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Hold this thought: Big Data is the future of online business and interactive advertising is its profit.

Much is being made of Big Data and its role in social media and online interactive advertising. The advertising industry itself has a “big crush” on Big Data, and it fuels the elevated revenues, profits and share prices of a number of online companies.

In 2011, a predominant social media company in preparation for their IPO announced that 85% of their $3.5B revenue came from advertising.

In the same year another high profile internet company made 96% of their revenue of $37B from advertising.

There are quite a few examples of internet companies that make the overwhelming bulk of their revenue from online advertising.

Much of the attraction of these companies can be found in the tremendous volumes of ‘social media’ data that they gather, mine and use to in the target the interactive advertising of brands, products and services.

Now consider this: advertising legend Dave Trott reckons that 89% of advertising is ignored, and who would argue with Dave Trott.

What does that mean?

Out of every $1M spent on advertising, $890K is money down the drain.

Let’s raise the stakes a little. If $37B is spent on advertising, and our assumptions about the effectiveness of advertising is true, then $32B went west, and no one even noticed.

So, what does that mean?

You may recall the frenetic DOT COM gold rush of the late nineties. That went well didn’t it?

The sub-prime revolution came later. But how did that turn out?

If 89% of advertising is ignored, and people online don’t want to engage with brands, interactive advertising or have meaningful discussions about either, then the ‘ignore’ rate for online advertising might even surpass that bar-setting 89%.

McKinsey (in 2014) stated that “E-mail remains a significantly more effective way to acquire customers than social media—nearly 40 times that of Facebook and Twitter combined”. What should that tell us? What sort of signal is that sending to the market?

Interactive advertising and online viewing were supposed to signal the end of traditional channel advertising and TV as we knew it. But, according to US advertising guru and contrarian Bob Hoffman, in 2013, 97% of video viewing in the USA was done on TVs, 3% was done on-line. In a presentation he made at Advertising Week Europe he commented on interactive internet advertising, the sort of thing we get in social media sites, he concluded that ‘people have no interest whatsoever in interacting with advertising, in fact online banner ads have a click-through rate lower than one in a thousand. This is not interactivity, this is absence of interactivity.’

For good measure, it has been claimed that more than 35% of the online traffic channeled through ads is actually fake. According to digital analytics provider comScore, 36% of online traffic is suspicious or non-human – source: The Guardian 16/May/2014. Michael Tiffany, CEO of fraud detection firm White Ops, has stated that some fraud today is so egregious that the only way it can be succeeding is because nobody cares – source: Advertising Age 22/July/2013.

Of course advertising expenditure won’t stop, it won’t mutate and it won’t die. It will just relocate; probably back to the more traditional channels and forms of advertising.

But what is going to happen when online advertisers get wise to the probable ineffectiveness of their advertising expenditure – an ineffectiveness that is magnificently amplified in online-land?

What will happen to the social media and other internet companies that make their money from advertising, when online advertisers rethink their advertising strategies and start to go elsewhere? What will happen to the organizations that are built on the idea that digital advertising is the future?

How about this for starters:

  • Markets will lose confidence
  • Share prices will plummet
  • People will lose money, big time
  • Big companies will radically reduce or curtail their expenditure on online advertising
  • Share prices will plummet even further
  • Smaller companies will follow the big companies and reduce or curtail their expenditure on online advertising

So what will these internet companies be able to do in order to compensate for the loss of what is essentially a massive slice of their core business? They have no bricks or mortar; they have no obvious intellectual capital worth shaking a stick at; and, they will be left without any clear market differentiators.

Will they actually start charging people to use their services?

As I wrote at the outset, much is being made of Big Data and its role in social media and online interactive advertising. But is its role being overplayed? Are we entirely candid about the effectiveness of online interactive advertising? And, will this “irrational exuberance” simply end in tears, as it has done so many times before?

How can the impending collapse be averted? I will leave my thoughts on that conundrum for another time.

Many thanks for reading.

File under: Good Strat, Good Strategy, Martyn Richard Jones, Martyn Jones, Cambriano Energy, Iniciativa Consulting, Iniciativa para Data Warehouse, Tiki Taka Pro