One week ago we said that Category 1 storm clouds are gathering over what has traditionally been one of the most lucrative, and perhaps only profitable, sectors to come out of Silicon Valley in decades: online advertising. We directed readers' attention to the recent Global Retailing Conference organized by Goldman Sachs, in which Restoration Hardware's delightfully colorful CEO, Gary Friedman, divulged the following striking anecdote about the company's online marketing strategy, and the state of online ad spending in general. What Friedman revealed - in brief - was the following:
"we've found out that 98% of our business was coming from 22 words. So, wait, we're buying 3,200 words and 98% of the business is coming from 22 words. What are the 22 words? And they said, well, it's the word Restoration Hardware and the 21 ways to spell it wrong, okay?"
There was much more in the full transcript which lamented just how seemingly useless and overrated online advertising has become (or perhaps always had been), a lament shared previously by consumer products giant P&G which several months earlier became the first to fire a shot across the "adtech" bow when not long after it announced it was slashing its digital ad spending because it thought it was not getting the kind of return on investment it desired, it made a striking discovery: “We didn’t see a reduction in the growth rate.” CFO Jon Moeller said “What that tells me is that that spending that we cut was largely ineffective.” Previously, the P&G's CFO had said that “the reduction in marketing that occurred was almost all in the digital space. And what it reflected was a choice to cut spending from a digital standpoint where it was ineffective: where either we were serving bots as opposed to human beings, or where the placement of ads was not facilitating the equity of our brands."
Moeller also touched on the two most common complaints about digital advertising scams: 1) advertisers are paying for ads that are viewed and clicked on by bots, not humans; and 2) ads are placed by thousands of automated “ad exchanges” that are out of control of the advertiser on sites and pages that don’t match the advertiser’s products.
The problem, as we discussed last week, for providers of online advertising is that increasingly more are waking up to the pitfalls of "adtech": the false promises, the opacity of digital advertising, the intractability of the Internet, the clicks and views by bots on which advertisers are wasting their money, and the billions of dollars that get blown down the drain without results. The larger issue is, of course, that retail spending has grown on average by a muted 2% per year in the US over the past five years, while over the same period, digital advertising has nearly doubled to $72.5 billion in 2016, which implies that even digital advertising – despite the lure of Facebook and the like – cannot induce consumers overall to spend more and increase the size of the overall pie for advertisers. It can only, at best, divide up the pie differently.
* * *
And while the Restoration Hardware anecdote may have been a Category 1 "ad tech" storm, on Monday a surprising development out of Uber pushed the maximum sustained windspeed for the online advertising industry to a solid Category 2.
What happened is that Uber, long accustomed to being sued itself, for once was the source of a lawsuit, taking advertising agency Fetch Media to court for click fraud and alleging that the firm improperly billed Uber for “fake” online ads and took credit for app downloads it had nothing to do with. Fetch, incidentally, is owned by the world’s fourth-largest advertising company, Japan’s Dentsu.
In the lawsuit filed on Monday in San Francisco, Uber said it discovered something was "amiss" when it canceled a campaign on Breitbart following the recent blowback against conservative media, where Fetch was placing Uber ads. After the company had asked Fetch not to post advertisements on Breitbart, it saw ads appearing there anyway. While Fetch allegedly pulled ads from all networks that had a relationship with Breitbart, the move had little effect on the number of people downloading the app, contrary to Fetch’s claims, the complaint said.
Uber traditionally had paid Fetch and other ad networks when a potential customer downloads its app after seeing an ad. Uber alleged that after further inspection, Fetch had a widespread practice of over-billing. Uber claims that Fetch had been attempting to claim credit for app downloads it didn’t generate.
Furthermore, Uber claims that after it suspended the ad campaign, it saw no material drop in total installations, as the decline in paid signups was offset byt a "nearly equal amount" by organic installations. To wit:
Just before Uber suspended the entire Fetch Campaign in March 2017, Fetch was spending millions of Uber's dollars per week on mobile inventory purportedly attributable to hundreds of thousands (even millions) of Uber App installs per week. Had the advertisements been legitimate, one would expect to see a substantial drop when mobile advertising was suspended. Instead, when Uber suspended the Fetch Campaign, there was no material drop in total installations. Rather, the number of installations supposedly attributable to mobile advertising (i.e., "paid signups") decreased significantly, while the number of organic installations rose by a nearly equal amount.
This indicated that a significant percentage of the installations believed to be attributable to advertising were in fact stolen organic installations. In other words, these installations would have occurred regardless of advertising. Instead networks or publishers in the Fetch Campaign fraudulently reported the last click attribution to claim attribution credit and were paid for the installation.
The complaint then claims ad fraud was not isolated to one core vendor of ads to subcontractors, but that ad fraud was "perpetuated and even encouraged" between the ad agency and the networks and publishers:
Fetch’s own actions perpetuated, and even encouraged, fraud by the networks and publishers from whom it purchased mobile inventory.
When Fetch obtained makegoods on behalf of Uber, the credit would be in the form of additional mobile inventory with the same network or publisher. In other words, after a publisher was caught red-handed, for example click spamming, Fetch would reward the bad actor with additional volume and opportunities to report fake clicks.
Upon information and belief, Fetch also misused its position as a marketplace leader, and as Uber’s mobile media agency, to solicit improper “rebate” payments from networks and publishers in exchange for purchasing advertising inventories during the Fetch Campaign, and failed to pass such discounts back to Uber.
Fetch also failed to enforce Uber’s prohibition against rebrokering. “Rebrokering” is where networks or publishers take advertising offers and re-broker them to third parties to obtain a greater volume of clicks, and thus, hopefully, installations. Rebrokering is against the terms of the IOs approved by Uber for use in the Fetch Campaign and also leads to a loss of control by the mobile advertising agency over the quality of the advertising and the amount of fraud.
According to the lawsuit, from 2015 to early 2017, Uber paid more than $82.5 million for advertisements overseen by Fetch, and said it refused to pay more than $7 million that Fetch has said it owes.
Of course, should the court find that Uber's claim has merit, the implications for ad tech would be staggering: whereas last week's admission by Restoration Hardware suggests that online advertising is either being gamed by bots, or generally underperforming to the point where it is not worth the investment, the potential involvement of premeditated ad fraud among the key players in the industry - since Uber's ads were certainly not the only cockroach - would not only jeopardize the revenue streams of ad giants such as Facebook and Google, but could result in civil liabilities into the tens of billions in potential ad fraud.
As expected, Fetch pleaded innocent, per Bloomberg:
“We are shocked by Uber’s allegations which are unsubstantiated, completely without merit, and purposefully inflammatory so as to draw attention away from Uber’s unprofessional behavior and failure to pay suppliers,” Fetch Chief Executive Officer James Connelly said in a statement Tuesday. “We vigorously deny the allegations from Uber and will be responding robustly to ensure we set the record straight.”
Still, Fetch has acknowledged the challenge of online ad fraud publicly and said it was working with research firm Forensiq to “fight against mobile ad fraud.”
“One of the biggest challenges we face as digital marketers is to reduce mobile ad fraud,” Fetch’s Connelly said a year ago. The problem, of course, is when Fetch itself is the source of fraud.
Around the same time, Fetch’s global head of media, Steve Hobbs, told Adweek that a “significant amount” of downloads in Fetch’s system are flagged as suspicious. “Where there’s money, there is fraud,” he told the publication. “Being 100 percent on top of it is an impossibility, but we think with Forensiq’s help we can get it significantly lower.”
As part of the lawsuit, Uber plans to seek at least $40 million in damages according to Bloomberg. More notable is that Fetch’s publicly traded parent company, ad giant Dentsu which has a $12 billion market capitalization, is not named in the lawsuit, at least not yet. The question is if and when it emerges that such ad fraud as that claimed by Uber is endemic across all online ad network and perpetrated by virtually all ad giants, not only Dentsu but also Google and Facebook, what happens then to the biggest growth stories in the tech world once customer faith in the online ad model "deus ex machina" finally evaporates?
The full redacted Uber vs Fetch lawsuit is below