The Prisoner’s Dilemma in online advertising August 1, 2007
Posted by jeremyliew in ad networks, advertising, Consumer internet, economics, video, web 2.0, widgets.trackback
I posted previously about how increased innovation in online advertising is driving up costs. Online media companies would generally prefer more standarization and less customization in online advertising; this makes their processes more scalable and keeps their costs down. However, they face a prisoner’s dilemma situation that has made it hard to drive standardization as an industry.
The prisoner’s dilemma is a staple of game theory classes. Wikipedia summarizes the problem as follows:
Two suspects, A and B, are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both stay silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. However, neither prisoner knows for sure what choice the other prisoner will make. So this dilemma poses the question: How should the prisoners act?
Classic game theory predicts that in a single instance of the game, the dominant strategy is to betray your accomplice. However, if the game is repeated, the best strategy for rational players repeatedly interacting for indefinitely long games can lead to sustaining the cooperative outcome.
The Wikipedia article cites several real world examples of the prisoner’s dilemma, including one involving cigarette advertising.
When cigarette advertising [on TV and radio] was legal in the United States, competing cigarette manufacturers had to decide how much money to spend on advertising … cigarette manufacturers endorsed the creation of laws banning cigarette advertising [on TV and radio], understanding that this would reduce costs and increase profits across the industry.
While not advocating that we use cigarette companies as a role model, I believe that the online advertising industry currently faces a similar opportunity to reduce costs and increase profits over the issue of increasing customization in online advertising that I posted about last week.
So how does this relate to the prisoners dilemma? Rather than the police asking suspects to confess, advertisers are asking online media companies for costly custom advertising. If one media company is willing to customize and its competitor isn’t, then the customizing company is more likely to win the deal.
But if both companies customize then creative and production costs go up while the size of the ad spend does not. More money is spent on creating the campaign, and less goes to buying media. Thus both media companies suffer.
If neither company customizes, then less money is spent on creative and more goes to buying media and filling the online media companies’ coffers.
To make this situation more complicated, there aren’t just two prisoners who need to cooperate, but rather many online media companies. With many players, it can be very hard to drive towards a cooperative outcome.
For media companies, the “cooperation” case means adhering to a set of standards in creative format. While this doesn’t eliminate the costs of creative, it does at least set boundaries to help control creative costs.
While these standards exist in banner advertising, (728×90, 300x 250, 160×600 etc), they do not yet exist in other, newer forms of online advertising (including social media marketing, widget marketing, online video marketing, and casual immersive world marketing). But through the IAB, we saw standards eventually emerge in banner advertising, and hopefully we will see the IAB and other standards bodies (perhaps the newly formed Widget Marketing Association?) help set standards within the newer forms of online advertising as well.
This is a necessary but not sufficient condition for the industry to converge to a stable “cooperative” equilibrium in this version of the prisoner’s dilemma. I’ve campaigned for standards in social network advertising before.
What else do readers think can be done to promote cooperation?
Lightspeed Venture Partners Blog 
Great article!
A question: Is standardization a good idea yet?
The Innovator’s Solution has interesting criteria regarding when standardization makes sense.
Roughly, if the product is not yet good enough in the customer’s eyes, then standardization is a bad idea. I would argue that online advertising products are nowhere near “good enough” for ad buyers.
If the product is not yet “good enough”, companies that provide vertically integrated solutions that come close to “good enough” win. Customization wins. e.g. AdWords.
An example of a “good enough” product is today’s Intel processor. It is a good enough for a lot (most?) of the stuff we do on personal computers.
But with the rapid development of new applications, I wonder if anything in information technology is ever “good enough”.
This goes back to the whole concept of dominant design. The point of a dominant design is that it emerges out of market consensus or through some kind of Darwinian selection. In markets where a dominant design is yet to evolve, it is true there is short run inefficiency due to non-standardisation. But equally I think it suggests a market consensus that standardisation at the current phase of product / industry design will impose unfeasibly high long run costs.
In other words, pre-dominant design, inefficiency is efficient.
Umair at BG may be on to something, Jeremy. Instead of trying to take an old model (advertisers pushing messages through networks that are willing to be incrementally different) with hopes of refining it to get to a collaboratively agreed upon playing field, another more optimal model needs to crack the code (=Nivi’s point on getting to good enough).
Advertising relevance appears to be moving beyond the model of push-messaging to community sharing and referrals. How do we contrast engagement in the Last.fm community with traditional radio stations? Should CBS try to find the LCD between Last.fm and the rest of the industry or completely break the rules when considering the potential for revenues?
Content can and is being created and customized prolifically (=publishers lack individual negotiating power), and as a result a differing view of the ad value chain may need to be considered beyond advertiser – ad network – publisher – consumer to monetize traffic.
Just as an aside on Game Theory in business from a while back…
http://www.fastcompany.com/magazine/91/debunk.html
A couple of comments:
1) The cigarette manufacturers were also very worried about government regulating their product out of existence. They realized they had to compromise on some restrictions and decided losing TV and radio media advertisements would not be devastating. So there were other factors at play rather than just cost-cutting.
2) To sell standardization, you need to explain the value proposition. How would standardization improve the product that the buyer is paying for? Will it reduce the switching cost for the buyer to move from one vendor to another? Will lower production costs lead to lower prices for the buyer? I can see the incentives that allowed for standardizing banner ad sizes. It makes it easier on web designers to decide where ads should go without restricting the buyer to one particular vendor.
I think the question should not be looked at as a prisoner’s dilemma problem, rather by thinking about how what qualities of standardization will help the ad creators and the ad buyers.
It’s all about advertising effectiveness, which can be achieved with different ad units and/or different creative. Yes standardization would reduce costs, but I wonder if standardization would also reduce advertising effectiveness, thereby compelling advertisers to refresh their creative more often.
The more you standardize, the less effective advertising might be overall since it’s easier for users eyes to know what to ignore. Regardless, for any given campaign/creative, effectiveness reaches a peak then diminishes — it’s just the natural life cycle of advertising effectiveness.
So in a standardized world, perhaps advertisers would have to spend more on renewed campaign/creative in order to achieve consistent levels of effectiveness. Then the question would be: are the cost savings of standardization offset by increased creative costs anyway?
Net net, I don’t think we’re ready for too much standardization yet … let’s keep the “wild west” going for a while and not inhibit innovation. It’s too early yet, and the market will standardize naturally when it’s ready.
There seems to be plenty of room for innovation even within standarized ad units- TV’s 30 second spots during the superbowl are a great example.
There are some great comments above about whether we know enough about what to standarize to, but this is a question of when, not if, and the standarization process is a lengthy one.
Take social media for example. There is a through line with a user willingly affiliating themselves to a brand between when they friend a brand in myspace, join a “i love brand” group in Facebook and theme their Rockyou Slideshow with brand logos, yet these are all treated as different today and sold separately. Is there a way to recognize and “standardize” the way that this user brand affiliation is valued and sold? I don’t know the answer here, but it seems like there is something here. Note that I’m not talking about pixel count – the “standards” will vary because the behaviors are new
The real question is how will behavioral targeting disrupt the ad value chain (including audiences) in the long run if we can confidently assume behavioral targeting become the new “standard”?
Now, standards don’t exist in the long run as innovation perpetuates. It’s those inefficiencies what drive innovation pressure as a way, too to attenuate the otherwise endless escalating advertising war costs. However standards themselves create new long-run costs as well that push the innovation wheel again.
However, I don’t necessarily agree, as it’s implied, that the pressure to differentiate comes exclusively from advertisers towards publishers. Publishers have the credit of trying to find as well new ways to better monetize their inventories, including more relevant ads and reduce any other inefficiency they see valuable to minimize.
This includes new social-driven advertising businesses and not only traditional publishers, but I doubt that brand affiliation and social-driven advertising will become “the” standard. It’ll rather become just another commodity requirement in the list.
The third factor, which will be relevant to direct response strategies is the incremental value created to the end user. This includes transactional ads that allow users to instantly respond on-the-fly, on-the-spot with brands. For example, buying travel tickets, credit cards, local services within ads themselves.
This is reinforced by the fact that each advertising strategy requires different set of technology levers and not a single “holy grial” standard.
The idea that standarization will be detected by audiences and therefore will become less effective as a result does not hold true if the value created to audiences significantly overcomes that possible, negative perception.
So the new but temporary equation may include but not necessarily be limited to something like this:
Total Ad Value = Existing Ad value + Relevance(behavioral targeting, brand affiliation) + Awareness(dynamic creative formats, brand affiliation again) + Responsiveness(Ad transactional IQ) + Value added to audiences (minus negative perceptions) – ad value chain long run variable costs
Innovative advertisers and publishers will always be pushing the envelope, looking for that little bit of advantage.
And it isn’t sufficient to just get online publishers to cooperate with such a scheme, you’d have to get every possible ad outlet — including some that you wouldn’t think of as ad outlets. Consider that in San Francisco they lit the Ferry Building red in conjunction with the launch of Virgin America. Or that the White Sox moved the start time of their home games to 7:11 as part of a sponsorship deal with 7-11.
One of the more effective ads I’ve seen recently was a sponsorship in my Facebook news feed. It was an ad for Showtime’s Weeds. I could play the promo right in the feed and then click off to watch the full show on SHO.com.
Companies who adapt new technology effectively will “win” (if they have a sustainable business model).
Behavioral targeting is just one of the possible technologies.
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The solution will save on lead and sales costs as it allows to focus on those interested companies who visit your website.
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