Online Ads: how they make money, how cookies work and how they affect your privacy

The internet is an incredibly rich source of information, yet the vast majority of it is provided for free. We fire up our browsers, search for whatever we need, and never pay a penny for the privilege. We all pay ISPs for internet connections, but none of that cash goes to those who create or host the content we all enjoy.

Think of all the full-time staff required to keep all those sites up and running: journalists, editors, web designers and network managers, to name just a few. Even services such as Facebook and YouTube, which largely consist of user-generated content, employ staff to update their software, not to mention all the servers required to keep such complex services online. So just how are these costs met?

At present, advertising is the key method for funding most of what you enjoy via your browser. Large numbers of sites are funded solely by advertising income. We all understand that to watch a programme on ITV we’ll have to sit through the ad breaks, but the sacrifices we make for internet advertising are far more complex. As well as the annoyance of flashy animated adverts, there are both security and privacy issues to consider.

Despite its apparent success to date, there’s some debate as to whether a purely ad-funded internet is sustainable in the long run. News is the key battleground, as sales of newspapers still massively supplement the costs of researching the stories we read online. Falling newspaper print revenues aren’t being met by the rising online revenue, leaving a gap in the finances.

The Times and Sunday Times have introduced online subscription fees to cover this gap. News Corporation head Rupert Murdoch said: “Quality journalism is not cheap, and an industry that gives away its content is simply cannibalising its ability to produce good reporting.”

The issue affects more than just news, though. The rising bandwidth costs of multimedia sites such as YouTube must be met by greater advertising revenues, something even Google appears to be struggling with – with so-called pre-roll advertising appearing. Mobile devices will also require new approaches by advertisers if they are to maintain free access.

Will advertising rise to the challenge of funding everything online? And will we have to compromise our internet experience to achieve this? Will websites ever be able successfully to charge for content, when we’ve become so used to having it for free? In short, is our current ‘free-for-all’ internet simply unsustainable?

PAY AND DISPLAY

Internet advertising is now big business, worth around £3.5 billion annually in the UK. It has also proved to be remarkably recession-proof, with 2009 being the first year when more money was spent on online ads than on TV commercials. Let’s start by looking at how it works.

When most of us think of internet advertising, what comes to mind are the adverts we see on web pages. We’ll concentrate on these for now, as they’re the main source of income for online publishers. These ads are often all referred to as banner ads, though in fact they all have different names. The banner runs across the top, on the sides are skyscrapers, while a more recent invention is the mid-page unit (MPU), a square-ish box that’s ideal for video-based ads. Collectively, all these adverts are known as display ads.

The ad industry has standardised the shapes and sizes of all these display ads and, by having to accommodate all of them, many websites end up with very similar-looking layouts. You could argue that creativity in website design is among the first victims of online advertising.

↑ Many popular web pages use ads to help pay for content

The value of a display ad is usually measured in one of two ways. The first is cost-per-click, where the advertiser pays the site only when you click on the ad. Such ad campaigns are designed to directly generate sales. The second is cost-per-impression, where the advertiser pays every time the advert is shown, whether or not you click on it.
A company – let’s take British Airways as an example – decides it wants to advertise its latest deals online. It employs a creative agency to design the campaign, as well as a media buying agency or ad network to serve the ads.

Media buying agencies usually negotiate directly with big websites; hosts would include newspaper sites and portals such as Yahoo! and MSN. Such deals are usually done on a cost-per-impression basis, as such reputable sites help improve brand awareness, which we’ll discuss later. Ad networks, on the other hand, usually act as middlemen between the advertiser and smaller website publishers. Ad networks usually deal in serving ads in low-cost space, and largely measure success using cost-per-click. Both media buying agencies and ad networks track web users and target adverts to maximise the effectiveness of their campaigns.

STAY ON TARGET

Big ad networks may have deals with thousands of individual websites, and sites can also employ multiple networks to get the best returns, so the range of possible ads to which you could be exposed is huge. They’re served from the ad network’s servers, where a complex process tries to select the most effective ad possible.

This process is governed by cookies, tiny text files that are stored in your browser by almost every website you visit. Many of the cookies in your browser are likely to be from ad networks; for example, you’ll most probably find a cookie from Sophus, which is used by both the Guardian and the Times, as well as ones from Doubleclick, Google Adwords and many others.

Most cookies simply contain a unique ID number, which refers to an entry in the ad network’s database. The database stores details on other sites in the network where the cookie has been logged. Based on that information, the network tries to predict the kind of products you may be interested in.

For example, if the database has logged the cookie in your browser at numerous travel sites, the ad network is more likely to serve you our theoretical British Airways ad, as this will probably by more effective than an advert for, say, a new sofa. Having done so, it then updates the database entry to show that the ad was served to that ID number.

There are millions of these tracking cookies out there. To get a grip on them, the ad networks place each cookie into one or more of a handful of pots. For example, if you regularly visit The Financial Times’ and Ferrari’s websites, you’ll likely be put in a pot aimed at big-spenders, regardless of whether you’re actually wealthy. Display ad space can then be sold on the basis of how many page views a site gets from a specific pot that the advertiser wishes to reach.

PRIVATE PARTS

This process is called behavioural targeting, and it’s one of the key advantages of internet advertising over TV and print. The ad networks argue that it’s better for everyone, as the adverts you see should be more relevant to you and so more effective for the advertisers. This in turn should generate more revenue for the website, which can help fund the content you want.

Obviously they would say that, but there is some truth in it. We tried deleting all the cookies in our browser and the results were noticeable. Instead of seeing familiar brands with adverts for products we might consider buying, there was a far wider spread of adverts, which was more distracting when browsing our usual sites.

But is this tracking process an invasion of your privacy? We talked to the UK’s Internet Advertising Bureau (IAB), part of a worldwide group of trade bodies for online advertising, about behavioural targeting. Unsurprisingly, it assured us that its members were trustworthy: “Any data used is done so anonymously. When personal data is used, it’s done so when you register for a website or service and you will be told beforehand.”

The IAB has set up www.youronlinechoices.com to help deal with concerns about targeted ads. There you can read more about behavioural targeting and even find links to major ad networks letting you opt out of the system. Not all the ad networks are represented, but it’s certainly a step in the right direction.

↑ Your online choices can help give you control over targeted advertising

If you’re worried about your privacy you could set your browser to block cookies or accept them only with your permission, but provided that you visit only reputable websites such actions are probably unnecessary.

CURRENCY CONVERSION

Once you’ve seen an advertisement, the best-case scenario for the advertiser is that you click on it and then go on to make a purchase. This is called a conversion, and the total value of such sales can be totted up at the end of the campaign to gauge its effectiveness – again thanks to tracking cookies. Such an approach allows the cost of the campaign to be directly compared to the cost of the advertising, which is hard to do with TV or print ads.

Such sales can be attributed not only to the campaign as a whole, but also to the website where the ad was shown. Therefore it could be argued that consumers should support the sites they like by providing them with conversions whenever possible.

Conversions are an ideal situation, but most of us simply don’t make purchases in such a direct manner. We see an ad, go away, think about it, Google the product later and then make a purchase. Even in this situation, though, cookies are used to track your browser activity and give credit to the ads you’ve seen.

CATTLE BRANDING

Not all adverts will lead directly to online sales; after all, most of us buy our beer in a pub and our petrol from a pump, neither of which can be tracked online. Companies selling such everyday products have been reluctant to take up online advertising because of its obsession with conversions as a measure of success. Try putting ‘washing powder’ into Google, and note the lack of sponsored links from major manufacturers. This is because Google concentrates on great conversion rates, while detergent manufacturers rely on building long-term brand awareness.

This can be hard to quantify. UK Online Measurement (UKOM) was launched in February 2010 with the aim of measuring brand awareness. It has 35,000 participants, and the data gathered makes a useful partner to behavioural targeting. This is because the participants’ identities are known, so their online activities can be studied via classic demographic divisions such as gender, age, location and household income. The results help the industry compare the branding impact of online ads to those on TV or in print.

↑ UKOM uses a test group to measure brand awareness

Branding is a sensitive issue. Placing a brand on the right website can boost its image, but the opposite is also true. You’d expect to see British Airways ads on news and travel sites, for example, but they’d create the wrong impression on a site promoting action on global warming.

The IAB’s Jack Wallington explained that big brands are uncomfortable with the unpredictable nature of sites with user-generated content. In 2007, six major advertisers pulled their adverts from Facebook after they were displayed on a page promoting the far-right British National Party. They included Vodafone, the AA, Halifax and Virgin Media, with the latter stating the requirement to “protect its brand”.

WHEN ADS GO BAD

Like all advertising in the UK, online ads are regulated by the Advertising Standards Agency (ASA). It says, “Ads should be legal, decent, honest and truthful. Broadly the rules for advertising are the same across all media.” For example, you won’t see cigarette advertising on UK sites. So there are no sponsored links if you Google ‘cigarettes’. The same goes for guidelines that govern alcohol advertising and food and soft drinks advertising to children.

Despite this, some ads do try to defraud you. Often this type of ad comes in the form of malware posing as anti-virus software. Once installed, the software falsely reports a virus infection until you pay for the professional version of the software. Such ads usually come through ad networks, largely due to their policy of subcontracting other networks to fill ad space.

It’s not just networks that can be at fault, though. Last year the New York Times approved ads that turned out to include anti-virus malware. Diane McNulty, a spokeswoman for the paper, said: “The creator of the malicious ads posed as Vonage, the internet telephone company, and persuaded NYTimes.com to run ads that initially appeared as real ads for Vonage. At some point later, the campaign then switched to displaying the virus warnings.”

FLASH HARRY

Even if the ad is tasteful, appropriate and harmless, however, it may still annoy the hell out of you. Flashy animations, particularly when they repeat over and over again, can be highly distracting, especially when they’re positioned right beside the text you’re trying to read.
Pop-up adverts now seem to be a thing of the past, largely thanks to browsers’ built-in pop-up blockers. However, such ads have been replaced by expanding ads, which slip out of their frames and obscure the page if you accidentally roll over them with your cursor.

Apparently, though, we’re our own worst enemy. “All the research shows that richer ads are more effective, both in terms of click-through sales and branding effect,” says Martin Pavey, head of creative at Flashtalking. This ad-serving company specialises in what the industry calls ‘rich media’ ads. These include animation, video and interactive elements.

“Ad agencies are always looking for something new to impress both their clients and the public,” Pavey continues. “Static ads were replaced by animated ones and then richer interactive ads and video. Right now… everyone seems to want a ‘social media campaign’ and an iPhone app to promote their products, such as Carling’s popular iPint app, and of course most brands are using Twitter to some extent.”

Social-networking sites offer great opportunities for imaginative companies. Domino’s Pizza recently launched a Facebook app that lets users put an ‘order pizza’ button on their profile pages. The clever part is that the profile owner gets a small kickback from the company for every pizza ordered.

As with all social media tools, however, companies have to be careful. Last year US confectionary giant Mars introduced an unmoderated Twitter feed on its Skittles homepage. The feed amalgamated every tweet with the word Skittles in it. Pranksters soon caught on and the site was bombarded with ‘amusing’ posts, such as, “Eating more than eight purple Skittles in one sitting can lead to cancer.”

ADDITIONAL SIZES

A basic skyscraper or banner ad used to be as small as 30KB, but rich media ads can be as big as 2MB. This may not sound much, but if you’re downloading hundreds or even a thousand ads a week, all that bandwidth can quickly add up.

Some ads are bigger still. Take Flashtalking’s recent campaign for the new Alien vs Predator (AVP) game. This was a ‘Homepage Takeover’ of the internet gaming website IGN. Visitors to the site were greeted by a lengthy action-packed animation, which spilled out of the ad’s frames and across the page. The campaign has now ended, but you can still see it here.

↑ Flashtalking’s AVP campaign featured a huge 5MB animated ad

“Clients will always want higher-quality animation in their ads, but larger ads cost more to serve, which can blunt the efficiency of the campaign,” says Pavey. In this case the final ad weighed in at almost 5MB, which is more than all the editorial content on the IGN homepage at any given time.

The AVP campaign is an extreme example, and one that was appropriately targeted at a hopefully appreciative audience. However, the bottom line is we are all paying for the additional bandwidth required to download these ads. Even if your broadband package has unlimited data usage, the pricing for these contracts are based on average use, and such use must therefore include a healthy slab of display advertising.

BLOCK PARTY

If you don’t like the idea of paying for bandwidth for ads, or if all those animated adverts simply drive you to distraction, you might want to consider ad-blocking software. Ad blockers are available for all major browsers. Probably the most popular is AdBlock Plus for Mozilla’s Firefox browser, which has around 10 million daily users.

We talked to Adblock Plus developer and Mozilla employee, Wladimir Palant. He told us there’s an ongoing arms race between advertisers and filter list authors: “The most notorious example is probably www.cpalead.com [one of a number of companies that specialises in placing content behind adverts or surveys]. Personally, I block most ads. I made an exception for Google Ads, however, which actually try not to be annoying. I also whitelist (allow ads on) a few websites, ones where the owners actually keep on eye on what ads are getting displayed.

↑ AdBlock Plus efficiently strips the ads from a web page

“I am not against advertising per se; it has its uses. What I don’t like is the intrusive advertising that we see all too often. Ads shouldn’t make noise, they shouldn’t try to steal your attention with animations, they shouldn’t cover up the content you are trying to read. And of course they shouldn’t waste your PC resources more than necessary, invade your privacy or try to make you download spyware – all issues that we are facing today.”

Ad blocking is a highly contentious issue. Some argue that it costs websites money, as they are serving you content but not profiting from showing you ads. Supporters of ad blocking argue that they wouldn’t take any notice of the adverts anyway, and certainly wouldn’t click on them. However, this argument doesn’t wash when you factor in brand awareness.

SUBSIDENCE

The main alternative to advertising is to charge subscription fees, often referred to as a paywall. The financial press have been very successful in implementing these. For example, you’ll need a subscription to the Financial Times to see its breaking news plus comment and analysis. However, a large percentage of these subscribers will undoubtedly claim back the cost from their employers as a business expense.

News Corp boss Rupert Murdoch has been outspoken in his support for paywalls on news sites. He recently attacked search engines for aggregating news stories: “We are going to stop people like Google or Microsoft or whoever from taking stories for nothing.”
Murdoch then went on: “I got a glimpse of the future last weekend with the Apple iPad. It is a wonderful thing. It may well be the saving of the newspaper industry.”

Mobile devices in general are a double-edged sword though. Apple’s business model certainly encourages owners to pay for content, but generally speaking portable devices such as smartphones are hurrying the decline of newspaper sales.

As mentioned earlier, News Corp has introduced a paywall to the Times and Sunday Times sites. The papers, which were previously on the same website, have split into two new sites: www.thetimes.co.uk and www.thesundaytimes.co.uk. Access to both sites will cost £2 a week, which sounds quite reasonable compared to around £6 for a subscription to the print versions. Those with existing print subscriptions will get access to the new websites for free. The success or failure of these launches is critical to the shape of the net to come.

ATTITUDE PROBLEM

We’ve seen how display advertising can compromise web design, track your web usage and even be a carrier of security risks. However, it’s undoubtedly an essential part of the internet as we know today. However, change seems to be on the way. We haven’t yet reached the tipping point, where print media falls away and leaves the internet to stand alone, but that day is approaching rapidly.

Recent developments such as the introduction of adverts into Twitter and the new iAd platform for placing ads into free iPhone applications show that the industry is continuing to come up with with new ways to place its products in front of us. It’s hard to say whether we should be supporting these efforts as funding for a free internet, or fearing the next interfering technology that might blight our favourite sites or services. In the end a balance needs to be struck, or else more web users will choose to block adverts entirely.

It’s easy to look good when you’re on top of the pile, but Google’s provision of excellent software tools, which then tie into and help drive its ad-based business model, certainly makes the company a poster boy for the industry (Click here for more details on how Google makes it money.). News Corp’s restrictive paywalls may seem like the big bad wolf at first glance, but remember that investigative journalism doesn’t come cheap and is a cornerstone of any democracy.

Looking into the future, we envisage an internet funded by both advertising and paywalls, with consumers voting with their clicks. The real changes that need to occur are in attitudes. Advertisers and website publishers need to see their readers as community members to be respected and advertised to with care, rather than simply a commodity to push products upon. But web users must also stop taking free content for granted, as no-one can expect high-quality content for free.