targeting really is key because one of the lessons we learned from the experiments at ebay. Was that people who never shopped on ebay. They were very much influenced by having ebay ads for non brand keywords. You know guitar chair studio microphone and if ebay would be able to better target ads to customers that are not frequent customers. That's where you would get the real bang for the buck. So as companies become more sophisticated. They could try to engage in these kind of experiments to focus attention on different customer segments in order to see where they get the highest returns on advertising by in large. I don't see that happening. A big part of it is the naievety on the side of these customers customers. Meaning the companies who are buying these keyword ads. The one actor sitting alone on their side of the fence across from the agencies the publishers the ad tech firms and one of the things that i try hard to do is to give people enough information so that they wouldn't be able to do the job themselves but if someone is trying to sell them snake oil they'll smell something as off working here coming up. After the break is the digital advertising economy a bubble. I do think this is very parallel to the kinds of psychology. Had driven bubbles in the past. Also if you like freakonomics radio and you've gotten this far so presumably don't hate it. You may also like the two other shows that recently launched within the freakonomics radio network. One is called no stupid questions. The other people i mostly admire. I am proud to say that. No stupid questions. Which launched in may is already coming up on five million downloads and people. I mostly admire which launched only at the end of summer is coming up on. Its first million so go. Listen and subscribe new stupid questions and people i mostly admire. You can find them wherever you listen to podcasts. And now here's an ad that somebody probably cooked up just for you. Freakonomics radio is sponsored by rocket mortgage getting a mortgage doesn't have to be a hassle rocket mortgage gives you the tools information and expert help. You need understand all of your home. 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Ghitis the podcast celebrating fraud and all those who practice it each week. I keep listeners up to date on current records. Deep dives into the latest scams and breakdown historic hoodwinked. Some of your favorite comedian tiny. It's like true crime but without all the did true fun as crimes with only little episodes drop every tuesday. Listen and stitcher apple podcasts. Or wherever you listen to podcasts. I remember congregation stay scheme. We reached out to facebook and google with some questions about their ad business and get a response to the research. We've been discussing today. Which argues that paid. Search advertising is substantially less effective than the conventional wisdom holtz. We got no reply from facebook. The google representatives wrote back to say quote advertisers invest money in search ads. Because they work they also sent some internal google research back up their claim separately. We received an unsolicited email from. How variant the chief economist at google. He attached a long list of research. Papers that the efficacy of search advertising as well as advertising on youtube which is owned by google. Much of the research was done by. Google analysts it offers a robust defense of the status quo the online ad ecosystem. Google has built off of there. Search capability is quite literally a license to print money alphabet. Google's parent company has a market capitalization of nearly one point two trillion dollars last year. Eighty three percent of their revenue came from advertising so it would probably behoove all of us to know a little bit more about how this ecosystem functions whether it's as effective as google says it is or as ineffective has researchers like steve dallas told us earlier about his research at ebay. Ebay believed that for every dollar. They're spending they're getting fifty cents of net profits and what we showed that on average. They're losing more than sixty cents on every dollar so okay. let's try to understand this ecosystem better. I we will need a guide. Sure my name is tim. Kwong h. w. a. n. g. My day job is. I'm a research fellow at the center for security and emerging technology at georgetown and before that i was previously global head of public policy for ai and machine learning at google one recently published a book subprime attention crisis advertising in the time bomb at the heart of the internet. It's about how big tech monetizes our attention. When i started to do research by very naturally started to talk to a couple of friends who work at these big tech companies and there was a little bit like talking to someone who works in national security or the intelligence community or something like that because they would be like oh adds definitely work. But we can't tell you how are y or give you any evidence for it. Google would plainly dispute that. There is no evidence for whether online ads work. Tim wong recognizes. He is tilting at windmills here. Trillion dollar windmills. But in fact he. i grew skeptical about online advertising. While still working at google he began reading trade journals and going to conferences and this fascinating experience. Where one of these keynotes at this conference was given by nicole. Newman who basically is a big ad. Critic nico newman. Is a marketing professor at the melbourne business school in australia and he presented to really fascinating studies that his lab had done the first one was looking into the quality of data used in the ad tech industry basically demonstrating in many cases. It was incredibly inaccurate and the second one was. He took dead. Aim at hype cycle around. Ai that exists in ad tech right now where people are saying if you have this latest machine learning you have this ai. You'll give the targeting in a way that you never ever were able to do before and nico's lap did. Some experiments have demonstrated that in many cases machine learning was finding people who would have bought the product anyway anyways bringing this message to an ad tech conference is a bit like bringing a safety pin to a balloon conference that looked around being like where so angry and it was just total dead air. No one responded no one engaged with it and it got me really interested in thinking about. Is there a bubble here. A bubble like the dot com bubble or the subprime bubble or the tulip bubble. Because this is exactly the kinds of behavior that occur in other financial bubbles where the red lights are flashing but everybody industry just refuses to take a look at the real data long began thinking about how bubbles happen so the origins of every bubble come in this gap that occurs in a marketplace. On one hand you have people who believe that. An asset whether it's collateralized debt obligations or advertising inventory is extremely valuable and on the other hand what you have is declining asset value so in the prime mortgage crisis believed that mortgages rose gonna just pay out regularly forever right. When next turned the package of mortgages were actually a terrible asset. There were toxic and about to go belly up. so how can wong justify a parallel with digital advertising. I think the first piece is really the big question of do people ever see ads at all. So google actually did a fascinating study not too long ago which concluded that close to sixty percent of ads on the internet are never ever even seen the ad is delivered but it just ends up in some dumb part of the page. Right is below the fold their sideline but what about the precise targeting. The digital ads are supposed to offer a two thousand nine thousand nine hundred study this one done by three academic researchers addressed this question by measuring the impact of users cookies. Those remember are the tracking codes. Most of us allowed to roam our computers and phones in exchange for all the free information we get from companies like google and facebook. This study found that when a user's cookies were unavailable ed revenues only dropped by about four percent. Why would cookies be so ineffective. Tim wong argues that people pay a lot less attention to online ads and they used to. People often forget that when banner ads first loss on the internet there click through rate was like fifty percent completely mind-bending and it's just continue to fall and fall and fall and now it's like point zero one. Two point zero three percent. Some estimates of click through rates are higher than what sites here that said precise measurement is hard because there are so many bots clicking on adds a whole other problem with the digital ad universe but no matter how you measure it click through rates have fallen a lot as the novelty wears off habituation sets in and an ad that might have once grabbed your attention becomes invisible or worse annoying. People increasingly don't want ads. So ad blocking for example is really really increasing over time. And i think these factors not being able to see ads the questions about the effectiveness of ads and the rise of things ad blocking bring into question whether his thing that we think is so valuable is actually worth as much as we think it is but if there is such a big gap between the perceived and real value of digital advertising. Why are google and facebook worth so much money. Look at it this way. There are a couple trillion reasons why tim might be wrong. But he doesn't think so. His theory is that digital advertising is grotesquely overvalued because it is still so hard to measure and one reason it's hard to measure is that the marketplace is exceedingly opaque. So there's a fascinating incident. That i always think about which is one of the last times. That mark zuckerberg was called up to congress and one of the questions that he got from. One of the senators was well. How do you guys make money. Sustain a business model in which users don't pay for your service and mark zuckerberg senator. We run ads and at the time. A lot of the chatter on twitter was like ha ha look at the super old. He doesn't know anything about the internet. But it's true that even if you talk to people in the tech industry and you're like okay level with me joe engineer. How do ads work on the internet. It's kind of a rumor like we know. This is how the business model works but no one can really explain how it works in detail. So when i say advertising a lot of people normally think of like madman right but it really looks like what the nasdaq looks like which is largely automated system that moves millions and millions and billions of pieces of ad inventory on a daily basis as steve to dallas explained earlier. Most ad inventory is sold by auctions which are run by algorithms operating at phenomenal speed. This is one contributor to the opacity of the industry for instance. It can be hard to figure out why certain ads and up on certain pages if you are a family brand like disney. You don't want your ad popping up on youtube video showing a terrorist beheading. This has been a source of chronic embarrassment to the ad industry. The prevention of this kind of ad mismatch is known as brand safety and despite the greatest efforts at trying to eliminate the risk of brand safety from the ad market. People buying largest haven't been able to again. The industry itself would disagree. We ask google how they ensure an ad doesn't show up on a page promoting misinformation or conspiracy theory. Here's their reply. We have strict policies that govern what kind of content we place ads on. And if we find the page or website that violates our policies we take immediate action in two thousand nineteen. We'd the former marketing boss at unilever helped create a consortium called the global alliance for responsible media which pushes for better add controls to protect brand safety end today. Everyone wants a well-functioning internet and everyone wants to have a positive impact on the world and not to have some of the issues. We're wrestling with right now. I think that off has not been easy. So far. This september after months of advertiser boycotts facebook twitter and youtube agreed to adopt a common set of definitions for hate speech and develop tools to let advertisers have more control over where their ads show up. But tim wong thinks the longstanding opacity of the online ad marketplaces. Just one reason. We might be in a digital advertising bubble. I think a second thing is a little bit like in the subprime mortgage crisis you have people who have very perverse incentives. I think to push the effectiveness of online ads. that's the ad agencies the ad platforms themselves. The people who run technology. All these people i think have a very strong incentive to say no. This stuff is way better than earlier generations of advertising. And this is why you should use it. If you've been listening closely you'll notice. This is the exact same problem. Steve levitt talked about regarding the tv ad ecosystem. Human beings generally make decisions based on self interest. No chief marketing officer is ever gonna say hey. I don't know maybe ads don't work. Let's not do a and see what happens. Or as the author upton sinclair once wrote it is difficult to get a man to understand something when his salary depends on his not understanding it so there is a common practice which is not very well disclosed in the ad industry whereby an ad tech company will basically offer ad inventory at a cheap price to the advertising agency the agency remember is paid by you the client who hired them to help you so what you're selling and the agency will turn around them say you should really use this ad tech product and sell at higher price and one of the worries about this is it changes the incentives right which is typically the ad agency should be working on behalf of the client but in these cases have very perverse incentives to push distribution of a message that may not otherwise be rational or even useful to them all of these issues and all the new empirical evidence we've been discussing about the ineffectiveness of advertising has persuaded tim wong that yes. The online ad. Marketplace is a bubble and it might soon pop in fact the deflation may have already begun a few years back proctor and gamble which is one of the largest advertisers in the world decided that they would run a little experiment they were gonna take about two hundred million dollars of digital ad spending and just cut it out of their budget to see what happens. Proctor and gamble said they were doing this. Because of concerns over brand safety and the proliferation of botts which can pollute the data on ad impressions and the end result was fascinating basically said that there was no noticeable impact on their bottom line again the ad industry. We'll have a lot of explanations for why this might be or for why there's a lot of value in advertising beyond short-term sales figures but proctor and gamble is a big player even if they are wrong even to a small degree. They're the ones whose money drives the advertising ecosystem. What would happen if this turned into a mass movement among advertisers. One shouldn't underestimate the size and reach of the advertising ecosystem. The sports you watch on. Tv supported by ads. The journalism you consume supported by at least much of it. Google maps and google drive and while google supported by ads as well as facebook and instagram and twitter. Nearly everything else you consume online and don't pay for including this cast just about every other podcast. You listen to. Advertising is also important for tim. Wong whose day job is researching artificial intelligence and machine learning some of the most cutting edge research in the world is being funded by ads right if you think machine learning and a is going to have a huge impact a huge impact in the world that is from economist. Travel to medical research and diagnosis. You may want to think about what it means that most of it is subsidized through this infrastructure. So there's lots and lots of links through the economy. That are not always obvious. But i think are thinking through because it points how widespread a downturn could be so if there is an advertising bubble canopy deflated in slow controlled. Way to avoid massive economic unraveling. Tim wong thinks so but change won't come from the industry players. They have too much incentive to keep selling it's got to be driven by the buyers one of the groups that has the most to lose our people who theoretically might be wasting a lot of money on advertising but wong does not think the buy side pressure will be enough because i think one of the biggest problems in the spaces that there is no objective. Third party evaluator of some of these claims claims. That is about ad efficacy. And so what i advise is kinda punk rock n d e r. The nba er is the national bureau of economic research. What does wong's punk rock version. Look like it's basically a research group that is willing to be a little bit of a troll to the advertising industry and so again. how do we throw off the veil reduce the passage in the marketplace. You really need a dedicated group of people who are doing good research on this run where you want is a handbrake where you can slowly bring down the momentum in the market so that it can deflate without exploding there are of course. Many people and institutions already doing research on advertising spending. But let's be honest. Most of them have someone's thumb on the scale and conventional wisdom. Isn't the only thing that someone like tim. Wong is challenging. It's also the billions of advertising. Dollars that dr trillions of dollars of market value. So it takes some courage to suggest those billions and trillions may not be kosher one of my favorite arguments. That people are using right now. Is you know. Companies wouldn't put money into this if it didn't work so isn't that proof that the ads actually work. That in fact is exactly what we heard earlier. From the unilever veteran keith weed the fact that coke and dove and ford have been around for decades and the fact that companies like unilever spend billions suggests that maybe advertising does work which is kind of crazy. Circular mind maze. If you think about it. But i do think that again. This is very parallel to the kinds. Psychology to had driven market bubbles in the past. One reason to suspect that ads do work. Well is the underlying assumption that firms like unilever who buy so much. Advertising are as econ. One one textbooks tell us profit maximize irs. So why would they waste so much money. Any economists that tells you that firms are profit maximizing is not ever worked with firms. That again is steve levitt. The realistic picture of is that firms are composed of people and all of the foibles and shortcomings that people exhibit in their everyday life. They bring those to work with them. We s steve to dallas the berkeley economist. Who worked for a time at ebay. What he thought of levitz take on the non profit maximizing behavior of allegedly profit maximizing firms as an economist hearing you say that causes my stomach to hurt but at the same time. I know that you are absolutely correct to dallas. By end of his time at ebay had come to think that his cynical view of advertising didn't go far enough he recalls the time ebay asked him to measure the efficacy of affiliate advertising. Think of bloggers who put in links to say company websites. Well we worked closely with the senior director in charge of spending the money on that and after two our intensive meeting. We figured out a way to do that to do that. Meaning to measure whether these affiliate links were really worth buying he turned to me and said you know steve if your results look as bad as they did for paid search. I'm not going to believe your numbers now. I was obviously shocked because it made me realize that religion and not science is. What's winning this battle. But then i realized that it's something a lot more profound and for which. I actually have a lot of compassion. If you're working on something for ten twenty twenty five years this is part of your identity and this is part of what you believe in. And if i'm going to prove that what you thought worked so well in ways that you don't quite understand because you're not a statistician or an attrition and you have to take it at face value. What are you going to believe your gut tells you that what you've been doing for the last twenty years is really influential or some egghead academic. That's showing you a bunch of equations that you don't understand and is claiming that you're wrong. This digital advertising issue is just part of a bigger conversation about the power of modern technology companies for their first few decades. They were pretty much given free reign. But now they are facing scrutiny over the breadth and depth of their power power both seen and unseen the. Us government has brought a major antitrust case against google facebook youtube twitter and frankly thousands of digital platforms and repositories stand accused of promoting misinformation and or mishandling user. Information given all that society probably deserves a better answer than a lot of companies. Pay a lot of money for advertising so it must work. I think the question isn't necessarily do want it internet with ads or without ads. That again is tim. Wong the question is do you want an internet. That's just based on a huge monoculture. that's largely funded through ads. We're the most powerful companies use ads and we're vc's don't choose to invest if you don't use ads right and i couldn't believe suggest like no. The kind of internet that i want to see is internet. That has a bigger diversity of business models and where ads don't suck all the air out of alternative business models. I just think that's a much more robust market. I think it's more stable market over time. And i think it's one that leads to much better at socially and so i think that's my vote. Which is internet that accepts many different ways of making money. We should also say that just as different ways of making money there are many many many different forms and styles and purposes of advertising over these past two episodes. We've talked about two of the biggest ad marketplace's tv and digital but there are of course many advertising channels and within all these channels are countless variations local ads versus regional or national adds calls to action versus brand building ads about price versus ads about quality ads for new products or services versus established ones. Ads meant to inspire or entertain versus. Adds it just deliver information personally. Those are the ads. I respond to most learning some information. I didn't know about some product or service that sounds useful for fun for me or my family. I can think of at least eight or ten things. I bought after first learning about them by voicing the advertisements that go on this podcast. Our business partners have told us that one reason. The podcast industry has grown so much lately because advertising is particularly effective on podcasts given the intimacy of the medium. I have no idea if this is really true. But i want to believe it is. Why wouldn't i. It's my livelihood so you could say this puts me on both sides of the fence true believer and skeptic at the same time one might say. This is a sign of intellectual laziness. The move right out of upton sinclair. But i'm gonna go f scott fitzgerald instead. Here's how he wants. But the test of a first rate intelligence is the ability to hold to oppose ideas in mind at the same time and still retain the ability to function assuming i retain that ability for at least a bit longer. We will be back next week with another episode of freakonomics radio until then take care of yourself and if he can someone else do. Radio is produced by stitcher. And w productions this episode was produced by daphne chen our staff also includes alison. Craig low mark mcklusky. Greg rippin xactly conceit. Married to duke. And matt hickey are. Intern is immaterial and we had helped this week from james foster. Our theme song is mr fortune by the hitchhiker's all the music was composed by the lease scare. You can get freakonomics radio on any podcast app. If you want the entire back catalogue use the stitcher app or go to freakonomics dot com freakonomics. Radio can also be heard on many. Npr stations around the country. as always. thanks for listening. And i will measure the success of the book based on. How much pisses everybody off and on that front. I'm glad to report that. We definitely have had ad tech people being like at guys in idiot vessels music to my ears stitcher.

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