Will ad tech require a regulatory revolution?

By Decipher – @DecipherOffAirnews@decipher.co.uk

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In many ways, 2014 was  a successful year for future ad-tech.  Blockbuster M&A deals saw the ownership of Adap.tv, Brightroll and SpotXchange change hands (to AOL, Yahoo and RTL respectively).  And the UK’s very own Channel 4 has announced (but not detailed) plans for a private, automated ad trading marketplace for All4, its rebranded catch-up service, to be launched early next year.

Yet dark clouds sit on ad-tech’s horizon as we start 2015.  A recent Financial Times investigation highlighted the malaise.  According to a study the FT conducted with Pixalate, a company specialising in detection and prevention of ad fraud, over the course of a single month 72% of ad impressions being offered on open exchanges under the FT.com name were fraudulent.  These ads, far from appearing on FT.com, appeared on low-grade websites that often masked their web addresses and had few, if any, users at all.  The FT has written to advertisers warning them not to trust inventory being sold on open exchanges, and to only use its trusted seller.  In the press commentary that has followed the breaking of this story this week, some security experts have been quoted as saying that between 30% and 40% of impressions being sold on automated exchanges are being generated by ‘bots’ – software designed to defraud by auto-clicking on display ads to generate ghost users, and fraudulant costs to advertisers.

The problem, of course, is not a UK only one.  A study for the US Association of National Advertisers projected that in 2015, marketers will lose $6.3bn to ‘bots’ alone.  Its projections were based on a two-month study that analysed 181 campaigns from 36 ANA member companies: over the course of 5.5bn ad impressions, a tenth of display ads were viewed by bots rather than real people.  The equivalent statistic for online video ads was 25%.  Just to give a sense of perspective, the ANA estimates that – globally – $40bn is spent each year on display ads, and $8.3bn on video ads.  Aside from the fact billions of dollars of advertising dollars are being lost to fraud, the effectiveness of brands’ campaigns is being undermined, and ad space on reputable sites is all the while being devalued.

In a later blog, we’ll examine the different types of ad fraud and what the industry – here in the UK and over in the US – is doing to reduce and protect against it.  In the meantime, the presence of such a widespread problem – set against the backdrop of ad tech, web and television becoming ever more converged – is clearly troubling.  So where do we go from here?

The Experience of Financial Services

While we have moaned about opaque trading practices for years, the arrival of ad tech means that for the first time we are talking about fraud as a strategic issue in the UK advertising industry.  It’s a market that has a strong record of self-regulation via the regulatory ecosystem of organisations clustered around the ASA.  And yet the arrival of ad-tech may challenge the industry’s ability to self-regulate.  Questions around the role of data and ownership of exchanges may be too complex for the market to manage alone. Even then, it may be beyond the capability of the regulator to control.

Here, comparing the ad trading world to the world of Financial Services is illuminating. Particularly if you compare the arrival of ad-tech to the ‘big-bang’ technology revolution in the financial services market.  More recently – the arrival of algorithm driven trading systems in financial services has exposed weaknesses in the market that should give cause for concern to the people advocating greater integration of ad-tech systems and companies.  In August 2013 the New York Stock Exchange (NYSE)  went into meltdown as the software in a single trading firm – Knight Capital – went wrong, creating panic. A program that was supposed to have been deactivated had instead gone rogue, blasting out trade orders that were costing Knight nearly $10 million per minute.   No one knew how to shut it down.  And this was in the most highly regulated market imaginable.  Will TV and web advertising be similarly exposed if an ecosystem of fully integrated exchanges and trading desks emerges?

The speed of innovation in this system is defeating those whose job it is to regulate the Financial Services industry.  As a quote from financial website ‘Mother Jones’ shows:

“In the four years since the collapse of Lehman Brothers drove the global financial system to the brink of oblivion, new technologies have changed Wall Street beyond recognition. Despite efforts at reform, today’s markets are wilder, less transparent, and, most importantly, faster than ever before. Stock exchanges can now execute trades in less than a half a millionth of a second—more than a million times faster than the human mind can make a decision. Financial firms deploy sophisticated algorithms to battle for fractions of a cent. Designed by the physics nerds and math geniuses known as quants, these programs exploit minute movements and long-term patterns in the markets, buying a stock at $1.00 and selling it at $1.0001, for example. Do this 10,000 times a second and the proceeds add up. Constantly moving into and out of securities for those tiny slivers of profit—and ending the day owning nothing—is known as high-frequency trading”.

This neatly describes the people that built the software at Knight Capital and integrated it with the NYSE,  which itself  is just one exchange within an integrated system of exchanges and traders.  It is an example of the kind of integrated exchanges forecast for the TV advertising industry after integration with programmatic systems.  One of the lessons that we might bring from the world of financial services to a new regulatory approach for ad tech is that exchanges must be independent of media owners.   The SEC has clear rules on ownership of exchanges and licences to operate on them, and very rigid rules on who can connect and interconnect.  A financial services version of RTL’s purchase of SpotExchange would not be allowed in the financial world.

Towards a new regulatory approach

Two issues are uppermost in our minds at the start of 2015.  The first is that the UK system of advertising self-regulation (or in the case of broadcasting, of ‘co-regulation’ with OFCOM) has thus far been weighted towards content standards and content regulation (i.e. around the claims made by advertisers), not process regulation.  The arrival of ad tech systems, and the level of fraud we’re beginning to see, might require this to change – with a greater focus on the mechanics of advertising trading.

The second is of one of the promises of the internet age: a trading world without borders.  The comparison with the financial services industry is interesting as financial services regulation is still based on clearly identifiable territory.  A company has to declare itself as operating in a particularly regulated territory to be given clearance to trade in that area.

The UK’s online advertising regulation has thus far tiptoed around the issue of jurisdiction, as evidenced by the slow and tentative steps into the ASA has taken in terms of policy and its enforcement.  From March 2011, online marketing and ads have been subject to the CAP code – the same advertising rules that govern traditional media.  However, notions of where and to whom the rules apply continue to prove complicated.  Online sales promotions, for example, are within the ASA’s remit as long as they appear in “British web space”.  The ASA’s run-in with the Scottish brewer BrewDog (strong language) is just one example of how things can quickly go wrong.   Greater clarity, and clarity in application, is needed.

No one calls for greater regulation flippantly, and in fact the trend in the UK (and Decipher’s natural position) is to support lighter touch regulation of the media. However, the sums involved (TV advertising alone in the UK is a £4bn industry) mean that it is too important to have this current level of confusion and criminality.  This is simply too big a problem to be ignored, and one that can only get bigger without a new form of intervention.  While it initially involved de-regulation, the arrival of the Big Bang in financial services caused such a trading shock that it eventually lead to the creation of the Financial Services Authority.  We might need the same here.

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