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The Lion's Den Vol. 5 - Cookies Are Going Away. A Digital Earthquake or Just a Tremor?
Why the abolition of user tracking won't kill digital advertising, but will pave the way for new ecosystem winners
Several years ago, I was advising AppNexus, one of world’s largest ad exchanges, and as we discussed the past and future of digital advertising Brian O’Kelley, the company’s founder, said something that stuck with me. It was quite intuitive, yet perceptive. His point was that as soon as the internet became the world’s central “town hall” where people exchange ideas, consume knowledge and connect with others it also became clear that most people are not willing to pay for participation. This led to an unwritten social contract that still holds today: content creators will invest in creating engaging content and users will “pay” for that content with their engagement and data, with the understanding that it will be monetized through targeted advertising. To this day, digital advertising is the main business model of the digital world and it is 100% here to stay.
With that in mind, Google’s plan to phase out 3rd-party cookies is an important and necessary evolution in the space, but not a fundamental paradigm shift in how the internet monetizes. In this post I’ll walk through why cookies were never here to stay, what this means for the future of online content and digital advertising and what I believe will be the holy grail of digital monetization going forward. Let’s go!
The Journey of a Cookie: An Imperfect Solution From The Beginning
When cookies were first introduced well over 20 years ago, their purpose was to help websites store important information and improve their users’ experience. Over time, website owners and advertisers recognized the treasure trove of data that third-party cookies (i.e. cookies across other websites) can provide for accurate targeting. This led to cookies becoming pervasive across the web as well as to two decades of back-and-forth between regulators and adtech companies, which culminated in regulatory reforms such as GDPR. Just so that we are all on the same page, over 90% of websites still perform some sort of user tracking through cookies today.
So, are 3rd-party cookies important to the internet’s future? Not really. When judging the benefits of any ad-enabling technology, I think it’s worth looking into two main criteria:
First, how invasive and transparent the technology is vis-à-vis user privacy (yes, there is a social contract in place, but there should be clear limits and users should have control over data they share).
Second, how powerful and effective the technology is in driving results (i.e., can a strong cause → effect be proven when using these technologies).
On the first criterion, 3rd-party cookies are at the very least not user-friendly. Many users don’t consciously opt-in, websites often use tiny fonts and invisible colors for the consent buttons and post-GDPR a new industry popped up - Consent Management Platforms that provide elusive solutions to get users to opt-in. Case in point: A survey run by The Drum showed that >80% of respondents were concerned about how websites use their personal data, yet 50% accepted all cookies...at least some of that “acceptance” has to be inadvertent.
On the second criterion, the internet has evolved so much in the past two decades that cookies are just not that impactful anymore. 15-20 years ago, users would usually use a single device and browser. Cookies would, therefore, capture enough data to tie between a visit, an ad click/impression and a subsequent purchase. With the rise of mobile and other connected devices, the use of the internet has become so diversified that tracking true cause and effect through cookies has become moot. Just consider the following:
According to Statista, the average person in North America will have 13.4(!) connected devices in 2023. Each device (laptop, mobile phones, tables, connected TV, gaming console) uses different types of identifiers, making it difficult to deduce what ad impression on which device actually led to a successful conversion.
Most advertising dollars today (60-80% depending on the source) are spent through the large tech platforms (google, facebook, amazon, twitter, snap, etc.). These platforms are called “walled gardens” because they don’t share their users’ data with advertisers. Rather, they get advertising budgets and goals and use their proprietary algorithms and first-party data (i.e. data that users contribute like email, interests, marital status, etc.) to target users. Cookies are irrelevant for this massive piece of digital ad spending.
The conclusion is pretty clear. Since 3rd-party cookies are neither user-friendly nor that effective, they need to go away.
What Does a Cookieless World Mean For The Internet?
Scrapping cookies is going to make an impact primarily on the open internet (a catch-all phrase for all websites that are not a walled garden platform). The open internet is comprised of local, national and global publishers (news, entertainment, sports, travel, etc.) that rely heavily on cookies to be able to serve relevant ads. They do so because, unlike the facebooks of the world, most websites know very little about their users (when was the last time you shared your interests with a news site? we do that daily on social media). This massive gap in data ownership and knowledge of users’ interests is what led to ~60% of ad spend being allocated to walled gardens, even though only 34% of users’ time is spent there.
Without getting too philosophical, this really matters because the walled garden companies have become way too powerful and influential:
Advertisers are held captive - they might get good results through these platforms, but it’s a black box, i.e. they don’t learn more about their end customers over time, while facebook/google/amazon do. Needless to say, pricing power is comfortably on the walled gardens’ side.
Publishers are in an unfair co-opetition - On one hand, publishers compete directly with the walled garden platforms for ad budgets and user attention, but their most engaging content ends up being shared and discussed on platforms like twitter and facebook. On the other hand, publishers rely on social media to promote their content and to get users, making them extremely vulnerable to algorithm changes. When facebook decided to pull back on news content in its feed, many publishers saw their traffic (and ad budgets) diminish materially.
Users (yes, that’s you and me) are productized and manipulated - The walled garden platforms have been blamed for spreading fake news, impeding diversity of thought and allowing the overall online dialog to become more toxic than ever before. These platforms are not a product built for users. The users and their data are the product that these platforms built for advertisers.
The internet requires more balance. Having a robust ecosystem of open internet publishers that can offer different points of view and can profit from engaging content is an absolute must. For that to happen, monetization in a cookieless world needs to be figured out.
Making Cookieless $Dough$
So where do advertisers and publishers go from here? there are several potential paths:
Tracking through other dubious methods - Data will continue to be the commodity that attracts advertising dollars and 3rd-party cookies are not the only invasive tracking method. Some website operators will continue using other methods, such as fingerprinting (i.e. collecting identifiers about users’ browser, device, settings, etc.) and if you want to get a sense of how much unique data you “emit” online and how easy you are to target, check out these links and you’ll be s.h.o.c.k.e.d:
Contextual and/or cohort-based advertising - As opposed to targeting individuals, these methods target large groups of anonymous users based on their browsing behavior. Google’s proposed alternative to 3rd-party cookies, called “Topics”, is along those lines. The Chrome browser will monitor the sites that users frequent and, for a limited time, allow advertisers to target groups of users whose browsing history showcases interest in certain topics. These methods present a good mitigation between privacy protection and advertising efficiency, but they are not as accurate as having 1st-party data, which means they will always lag behind the walled gardens.
The holy grail: 1st-party data - this is the future of the open internet without a question and it requires enabling technology. The problem for publishers is that very few have enough users or data, and while I expect more publishers to experiment with paywalls, it will only work for top tier and super niche publishers. In addition, 99% of publishers don’t have the technological chops to develop powerful solutions for generating, collecting and monetizing 1st-party data. That is why I believe technology players that solve this challenge will generate many billions of dollars in value.
Several companies have identified this opportunity and are going at it from different angles: The Trade Desk has a data management platform that lets advertisers combine their own 1st-party data with other 3rd-party data. Pubmatic launched Connect, which allows publishers to enrich Pubmatic’s marketplace with their audience data such that advertisers can utilize the aggregated data across the web. OpenWeb (discalimer: one of my portfolio companies) provides hundreds of top tier publishers with a software platform that manages user registration, encourages users to share data through engaging social offerings, moderates conversations with machine learning and drives efficient monetization so that publishers can focus on content creation. OpenWeb already has >100M MAUs, which is a significant scale (for context, that’s ~20-25% of giants like Snap and Pinterest).
Unsurprisingly, in the 2-week period between when I started writing this post and today, Google pushed out its 2023 deadline by another year (not the first time) and I won’t be surprised if it gets pushed out again as the industry is clearly not fully prepared. Soon enough though, it will be the end of the cookie era and we are going to have some big winners and losers in the ecosystem. Pick wisely :)
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