The Internet: From Utopia to Dystopia
Once upon a time, the Internet was the place where utopias took place. It was the place where the futuristic Memex project, conceived by the visionary technologist Vannevar Bush, had found a concrete outlet. Today the Internet is a despotic territory annexed to the territory of Wallstrettian homo economicus. It is the territory of the raids of gangs of "good". Cyberspace has become the space of competition that gives everything to the winner and nothing to the other participants ensuring embarrassing dominance. It is the place where the producer-consumer identity splits dramatically as in the greatest classic of fantasy literature.
One of the most attentive contemporary chroniclers such as Thomas Friedman, who remains optimistic about the future of cyberspace, described it in these terms:
“We are at a point of no return. A critical mass of our lives and work has drifted away from the terraqueous world into the realm of cyberspace, where everyone is connected but no one is in charge. There are no floodlights in cyberspace, there are no policemen patrolling the streets, there are no judges, there is no God to punish the wicked and reward the good, and certainly no hotline to call if someone is harassing you. Cyberspace is the territory in which we spend hours and hours of our day, where we do most of our shopping, where we have most of our meetings, where we cultivate our friendships, where we learn, where we do most of our business, where we teach, where we inform ourselves and where we try to sell our goods, our services and our ideas. It is where the President of the United States as well as the leader of ISIS can communicate equally easily with millions of followers, without the need for editors, fact-checkers, law firms and other filters. All of this is terrifying."
A terribly serious matter
The matter is therefore very serious because human development and the economy of the XNUMXst century will move into cyberspace.
Let's take advertising. Originally, advertising could have been a tool to support the migration of activities important to human development into cyberspace or to bring resources to small groups that might otherwise have been cut off from the public conversation. Today, online advertising is almost entirely the preserve of two large groups that have taken almost everything and are using it to perpetuate their dominant position.
And it is precisely on this despotic world that speculators and the stock market are betting. Will this gamble pay off? Maybe not, says The Economist, which has published an article discussing the despotic wager. We are pleased to offer our readers the Italian translation of this article which we hope is right.
Betting on dystopia
Imagine a world where you are manipulated by intelligent advertising from sunrise to sunset. Your telephone and TV screens are constantly flooding you with commercials that can guess desires before they occur to you. The self-driving cars bombard you with personalized advertisements the moment you close the door, and if you try to evade them by donning a virtual reality helmet, all you see are virtual billboards. Your digital assistant chirps incessantly, systematically distorting information in order to direct you to products that advertisers have paid to promote.
Jaron Lanier, a Silicon Valley thinker who also served as a consultant to Minority Report, a bleak sci-fi film, thinks this is our future which he calls a world of omnipresent digital espionage. Few platforms will control what consumers see and hear while businesses will have to give up their profits (by buying advertising) to participate. Advertising will be a tax that will strangle the rest of the economy, like medieval gabelles on the earth.
It may seem bizarre, but it is precisely this dystopia in which speculators and the stock market are investing.
The race for online advertising
The market value of a dozen American businesses that depend on online advertising, or are reshaping their strategies around it, has grown 126% to $2000 trillion over the past five years. The advertising-centric component of the US economy has become systematically important and has achieved a market value that is higher than that of the banking sector.
The largest companies are Facebook and Alphabet (the parent company of Google) which rely on advertising for 97% and 88% of their revenues, respectively. The monstrous concentration of American television networks will cause their advertising revenues to fall very slowly or not at all. The shares of advertising-reliant start-ups like Snap are fluctuating towards values that point to tremendous growth.
Even large acquisitions seem to be justified in light of potential advertising revenue. Microsoft's 26 billion LinkedIn acquisition is justified by the goal of "monetizing" the LinkedIn user base through advertising. The primary reason AT&T is buying Time Warner for $109 billion is to create a digital advertising platform by combining AT&T's big data with Time Warner's content.
What if, on the other hand, the advertising market falls apart?
The immense resources thrown into advertising raise a question: how much of it can America absorb. One estimate that fits the bill is that the value of ad revenue will grow from 1% of GDP today to 1,8% in 2027, a massive jump. Since 1980 the average value has been 1,3% according to Jonathan Barnard of Zenith, a media agency, who also estimates that in recent years the advertising market in relation to GDP has been shrinking. There are reasons it could fall apart, points out Rob Norman of GroupM, another media agency.
In the old days gone magazine advertising Time or billboards in Times Square was an expensive investment that only giants could afford. But tech firms have done a brilliant job persuading smaller companies to invest money in targeted advertising. Facebook has six million advertising investors equal to one-fifth of all American small businesses.
Advertisements could become even more effective at identifying consumers and enticing them to spend by using the wealth of data they have collected to anticipate their needs. As commerce migrates online, businesses will cut back on conventional promotional tools, such as consumer goods firms' habit of paying for product placement in supermarkets, to divert their budgets to online advertising.
The limits to the development of the advertising market
However, there are two logical limits to the development of the advertising market. The first is the "psychological saturation" factor linked to the consumers' absorption capacity of the ubiquitous advertising. In the analog age there was the rule that advertising could not occupy more than 35/50% of radio or television programming or of the pages of a newspaper. The digital world is already showing signs of saturation.
More and more people are using ad blocking software. Tech firms that avoid the ad-bombing, like Apple and Netflix, are increasingly popular. The trend of increasing the time users spend on social media through sensational content, so that they can increase the number of ads, has proven to be boomerang. On January 11, Facebook announced it would show fewer posts from business and media companies. The average American's time online is growing at an estimated 10% a year, less than the 15% to 20% advertising growth that tech companies expect.
The second limit to the size of the advertising market is given the aggregate amount of resources firms have to allocate to advertising. In theory they can spend until the return on invested capital falls below the cost of capital, thus compromising financial viability. Advertising revenue expectations are now so high that this limit will likely be tested.
The commercial breaking point
Let's assume that advertising spending in America actually rises by 1,8% of GDP in 2027. Costs of most firms will rise, causing profits (excluding digital platforms) to decline from 6,5% to 5,7%. % of GDP, the kind of decline that typically occurs with a recession. We also assume that the rest of the firms in the S&P 500 index bear the additional costs of the advertising boom. The combined return on capital will decline from the current 10% to 8%, at or below the cost of capital. The American economy will change from being the biggest profit machine in the world to a Japanese-style zombie. This doesn't appear realistic. More realistically, hopes for an era of advertising nirvana are too optimistic.
Traditional media companies' revenues (which account for half of the total, with television dominating) are likely to decline rapidly rather than stagnate. It's equally likely that tech firms will struggle to grow their advertising revenues at a 15-20% compound annual rate as they hope. The expectations of both groups are exaggerated. Something is not right in the world of advertising and that of Wall Street.
Fortunately, one might add.
