Targeting Issues
The heart of the digital economy beats to the rhythm of online advertising. Overall, €86 billion were spent on online advertising in Europe in 2022. The corresponding value for the US is even larger: nearly €200 billion. After a slowdown due to the pandemic, the online advertising market has started to grow again and has now firmly replaced advertising on traditional media (TV, radio and print media).
This enormous volume of spending is in turn the source of economic success for almost all Big Tech giants. Suffices it to say that almost all European advertising on search engines takes place on Google, and that this type of digital advertising alone accounts for 44% of all online advertising. Another 25% is spent on social media where Meta, with its Facebook and Instagram platforms, plays a central role. The third main channel, which is worth roughly an additional 25%, is display advertising, where publishers and website owners sell screen space to display advertising messages.
The reason for the success of online advertising is simple and lies in its effectiveness due to targeting. When we do an online search, the advertising we receive on the search engine is targeted to the content of our search.
There are limits, however, to what can be targeted. For example, starting in the summer of 2021, Google has banned the targeting of minors. Similarly, in many countries, including Italy, there are laws that limit advertising in various fields ranging from politics to gambling and medicines. And these types of restrictions are set to increase significantly in the coming months with the advent of the new rules on digital markets established by the European Union.
In particular, the rules are contained in two new EU regulations: the Digital Markets Act and the Digital Services Act. These new rules define a European strategy for online advertising that moves along two main axes. The first, as mentioned, is to impose restrictions on targeting restrictions, all forms of targeting of minors are prohibited, as are those based on sensitive personal data, i.e. data that may reveal racial or ethnic origin, political opinion, sexual orientation, health status and so on. The second direction is transparency in the interactions between digital platforms and their different users. For consumers, transparency means being able to know why they were targeted by a certain ad. For publishers and website owners, transparency consists in having access to detailed information on how the advertising space was allocated on the intermediating platform. Finally, for advertisers and their agencies, it is about being able to see exactly how the budgets allocated to the various advertising campaigns are spent.
This strategic vision is based on clear issues: the protection of privacy, especially for the most sensitive categories, and the promotion of competition between platforms, making it easier to measure the effectiveness of the various advertising channels and tools.
There are many open questions. For example, how achievable are transparency objectives when artificial intelligence algorithms now often determine the allocation of advertising? The complexity of algorithms makes their choices inexplicable to date. But the more complex question is how desirable it is to move towards a less advertising-based digital world. Advertising collection has allowed tech companies to provide services without requiring payments from users, but often exploiting their data. An alternative is a digital world revolving around subscription-based business models. The EU strategy has not gone so far as to ban targeting, but the restrictions are an incentive to think about business models more disconnected from online advertising. The strength of this stimulus will help determine the evolution of digital markets in the coming years.