Big Tech Can’t Escape the Ad Business

At a glance, the tech giants don’t seem to have a lot in common. Google delivers information quickly. Meta connects you to friends and family. Amazon is a store. Apple makes phones and computers. Microsoft is all about business software.

But under the hood, they are united by advertising, referred to as the “dark beating heart of the internet” by the author Tim Hwang in his book Subprime Attention Crisis. About 80 percent of Google’s revenue comes from the ads it places next to search-engine results, on sites across the internet, and before YouTube videos. Meta makes considerably more than 90 percent of its billions in revenue from advertising. Amazon has the third biggest share of the U.S. ad market, thanks to what it charges independent retailers for placement on its site. And although few people think of Microsoft as a company that benefits from digital ads, it, too, makes billions from them every year.

Even Apple, which foregrounds user privacy as one of its selling points, is in on the ad game. Advertising makes up close to $4 billion of its annual revenue, according to the research company Insider Intelligence. All told, outside of China, the online-ad industry was worth about $500 billion last year, according to data from Omdia, and Google, Meta, Amazon, and Apple are believed to have taken some $340 billion of that. Companies that traditionally opposed advertising are looking for their way in too: After resisting ads since its inception, Netflix introduced an ad-supported version of its streaming service last year, as did Disney+.

As so much of the internet is changing—social media feels less relevant than ever; generative AI threatens to disrupt everything—advertising remains its inescapable business model. That’s a problem, because digital ads are terrible. Users hate them, they’re easily exploited in fraud schemes, and they encourage controversial business practices such as tracking. They also might not work very well: Studies suggest that most users ignore them, and roughly a third of display-ad clicks are believed to be accidental.

But the ad-supported internet is about to get worse. Many publishers are already motivated to generate as much content as possible, for as low a price as possible, for the largest audience possible. (That’s why they push out so many formulaic posts at mass volume, trying to eke out marginal ad profits from endless How old is this actor? Who is her wife? What is her net worth? articles.) Now we can add to this derivative fluff a flood of articles that were written by programs. In the ChatGPT era, we face a future of low-quality content automatically churned out, itself “read” only by other algorithms as they train themselves up and by bots generating fraudulent ad clicks—a “gray goo” internet created by algorithms, for algorithms, and shunned by everyone with a pulse. Ads already make the internet less usable; the effect will only be magnified as we’re forced to wade through the sludge.

[Read: Death by a thousand personality quizzes]

It’s a problem for which we urgently need a solution. The internet as we know it relies on ads, but no one feels like they’re getting a good deal out of them. The web is crucial infrastructure, but its financial foundations are alarmingly shaky.

You’re no doubt familiar with article pages whose loading is dragged to a standstill as multiple clashing ads load, videos autoplay, and hard-to-dismiss pop-ups occasionally lead to accidental clicks. Very few of us deliberately look at, let alone click, online ads. Far fewer than 1 percent of people who see a given ad next to content will click it, on average, and about 40 percent of internet users in the U.S. employ an ad blocker. The result is an online arms race, with ever more determined ad networks fighting to get their inventory in front of the public’s unwilling eyeballs.

For the tech giants, one solution to this is to better match advertisers with users through improved targeting. This is usually presented as a win-win-win situation: We get advertisements we’re more likely to appreciate, brands get a better result from their campaign, and both the website we visit and the ad network get more money. But the reality is very different. Targeting isn’t about making the user’s ad experience better; it’s about showing the highest-value advertisements to the users who match the advertiser’s criteria. In effect, this means that when you visit a site, it looks for the identifying information it has about you, and determines which detail has the highest value.

For example, a site might identify that you’re browsing from the U.S., that you’re currently logged in to your Facebook account, and that you’re a regular reader of a premium newspaper that we’ll call The Economics Times Journal. That last bit of identifying information is worth much more than the other two: On average, readers of this publication have significantly higher salaries than the U.S. population at large.

This means that you might get an ad for a more premium product, even on a garbage clickbait site, than someone who reached it with just the first two tags attached to them. But this presents a problem for the publication itself: Its homepage now becomes the most expensive place on the internet for advertisers to reach its own readers. Why pay to advertise there if you can reach users more cheaply when they browse elsewhere?

The result of this system is a conflict of interest between the Big Tech companies that run the ad networks and their clients, fueled by relentless tracking of users across the internet, with perhaps dozens of different trackers on any site that seeks to make money from advertising.

So-called artificial-intelligence search, powered by large language models such as GPT-4, will likely make that conflict even more intense, as Bing and Google allow AI assistants to present information from across the web on their own sites, giving users even less reason to click through to publishers.

At present, if someone searches for information that is on a publisher’s site, the search engine makes some money by showing ads next to the search results, but then the publisher has a chance to make some money once the user actually visits their site. If AIs just scrape and rephrase the key information, making the visit unnecessary, only the search site gets the benefit. This is a legal gray zone—information cannot be copyrighted, but particular phrasing of it can—and is set to lead to new showdowns between tech and content, once again over who gets the ad dollars.

[Read: Bing is a trap]

The AI monkey wrench is being thrown into the machinery right as regulators are taking a hard look at the digital-ad industry. Google is facing an existential antitrust lawsuit against its advertising business, led by the Department of Justice and joined by a coalition of 17 states.

Most previous lawsuits have been easily batted aside by Big Tech. Because of the companies’ scale, even multibillion-dollar fines, themselves very rare, are little more than the cost of doing business. This time, in a move not seen against a tech giant since the efforts targeting Microsoft in the 1990s, the DOJ is seeking to break up Google’s ad-tech business.

The very existence of such a suit may change the calculus of tech’s business model. This is especially true when European regulators are starting to make more aggressive use of the bloc’s stricter data regulators; the EU is, after all, more populous than the U.S. and is one of the world’s largest markets. Meta was fined $414 million by the Irish Data Protection Commission earlier this year for violating privacy law.

There are signs that Big Tech is adjusting its model. Last year, Elon Musk paid $44 billion for Twitter, a company that made 90 percent of its revenue from advertising. This is a model that Musk has repeatedly and openly criticized (Tesla famously does not advertise, although that may soon change), and he quickly sought to replace it with a subscription model, Twitter Blue, priced at $8 a month. A key part of Musk’s proposition for those $8-a-month users was that Twitter would halve the number of advertisements they saw. (Internal documents showed that the economics of this made absolutely no sense: The top 1 percent of Twitter users were, they revealed, worth $40 a month in ad revenue. Twitter is now valued at a third of what Musk paid for it.)

Elsewhere, Mark Zuckerberg has staked the future of his company (and even its name) on the metaverse, an immersive world in which proponents hoped for new ways not just to display ads, but to sell and trade virtual goods and even digital real estate. It hasn’t quite panned out. Amazon made a huge bet on Alexa as a new ecosystem with which users might interact, but it failed to generate revenue. The crypto boom became as inflated as it did in part because venture capitalists believed it could revolutionize how businesses make money online; it crashed and burned.

At some point, something new will come—it always does. But new business models, let alone technological breakthroughs, rarely appear on demand. They also almost never benefit the incumbents of the previous cutting age of tech. The Kodaks of the world had too much to lose from the dissolution of their large-but-declining print business to pivot to digital in time, and so they diminished.

The tech companies most hooked on the ad industry are left to hope that this time is different. Advertising was the engine that propelled them to global prominence and unbelievable wealth. Now they’re left wondering what to do as they feel the engine sputtering. Do they restart it, or do they accept that they’re destined to spend their future in a state of stagnation?

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