Ad Revenues: The Internet’s Existential Crisis?

Three questions to Paul Hermelin and Poppy Wood

Tech & Innovation

Ad Revenues: The Internet’s Existential Crisis?

Paul Hermelin

Chairman of the Board of Directors, Capgemini

Poppy Wood

Senior Advisor at Reset.Tech

In the past few months, several large technology companies have been clashing on a basic yet crucial parameter of the digital world: the Internet’s business model. In the last twenty years, Internet giants have prospered through an economic model that has relied on data collection and advertisement. When Apple proposed to make it harder for applications on its operating system iOS to collect users’ data, it faced criticism from Internet companies such as Facebook. In this cross-interview between Paul Hermelin, Chairman of Capgemini, and Poppy Wood, Senior Advisor at Reset, we look at the underlying stakes.

In March 2021, the French Competition Authority rejected a plea from French advertisers to block Apple's iOS update. How has the debate around Apple's plan unfolded?

Poppy Wood:

Apple’s App Tracking Transparency update, which changes the tracking of user data on the App Store from an "opt out" to an "opt in" model, is a major shift in corporate tech policy. The update is in part a response to the increasing reluctance of internet users to be subject to "surveillance advertising" - where data is extracted and sold to advertisers as a means to increase personalization. The volume of information and the collection of users’ data to sell them services and products has come under increased criticism, especially in the context of political ads. Over the past year, there has been a groundswell of support for reframing or even banning the surveillance advertising model, such as the "Tracking Free Ads Coalition" launched in the EU; the "Ban Surveillance Advertising" campaign led by Accountable Tech in the US; and the "End Surveillance Advertising to Kids" from Global Action Plan in the UK. Much of the critique hinges on the unethical, and perhaps unlawful, use of personal data for corporate profit. By making this update, Apple has demonstrated an understanding of public sentiment and tried to put itself on the side of the everyman. As such, the update has been welcomed by many consumer and data rights organisations across the world.

The App Transparency Update was just another reminder of how powerful Apple is as a tech monopoly, who with one fell swoop can disrupt the business models and operations of an entire industry.

Conveniently, of course, this move also offers Apple commercial gains - both financially and reputationally - in the battle against social media. Apple is one of the few Big Tech monopolies which doesn’t rely on an ad-based business model. It continues to distance itself from Internet giants such as Facebook, whose practices and business models are under increasing scrutiny by regulators worldwide. Unlike the millions of apps on its App Store, Apple has much more lucrative revenue streams than ads. In fact, Facebook’s main objection to the iOS update was on behalf of the small developers and businesses who are reliant on ad revenues.

They took out full pages of newspaper ads claiming the update would be "devastating for small businesses", another "altruistic" campaign which conveniently aligns with the interest of the Big Tech company.

The App Transparency Update was just another reminder of how powerful Apple is as a tech monopoly, who with one fell swoop can disrupt the business models and operations of an entire industry. While on the one hand the move put Apple on the right side of the targeted advertising debate, it also shed further light on the power and autonomy Big Tech companies have in the internet economy.

Advertising revenues have not always fueled the Internet. What were the other options available in the early 1990s and, in your view, why has the ad-based business model won?

Paul Hermelin:

A quite unique cooperation between the Pentagon and US universities gave birth to the Worldwide Web as we now know it. The "Internet Society" was founded in 1992 as a non-profit organization to develop Internet related standards, education, access and policy. A few technologists quickly understood the potential of this new medium.

I remember that some French IT advanced professionals flew to the US in 1994 and met the pioneers of the Internet. They tried to convince them that we had created a successful economic model with the French Minitel services financed by micropayments, collected by the Telco operator (which was a monopoly at the time). It was instantly rejected because they hated the idea of a distribution through large telco players, and because advertisement was better accepted. Just think of the commercial TV channels that ruled the US television market at the time. It was still pretty new in Europe, and not easily accepted, while it was not only common but nearly the norm in the USA. Strangely enough, the power of telcos was seen as a threat, while the advertisement approach showed some respect to the consumer’s freedom.

These were the early days. We had not imagined data collection through cookies and how the power of search engines and web browsers would lead to the dominance of some players. When someone gets a free service, it means that they are themselves a "product". This was not understood at the time.

In your view, can Internet-based services put an end to their current business model based on data collection and advertising?

Paul Hermelin:

We tend to think of the "GAFAM" as a unified consortium. This is pure fiction. Apple supports a philosophy whereby, through iOS features, advertisement can be eliminated. This caused Facebook to react and suggest that, if iOS users discard data collection and, therefore, advertisement, then they will have to pay a subscription fee to access Facebook services. In parallel, let’s note that Epic Games, who owns Fortnite, the extremely popular battle royale video game, sued Apple for collecting 30% of the subscription when they are downloaded through the Apple store.

In parallel, let’s note that Epic Games, who owns Fortnite, the extremely popular battle royale video game, sued Apple for collecting 30% of the subscription when they are downloaded through the Apple store. So disruptions will happen. The GAFAM market control will be challenged, as it was recently illustrated by the emergence of the Chinese newcomer Tik Tok. Will new players drop the source of revenue deriving from data collection as a tool to refine advertisement strategies ?

The GAFAM market control will be challenged, as it was recently illustrated by the emergence of the Chinese newcomer Tik Tok.

Maybe for some demanding market segments and highly educated consumers, but I think the traditional approach will prevail for the mass market. Regulators will enforce more transparency, but the appeal for apparently free services will remain very strong, notably for teenagers.

Poppy Wood:

Advertising in general is not a bad thing. Customers enjoy elements of personalization, which can be a useful and efficient tool to discovering new products and services. Ads can be creative, powerful and, in many cases, a force for good. While many are calling for a ban on surveillance or "behavioural" advertising (adverts placed based on the personal characteristics of the user), very few expect or are calling for a complete ban on advertising in any form. While there are increasing instances of companies and services shunning the ad based model in favour of subscription or other approaches, it is unlikely that internet-services as a whole will follow.

Aside from public pressure, the major incentive to ditch the surveillance advertising model will be regulation.

There is undoubtedly plenty of middle ground between a total ban on ads and the status quo of surveillance advertising. Contextual advertising is one part of the solution. In contextual advertising, limited personal data is still collected in order to measure the effectiveness of ad campaigns, but this data is not used for profiling or targeting. There is also a hybrid approach combining advertising with subscription revenues, as used most traditionally by news publishers.

Customers pay to access a content while also being served up ads - a model which applies to news media’s offline and online offerings. Since the rise of digital platforms, publishers have been increasingly squeezed by losing their ad revenues to digital platforms with much wider audiences and richer data offerings. This has played out in a very public way, particularly with recent events in Australia. Publishers offer news and facilitate debates which are vital to society and functioning democracy. In any "post ad" world order, the role of publishers must be carefully considered.

Aside from public pressure, the major incentive to ditch the surveillance advertising model will be regulation. No government has gone as far as to mandate new business models, but governments across the world are certainly getting to grips with the issue. The UK’s new Digital Markets Unit is being established to look at the competitiveness of Big Tech companies, especially with the market dominance of Google and Facebook. Australia has triggered an international conversation about regulatory interventions to support publishers. The US is looking carefully at antitrust issues in digital advertising, with some states drafting their own data laws based on the EU’s GDPR (General Data Protection Regulation). The combination of regulatory changes and public pressure may well push more companies away from the ad-based model, but for now - and for the foreseeable future - it will remain the dominant approach.