Can a Loss of Confidence in Digital Advertising Cause Financial Market Fallout?

What? Market observers have been sifting through the financial tea leaves for years looking for the next “black swan,” that most extraordinary and unlikely event that will cause the financial markets to tumble. Dozens of possibilities ranging in scope and scale are found all over the map, literally: Euro zone, China, Japan for their challenging economies; North Korea, Russia, Iran, Syria, Venezuela for their geopolitical implications; stock bubbles, bond bubbles, auto loan bubbles, student loan bubbles, municipal bond and pension bubbles, and so forth.

What about the bubble in digital/online internet advertising? Many recent and prospective fortunes are tied to the continued rapid rise in digital advertising, but bumps seem to be popping up along that otherwise clear path. Recent reports are that a significant share of “customer clicks” is the result of “bot traffic” (internet robots), not actual customers. Estimates are that businesses have lost more than $16 billion due to ad fraud this year alone. Even more significantly, it would appear that corporate America is beginning to question the effectiveness of digital ads as a marketing tool. Proctor and Gamble recently reported that notwithstanding its decision to reduce its online advertising budget by $100 million in the June 2017 quarter, the company saw no difference is sales. Those trends should be disturbing to stakeholders in the digital ad business.

So, what’s the big deal? The fact is that since the beginning of this century much of the robust economic growth of mature global economies in many industries has come from the growth of the internet, in one way or another. Much of the optimism about future economic growth stems from its continued expansion. The problem is that much of that activity is paid for with revenue from digital ads, and the fate of many of the fastest growing and most valuable companies on earth, like Google and Facebook, are tied to ad revenue growth.

Online advertising is here to stay, but what if the prospects of its growth are tarnished, diminished or, worse yet, more companies get the heretical idea to reduce their online advertising budgets? Digital ad spending is approximately $200 billion globally now and expected to grow more than 50 percent in the next three years. The mere hint of a slowdown in that inexorable rise in digital advertising could have severe ramifications for many companies, and by extension, economies and financial markets. Time will tell if such a heretofore unimaginable reversal of fortune and loss of optimism in that business can cause meaningful fallout in global economies and financial markets.