Digital Ad Regulation Doesn’t Necessarily Spell Disaster

Digital advertising denunciations of the cookiepocolypse have been common for years. Others argue that privacy regulations are even worse, threatening to send digital media back to the stone age. But there is disagreement over just how severely ad regulation will affect publishers, advertisers, and adtech companies.

Scott McDonald, President and CEO at the Advertising Research Foundation (ARF), checked in with Street Fight to provide his take on what regulations are likely to pass and how they’ll affect digital advertising.

President Biden recently called for limits on data-driven ad targeting. What such limits do you imagine might come to pass?

Anything can happen, but I wouldn’t bet on significant ad regulation making its way through the divided US Congress this year. But the patchwork of state-level restrictions will likely grow. and we will see the first tough enforcement of California laws on ad targeting starting around mid-year. So, the pressure will still be on — but with a very foggy outlook for companies trying to navigate through all of this uncertainty.

How would ad regulation affect marketers? 

Marketers are desperate to get a clear view of reach and frequency across the very fragmented media and advertising landscape — to plan, to activate, and to evaluate the efficacy of their efforts. The specter of eventual cookie deprecation has stimulated a host of alternative identity solutions that, it is hoped, will meet rising privacy requirements. But because the regulatory and platform requirements remain very uncertain, there is a lot of risk of betting on solutions that later are declared out of bounds. This is a challenge to most digital forms of marketing and media measurement, including the emerging field of CTV.  

Thus far, marketers have responded by trying to build their first-party data that can be matched in privacy-safe clean room environments for campaign evaluation — and I would expect that to continue, though it would not surprise me to see some kind of scandal where clean room implementations turn out to have some kind of data leakage. But even if that doesn’t happen, the clean room approach may still offend some consumers if they don’t feel that they really consented to have their data used for targeting or evaluation. And for many marketers, clean room solutions are hard to scale while also controlling reach and frequency. So, the approach remains fraught with problems.

I generally try to remind people that advertising worked well for a long time prior to the advent of person-level targeting data and I continue to think that it still can work well with privacy-safe aggregations or with greater use of state-of-the art contextual targeting. But make no mistake, the loss of person-level data makes digital marketing less efficient. 

A recent academic study presented at the Marketing Science Institute ran a vast field experiment comparing over 70,000 campaigns on Facebook with and without person-level targeting; they found that the cost-per conversion increased by 37% when the “next best” method of targeting was used. That meant that the median ad cost 6.2 incremental customers per $1000 of ad spend. 

This is where we find the unintended consequences of tougher privacy restrictions — and there is now a considerable amount of work suggesting that it’s the smaller advertisers who suffer the most. In the MSI study, small advertisers had 2X the economic harm from data loss, compared to the big companies. We’ve already seen this since research has shown that ad regulation like GDPR had the unintended consequence of pushing ad spending into the walled gardens – thereby abetting market concentration that was never the intent of GDPR.

How would changes affect adtech? 

Ad tech will likely suffer short-term disruption from greater ad regulation and it might actually shrink as a fraction of the digital economy. However, there will continue to be a need for tech innovation, for advertising and for the skills represented in that sector — so, I wouldn’t write them off. It’s just likely to be a bumpy ride.

What do you say to critics of regulation who say banning behavioral targeting would push digital media back 20 years?

We’ve seen for decades that advertising works very well even with the lower precision of contextual targeting. And in the past few years the industry has been figuring out how to cope with data and signal loss from privacy and pandemic disruptions. We’re already on this path and, therefore, I don’t think it will push us back 20 years.

What regulations, if any, would you like to see in the digital media industry?

Any proposed ad regulation or legislation should keep real consumer preferences in mind. Despite advertising’s privacy backlash, the ARF’s most recent privacy study found that most consumers actually say it is at least somewhat acceptable to receive more relevant ads because of certain information that is collected. In terms of what info is most acceptable to use, “prior purchases” and “the media you use” ranked highest at 76% and 74% respectively.

Regulators and legislators should pay attention to the law of unintended consequences and recognize that their actions might be especially harmful to the millions of small businesses that have prospered and found customers as a result of digital advertising. They should be careful not to facilitate even more market concentration and even higher walls around walled gardens. As with the release of local-level US Census data, there should be guidelines for minimum aggregation standards that would make it easier to use geo-targeting at high enough levels of aggregation as to not pose a threat of individual identification, but that give advertisers the benefit of efficiency in targeting.