The Subprime Banner Ad Crisis

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Are Banner Ads Poised to Experience the Same Fate as the 2008 Housing Market?

I recently watched Adam McKay's Oscar-winning film "The Big Short." For those who are unfamiliar with the film, "Four denizens in the world of high-finance predict the credit and housing bubble collapse of the mid-2000s, and decide to take on the big banks for their greed and lack of foresight," according to the movie's official description.

Although we're all too familiar with the financial collapse of 2008, hearing the story told from a new perspective highlighted some concerning parallels with the current display ad ecosystem. The movie piqued my curiosity, leading me to a deeper dive into the book that inspired the film by Michael Lewis, followed by hours combing through Investopedia trying to make sense of the plethora of terms, definitions and financial jargon. The more I dug into the intricacies of the subprime mortgage crisis, the more I saw that it resembled the ad ecosystem I've worked in for the past decade.

The mixed bag

Prior to the housing market collapse, investors took the mortgages that nobody would be willing to invest in and bundled them together with highly rated ones in order to make them saleable. These poorly rated mortgages were now being sold at AAA prices, and most investors were none the wiser.

The way in which display ads are sold today is strikingly similar. Banner ads, or display ads as they are better known in the ad industry, account for 47.9% of all digital advertising spending in the United States, and are projected to reach total spending of $32.17 billion in 2016. At the same time, however, as much as 54% of all display ads are never seen, and at least $7 billion is spent serving ads to nonhuman "bots."

Much like the bundling of good and bad mortgages prior to the 2008 crash, the bad online ad traffic is being packaged together with the good by supply side platforms (SSPs), traded through exchanges and bought by advertisers through demand side platforms (DSPs) as investible, and valuable, impressions.

The complex ecosystem

The mortgage crisis managed to remain largely undetected in the years leading up to 2008, thanks in large part to an extraordinarily complex ecosystem of money and speculation. Such can also be said about today's display ad buying ecosystem, where marketing dollars pass through a varietyof hands, each of which takes a small cut before passing it down the line where it reaches (or more often than not, doesn't reach) its final destination.

"Financial markets are a collection of arguments," wrote Michael Lewis in "The Big Short." "The less transparent the market and the more complicated the securities, the more money the trading desks at big Wall Street firms can make from the argument."

Finding supply where none exists

Before the mortgage bubble reached its bursting point, investors were eager to get in on these seemingly low-risk, high-return mortgage bonds. For brokers, this meant the more mortgages they could bundle, the more money they could make, even when the good mortgages were becoming fewer and farther between. This led banks to provide loans they knew were likely to default.

The same is happening in the digital advertising industry, where demand for display ad impressions continues to climb. Just as it was difficult to create enough AAA mortgages to satisfy investors, the same is true in creating premium digital ad real estate. There are only so many ad impressions available on the likes of The Wall Street Journal, but look-alike inventory created by bots is unlimited. As with the run up to the subprime mortgage crisis, there's an incentive to create more inventory, and the easiest, most cost-efficient way to do so is to create bad inventory.

Ad blockers: The X factor

The breaking point of the subprime mortgage crisis was the floating-rate mortgage, where "teaser" interest rates automatically shot up, substantially increasing monthly payments and causing waves of defaults among mortgage holders. It took many years for the housing market to come crumbling down, but the fall of the digital ad industry has an added factor that threatens to speed up the process: ad blocking.