Just Because “It All Adds Up” Doesn’t Make It True

When someone says, “Figures don’t lie,” know this: Figures lie, and liars figure.

Never trust a weasel with a calculator.

Do you remember the mortgage meltdown of 2008 and The Big Short, the movie that was made about it? There is a scene in that movie where investors Mark Baum and Vinnie Daniel go to visit Georgia Hale, an employee of the ratings agency Standard and Poor’s:

Georgia Hale: So, alrighty, FrontPoint Partners, how can Standard and Poor’s help you?

Vinnie Daniel: Well, we don’t understand why the ratings agencies haven’t downgraded subprime bonds since the underlying loans are clearly deteriorating.

Georgia Hale: Well, the delinquency rates do have people worried but they’re actually within our models.

Vinnie Daniel: Says you.

Mark Baum: So you’re convinced the underlying mortgages in these bonds are solid loans?

Georgia Hale: That is our opinion, yes.

Vinnie Daniel: Did you check the tape? Have you looked at the loan level data?

Georgia Hale: What do you think we do here all day?

Vinnie Daniel: They’re giving these loans to anybody with a credit score and a pulse.

Georgia Hale: Excuse me, sir. What do you think we do here all day?

Vinnie Daniel: We’re not sure. That’s why we’re here.

Mark Baum: Here’s what I don’t understand,

Georgia Hale: We check, we recheck, we check again…

Mark Baum: If these mortgage bonds are so stable, if they are so solid,

Georgia Hale: Perhaps you should check your friend.

Mark Baum: have you ever refused to rate

Georgia Hale: We stand behind them.

Vinnie Daniel: That’s delusional.

Georgia Hale: We stand behind them.

Mark Baum: Georgia, have you ever refused to rate any of these bonds – upper tranche – as Triple-A? Can we see the paperwork on those deals?

Georgia Hale: Oh, I’m under no obligation to share that information with you, whoever you might be.

Mark Baum: Just answer the question, Georgia. Can you name one time in the past year where you checked the tape and you didn’t give the banks the Triple-A percentage they wanted?

Georgia Hale: If we don’t give them the ratings, they’ll go to Moody’s, right down the block. If we don’t work with them, they’ll go to our competitors. It’s not our fault. It’s simply the way the world works.

Vinnie Daniel: (after a dumbfounded pause) Holy shit.

Georgia Hale: Yes, now you see. And I never said that.

It seems to me the principal difference between the unregulated world of subprime loans and the unregulated world of online marketing is that there is no way to “short” the world of online ad fraud. There is no way to make a profit by exposing and ending it.

In a widely-circulated news column published the day after Christmas, 2018, reporter Max Reid asked and answered an important question:

“How much of the internet is fake? Studies generally suggest that, year after year, less than 60 percent of web traffic is human; some years, according to some researchers, a healthy majority of it is bot. For a period of time in 2013, the Times reported this year, a full half of YouTube traffic was “bots masquerading as people,” a portion so high that employees feared an inflection point after which YouTube’s systems for detecting fraudulent traffic would begin to regard bot traffic as real and human traffic as fake…”

“In late November, the Justice Department unsealed indictments against eight people accused of fleecing advertisers of $36 million in two of the largest digital ad-fraud operations ever uncovered…”

“Take something as seemingly simple as how we measure web traffic. Metrics should be the most real thing on the internet: They are countable, trackable, and verifiable, and their existence undergirds the advertising business that drives our biggest social and search platforms. Yet not even Facebook, the world’s greatest data–gathering organization, seems able to produce genuine figures. In October, small advertisers filed suit against the social-media giant, accusing it of covering up, for a year, its significant overstatements of the time users spent watching videos on the platform (by 60 to 80  percent, Facebook says; by 150 to 900 percent, the plaintiffs say).“

In response to that story, Former Reddit CEO Ellen Pao tweeted,

“It’s all true: Everything is fake. Also mobile user counts are fake. No one has figured out how to count logged-out mobile users, as I learned at reddit. Every time someone switches cell towers, it looks like another user and inflates company user metrics.”

Also in response to that story, Aram Zucker-Scharff tweeted,

“The numbers are all fking fake, the metrics are bullshit, the agencies responsible for enforcing good practices are known bullshitters enforcing and profiting off all the fake numbers and none of the models make sense at scale of actual human users.”

Zucker-Scharff is director of Ad Tech at the Washington Post.

But none of this is surprising, or even new.

Two years ago, at the annual convention of the Interactive Advertising Bureau, (a business organization that develops industry standards, conducts research, and provides legal support for the online advertising industry,) Marc Pritchard, CEO of Procter and Gamble, the largest advertiser on earth, said,

“We’re all wasting way too much time and money on a media supply chain with poor standards at option, too many players grading their own homework, too many hidden touches and too many holes to allow criminals to rip us off.”

“We have a media supply chain that is murky at best and fraudulent at worst. We need to clean it up and invest the time and money that we save into better advertising to drive growth…”

“Adopt one viewability standard. Implement accredited third-party measurement verification. Get transparent agency contracts and prevent ad fraud. Yet, for many reasons we haven’t taken enough action to make a difference.”

“Now maybe one reason is that cleaning up the media supply chain is not really a very sexy topic. I mean let’s face it, it would be a lot more fun if I were up here talking to you about the latest VR experience than bot fraud. But maybe there’s another reason and I’m going to make a confession, which may sound familiar to some of you. I confess that P&G believed the myth that we could be the first mover on all of the latest shiny objects despite the lack of standards and measurements and verification.”

“We accepted multiple viewability metrics. Publishers self-reporting with no verification, outdated agency contracts and fraud threats with a somewhat delusional thought that ‘digital is different’ and that we were getting ahead of the digital curve.”

“We’ve come to our senses. We realized there is no sustainable advantage in a complicated, non-transparent, inefficient and fraudulent media supply chain.”

Marc Pritchard looked the Interactive Advertising Bureau in the face, much like Mark Baum looked the ratings agency, Standard and Poor’s, in the face during The Big Short. 

I bring these things to your attention only to suggest that you be extremely careful when evaluating marketing opportunities.

I’ve heard the stories of exciting success being created through online marketing. And I’ve investigated a number of those stories to see what they have in common. The denominator I found to be most common was that the big winners have remarkably high profit margins, with 18x and 20x markups being typical.

This is because it takes a 20x markup to fund a cost-of-marketing that exceeds 30% of sales.

Am I suggesting that you avoid online marketing? No, I am not. I am merely suggesting that an enthusiastic “true believer” in online marketing may not be the best person to entrust with your ad budget.

I don’t get involved in the selection of online media. Instead, I have partnered with knowledgeable, experienced online marketers who know how to separate fluffy data from hard facts, and whose basic nature is to be quietly, politely suspicious of everything they are told.

I can put you in touch with them if you like.

As for me, I’m continuing to invest heavily in broadcast radio ads and broadcast television ads. And based on the growth of businesses I witnessed last year, anyone who says that radio ads and TV ads don’t work anymore has been woefully misinformed.

Roy H. Williams