 I really hate when a podcast that I'm listening to goes from sponsorship to commercial to promotion on and on ad infinitum. A few weeks ago, the train that runs by my apartment got a new paint job. Instead of a shiny blur of stainless steel, it became a mobile billboard for Google Chrome. A giant banner ad, thundering past my window every hour or so. More often whenever I'm recording. Being in Silicon Valley, I'm used to seeing ads for Chrome in all sorts of places. On train platforms, on the freeway, on buildings, and of course, every time I Google anything from Firefox. But the side of the train was a new one for me. Marketing departments exercise impressive creativity finding ways to embed advertising in and on just about anything these days. From product placements in movies to your phone's notifications. Even media services like cable television, satellite radio, Hulu, and YouTube that built their audiences by tempting them with ad-free entertainment, sooner or later, when revenue starts to get a little too tight for comfort. This week's episode is sponsored by BurmaShave, a shave that's real, no cuts to heal, a soothing velvet after feel, BurmaShave. It's not hard to deduce why ads find their way into everything. U.S. companies spent around $285 billion on advertising in 2021, with $781 billion spent globally. That money props up entire industries. Radio stations, TV broadcasters, news agencies, not to mention massive online marketing firms like Google and Facebook are built on a backbone of selling ads to a seemingly endless supply of eager clients. These facts are often held up as evidence of the importance of self-promotion to running a successful business. So many companies pay so much money to hawk their wares, so much of the economy and the internet itself is built on top of ads, they must be absolutely essential. Even more impressively, Facebook has been subject to numerous investigations regarding their negligence during the 2016 U.S. presidential election, purportedly changing the electoral outcome by failing to moderate ad campaigns of strategic misinformation. It seems that the stakes are even greater than generating sales, that the fate of democracy itself relies on judicious stewardship of advertising. It's a good thing the effects and effectiveness of ads are so well documented and robust, right? In a 2021 meta-analysis evaluating 288 studies spanning several decades, economists Shapiro Hitch and Tuckman looked closely at the overall effectiveness of TV ad spending, attempting to quantify just how much those ads affect consumer behavior, what the return on investment looks like for a business that shells out some of its hard-earned cash for a Superbowl halftime commercial or something. After crunching all that data, they found that the median elasticity of TV promotional spending is about 0.01, meaning that if you doubled your company's TV ad budget, you'd expect your sales to increase by 0.01%. Depending on how much money you can make from a sale and how much your ads cost, there's technically an optimal trade-off value where a 0.01% bump would be worth buying a commercial or two. But does anyone actually run anywhere close to that number? According to Shapiro at all, no. It seems the vast majority of firms significantly overspend on TV commercials, so much so that the median dollar spent represents a net loss of 57 cents compared to not running any ads at all. That sounds pretty crazy, right? According to this analysis, commercials aren't just ineffective, but if most companies cut their budget for commercials in half and then just dump that money into a big hole on the ground, they'd be better off. That's pretty counterintuitive. But in several real-world experiments, the effectiveness of advertising has been tested, and it sure looks like those researchers might have been onto something. In 2012, eBay discontinued its Google AdSense keyword budget for several months to negotiate a new contract, and nothing happened. Site traffic and sales toodled along, more or less unchanged. It turns out that paying Google $51 million per year to display an ad for eBay when someone types eBay into their search engine is $51 million wasted. Chase Bank reduced their online advertising presence by 99% and saw no change in outcomes. Uber cut $120 million from their campaign to increase the number of new users and saw the same number of new installs as they had the previous month. That leaves us with one hell of a puzzle. On the one hand, corporate ad budgets are huge, and the industry is growing every year. Some forecasts suggest that the next year will see $3.5 billion thrown at marketing in the US alone. On the other hand, careful analysis and real-world experiments seem to suggest that it's almost wholly ineffective. Why are companies spending more and more on advertising when there's decent evidence to believe that it might be a waste of money? Well, Shapiro at all have a few ideas. First, the notion that self-promotion is important to secure sales is deep in the cultural zeitgeist, which might cause decision makers and bosses to seek out alternate explanations for any observed drag on their firm's profits. In this scenario, a CEO might be losing $0.60 on the dollar for every ad they run, but it might not even occur to them that that's where they're losing money. They simply assume, wrongly, that every other facet of the company is performing even worse than they expected. Man, Q2 profits are down. Guess we should run some more ads, hope things turn around. Second, it's notoriously tricky business to establish a causal relationship between ads and sales. Companies will typically buy more ads during times of year that people are more likely to buy things, like Christmas or Black Friday, so seeing a spike in sales might be owed to a killer marketing campaign, or seasonal trends that would have happened anyways. Similarly, there's no real way to say whether someone who buys a thing after seeing a commercial wouldn't have bought the thing anyway if they hadn't seen it. And of course, sales vary considerably in the normal course of things due to a huge number of factors that can't be quantified or predicted. All that fuzziness creates a fog of uncertainty about the relationship between marketing and business success that makes it easy to squint and convince yourself of just about anything. Which leads me to their third proposed explanation, and I want to be real careful here. If you wanted to know how effective your advertising is at bringing in sales, and when you ask the person at your company who's most qualified to talk about the relative success of those efforts, who knows all the ins and outs of what sort of promotions you're running and how well they're being received, how likely do you think it is that the head of your marketing department is going to say, none of the work my team does is making the least bit of difference? To be absolutely clear, I'm not saying that anyone who works in advertising would deliberately mislead their companies as to the ultimate utility of their work, but there's a widespread cultural belief that advertising is important for business, and a fair amount of ambiguity that makes it very hard to prove where it is and isn't working. If you're trying to make a living in that field, even if you can't convince yourself that your work is absolutely essential, there's no compelling reason to disabuse anyone else of the notion, and 285 billion reasons not to. Other effects might also explain why Zuckerberg didn't even try to dispute accusations that Facebook ads changed the course of the 2016 election. Why would he? That's great publicity. Skepticism of the ultimate effectiveness of advertising doesn't square well with the story we usually tell about markets and competition. Surely, if there were hundreds of billions of dollars being wasted on ads that could be invested in other ways that might give companies a competitive edge, someone would have figured that out by now and exploited those lower costs to dominate their corner of the market, right? If ads don't work, why do so many firms hire advertising agencies? In his infamous book Bullshit Jobs, anthropological historian and activist David Graber suggested that most marketing work occupies a growing economic niche of jobs that don't add value to their companies or society at large, but exist solely to justify and perpetuate themselves. In Graber's taxonomy, advertising jobs are goon jobs, that is, jobs that are only really necessary because other companies employ their own goons. In a theoretical world where advertising had never been invented, someone might have the idea to try running an ad or two, observe that it didn't really seem to boost sales, and that would be the end of that. But in a world where Coca-Cola drops $4 billion on ads every single year, trying to convince investors, clients, or your board of directors that you don't need any advertising to be successful is a tough sell, even if there weren't people whose paychecks depended on proving you wrong. Graber suggests that this pressure is more than enough to offset the general economic pressure to reduce costs. If nobody takes your company seriously unless you're dumping money into ads, even if you're fully aware that it's ultimately a waste, it's entirely possible that shelling out for marketing goons and their commercials is just the cost of doing business. I don't want to make any of this sound like a foregone conclusion. The ambiguities in the effectiveness of marketing cut both ways. It's entirely possible that advertising has subtle but meaningful effects on people's behavior that wouldn't show up under this type of scrutiny, like maybe driving people to think more about buying things, even if they don't end up buying any particular product, results in more economic activity that lifts all boats. Well-established companies like eBay and Uber ads aren't necessary, but for small companies trying to make a name for themselves, they're absolutely essential. Again, many valuable things, including YouTube, are built on the steady stream of revenue from companies, both big and small, looking to entice new customers. It's hard to imagine how the world might be different if we stopped spending so much time and energy selling each other stuff, but I gotta say, when the 273 Northbound Rockets passed my apartment at 10 p.m., garishly reminding me that Google Chrome exists, I do wonder what a world without ads would be like. I don't think I'd miss them. Have you ever been convinced to buy anything because of the little ad that shows the beginning of every YouTube video? Please, leave a comment below and let me know what you think. Thank you very much for watching. Don't forget to follow us, subscribe, share, and don't stop thunking.