The backstory on native advertising

Why the ad technology revolution that was supposed to help publishers actually devastated so many of them

Back in antiquity (five years ago), when I ran a popular Web 1.0 content site called Beliefnet, we used to cockily predict to investors that our advertising rates were going to rise every year. We knew this because the prestigious market researchers told us so. And their logic seemed flawless: More and more ad dollars were going to shift online, and improved ad targeting technology would improve CPMs.

We all know why the first trend didn’t lead to a windfall for publishers (the money did move online, but most of it went to Google, Facebook, and Yahoo). But why haven’t ad tech improvements provide a windfall for most content publishers?

The answer is a revolution in how advertisers view the importance of what content is surrounding their ads. Many advertisers now care more about who sees their ads than where they appear. Context no longer matters so much.

That poses huge problems for publishers who invest in costly forms of content creation (sometimes known as “reporting”)—and it partly explains the escalating acceptance of native advertising. Debates have intensified about the pros and cons of native—a study this month showed that native risks harming publishers’ brands—but it’s worth understanding how publishers got into this position.

For most of modern media history, advertisers spent with a media outlet for two reasons: to reach a certain type of person and to have their brand rub up against the publication’s brand.

For the first goal, it was an inexact science. If your pimple cream wanted to reach, say, 17-year-old teenage girls, you’d advertise in Mademoiselle. If your local hardware store wanted to reach middle-age guys in town, you advertised in the newspaper. Truth is, it was pretty inefficient for advertisers, since they were also paying for the many other readers of the newspapers who didn’t care much about lawn care. But it was the only option advertisers had.

The publications could tell themselves that the advertisers wanted to be alongside the great content, but really advertisers were mostly viewing context as a proxy for reach.

Of course the internet blew up that formula: Advertisers can target their ads to particular demographics with precision.

At first, it seemed this targeting might be fine for publishers. For instance, in the early days of Beliefnet, we could charge pharmaceutical advertisers more for the health section than the religion section of the site on the assumption that the readers of health content were more sickly. And we could target health-content readers even as they went to other parts of the site. Sure, it created perverse incentives for us to produce twice as much health content as religion content, which was awkward since we were, well, a religion website. But it worked for a while.

Then technology evolved further in a way that proved harmful to publishers.

Google got better and better at providing advertisers the audience they wanted based on search results, obviating the need for many advertisers to place banners on websites. Facebook did the same.

Then came the birth of programmatic ad buying, which meant that advertisers could reach their precise target audience with little regard to where the ads appeared. Using a variety of technology, programmatic buying enables advertisers to find the cheapest, most cost-effective inventory, including with “real-time bidding.” Now, an advertiser goes to an agency and says, I’d like the best possible rate for reaching 25-year-old single men, and the agency will provide them with inventory throughout the entire internet. The key is getting the best possible rate. They can basically scour the Web—where volume continues to grow rapidly—for the cheapest way to reach that type of person.

That’s not to say that advertisers don’t want to reach certain types of readers. But a marketer can now reach “New York Times readers” without ever actually advertising in The New York Times, and for less money than sending a check to the Gray Lady.

The result is that all this great new targeting technology has put downward pressure on ad rates for publishers.

This is all a bit strange for anyone who experienced the old ad system in which advertisers were hyper sensitive about what content was going to be adjacent to their ad. Newsmagazines had to be careful not to put upbeat ads next to disaster coverage. At Beliefnet, we had Christian advertisers request that their ads not appear in the Wiccan section. (We used to joke that we should charge them more to appear in non-Christian areas since they might rack up some religious conversions over there).

Now, all sorts of well-preserved brands have their ads appearing in all sorts of second-rate places. And they don’t seem to care! Many advertisers don’t know where their ads appear.

The main response from publishers has been native advertising. In effect, native ads can be seen as a last-ditch effort on the part of publishers to make context relevant again. Advertorials, after all, have to be alongside other pieces of content to work well.

Tragically, too many publishers have deployed native to make it seem that the ads are editorial content, not merely physical companions. In dropping standards so rapidly, publishers have ended up trading the one thing they had left—their credibility with readers—for a few scraps of CPM.

Is it hopeless? To be sure, there are some publishers who still manage to pull off the traditional pitch about the value of being next to good content. Being in Vanity Fair still rubs your brand with both panache and scratch-and-sniff fragrance. And publishers are valiantly trying to convince advertisers that their ads will really, truly be more effective if they’re on high quality sites. Some big media companies are trying fight fire with fire by creating “premium programmatic exchanges,” which might prop up rates for a bit.

There is also, believe it or not, a public policy remedy. The programmatic buying relies on the ability of ad tech firms to freely cookie users without them knowing how their information is being used. If content creators had united politically, they could have pushed the Federal Trade Commission to impose proper right-to-know disclosure rules that would have benefited consumers and, as a side effect, helped content publishers.

Some companies have gotten so good at generating pageviews cost-effectively—using social media, user generated content, aggregation, photo galleries, etc.—that they outrun the declining ad rates by increasing their ad volume. Alas, that doesn’t work so well for companies that are trying to invest in, say, local reporting or other types of labor- intensive techniques.

Perhaps some new technology will develop to shift power back to publishers. But mostly it means that media businesses that want to invest some money in high quality original content are going to need to develop other revenue streams in addition to or instead of advertising.

The digital revolution has made it possible for advertisers to become more efficient in how to spend their money. Damn.

Steven Waldman is founder of LifePosts.com, co-founder of Beliefnet, and a former newsmagazine journalist.