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What Are The Economics Of Digital Ad Fraud

This article is more than 3 years old.

Even though everyone has heard of digital ad fraud, some still don’t believe it is much of a problem; others think the fraud doesn’t affect their campaigns; and still others justify their continued media buying despite the fraud, because they are getting low prices. So let’s talk about the economics of ad fraud.


The Law of Supply and Demand

At a macro level, we can see that humans’ usage of the Internet, mobile devices, and social media have all plateaued. Pew Internet, a research firm that has tracked these trends for more than 20 years, shows humans’ usage plateauing (yellow and green lines). But note how the digital ad spend line (blue) continues to diverge from the humans’ usage lines, rising even more dramatically after 2013. A more recent study from the IAB showed humans’ online usage remained flat through Q1 2020.

If there is limited supply — humans visiting webpages, streaming videos, and using mobile apps — prices should go up too when demand goes up. But despite record inflows of dollars into digital media, we’ve witnessed at least a decade of price declines. Why? Because supply went up even faster. Vast, scalable botnets can easily create billions of ad impressions out of thin air, literally since it’s all bits and bytes flying around. The resulting CPM prices (cost per thousand impressions) are substantially lower now than before.


“Fraud Is Priced In”

“Fraud is priced in” is one of the most common reasons cited by marketers and media agencies to justify continuing to buy digital media, despite knowing there is ad fraud. They’re OK with there being ad fraud, because they got lower prices. But this misconception is causing marketers to spend even more on fake ads on fraudulent sites and apps. Here’s why the thinking is wrong.

Years ago, marketers would buy ads directly from real publishers at, say, $30 CPMs (cost per thousand impressions). Today, they are buying ads from ad exchanges for $3 CPMs. But they are buying ten times the quantity, so they are still spending $30 total. Even though the unit price has gone down, the total spend is the same, so no money was “saved.” Instead, because ads are bought at low prices and placed on thousands upon thousands of unknown sites, the exposure to ad fraud is much higher. Despite this, the low prices are so addictive to marketers and media buyers who buy media with a “Costco mentality” they continue buying it anyway. But no matter how low the unit cost, most of the ads are still worthless — i.e. won’t produce business outcomes for the marketer — because they are not shown to humans.


“Buy Low, Sell High”

These digital ads are worthless to the marketer, but they are highly lucrative for the fraudster. This is because their costs are very low. In the case of piracy sites - think free music and movie streaming sites - their cost of content is zero because they stole all of it. Whatever revenue they make from digital advertising is nearly pure profit. A 2013 study by the Digital Citizens’ Alliance documented just how lucrative ad-supported piracy sites were: 83 - 99% profit margins and millions of dollars.

Far more abundant than piracy sites, outright fake sites number in the millions — see some examples in the slide above. These sites were created solely for ad fraud, and have no human audiences (imagine any human typing those domains into a browser). The fraudsters “buy low, sell high” — simple arbitrage where they buy traffic at a lower price and sell ads at a higher price. For example, if they buy traffic for $1 - 3 per thousand, and they sell ads at $9 - $15 per thousand, their profit margins are very high. All of this is made possible by programmatic advertising tech because ads are transacted and placed on millions of sites, instead of a small number of good ones where human audiences actually go.


How the Money Flows

But marketers persist, “we would never pay fraudsters” so “how does the money get to the fraudster?” Here’s how the money flows.

Large marketers allocate a digital media budget to some media agency to spend for them. The goal is to get as much quantity of ads as possible at the best possible prices (similar to TV ad buying). The media agency goes to the largest ad networks to negotiate for the largest quantity of ads they have and the best prices. The ad networks happily sell them a large number, perhaps even their “stretch goal” for the quarter. Keep in mind, these ad impressions don’t exist yet, until users visit web pages and cause the ads to load. These networks, in turn, go to medium and small networks to buy up whatever “volume” of ads they have to sell them. This process goes on one or more rounds, until someone magically finds a way to guarantee a specific quantity of ad impressions.

How do you think they got all that “guaranteed” volume? Are there a whole bunch of humans sitting around with nothing to do but to go to those specific websites? No. It’s far far easier and more reliable to just use bot traffic to generate whatever number of ad impressions you already sold. Otherwise, you’d be in breach of contract. This is how digital ad dollars flowed from marketers all the way down to fraudulent sites and bot makers, even though you never met them or paid them, personally. 

Further reading: A study by PwC/ISBA (British Advertisers trade body) showed that only 50% of the dollars spent by advertisers makes it through to websites for showing ads; the rest of the dollars are absorbed by adtech companies in the supply chain as their own profits. More concerning, though, is that about a 1/3 of these dollars (15% of overall) simply “went missing.”


CMOs should assume fraudsters are feasting on their digital ad budgets, until proven otherwise. The best way to tell is to shut off ad spend for a period of time and see if anything changes. Chase and P&G did in 2018 and both saw no changes in business outcomes. Cut some digital budget, observe; then cut more, and keep cutting. After all, whether it was fraud or not, if the digital ad spend was not generating any incremental business outcomes anyway, it would be better spent elsewhere. Otherwise you’re just “blowing your money away” no matter how low the prices.

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