Fake Views, Real Losses: future struggles of ad-based revenue streams
Thesis
Companies that rely on ad revenue as their primary source of income (specifically internet ad rev, not billboard companies etc.) are likely going to see a significant decline as bot traffic and AI capabilities increase.
acronyms
- SMBs: Small & medium businesses
- CPM: Cost Per Mille (1k impressions)
- ROAS: Return on ad spend
Supporting Analysis
Meta posted really strong earnings with an increase of ad revenue as the average price per ad increased 9% and impressions rose by 21% yoy.
As ad revenue increases so to does bot traffic, suggesting that ad spend is increasingly being spent on non-converting bots. It’s not sustainable, at some point advertisers are going to stop spending money on these platforms unless they can get the bot problem under control. Sure, ad revenue is expected to increase but the its starting to flat line.
With increasingly sophisticated interference and obfuscation, AI assisted ad targeting isn't going to fix the problem and will eat the R&D budget of these companies while they constantly play catch up to ensure their conversion rates remain reasonable.
Companies are already reporting decreases in ROAS due to increasing CPM and declining conversions. SMBs are already rotating their ad spend out of meta and tiktok into cheaper more effective means of advertising, I expect this trend to accelerate as the price of CPM increases.
Recent news about ID verification on social platforms confirms the idea that these companies are painfully aware of this issue. i don’t know about you but I don’t really believe that politicians are pushing for to protect the kids, in fact I can almost guarantee it’s major platforms that are lobbying for it. It’s not a secret that corporations don’t give a fuck about kids…Instagram had a report leaked while ago showing they knew that social media was bad for kids but they still targeted minors to use their apps anyways. The only reason they’d want to implement ID verification is to ensure that bot traffic goes down so conversion rates and CPM goes up.
Eventually major advertisers are going to demand transparency on who is seeing their ads, if that happens one of two things will happen:
- Advertisers will negotiate for lower CPM, cutting platform ad rev.
- Advertisers will find different marketing avenues. In either event ad rev platforms (meta, google, tiktok) are going to see a decrease in ad spend.
These platforms are so leveraged on their ad rev that even a small cut to CPM would result in billions lost.
Snap will fall first
Sure, meta and google would take a hit. Do you see Snap on here? No? That's right, don't because I cut the EPS off at the 0 mark. Snaps EPS for the quarter ending March 31 was $-0.08 a ~58% decline yoy, they don't have any wiggle room, they're already unprofitable. Oh there's also the fact that Snap's revenue stream isn't significantly diversified and they have very little runway.
Google has cloud services and meta has whatsapp monetization, they'll be okay for a bit, but Snaps Income is primarily ad rev. (chart below)
| Signal | Catalyst | Observed? |
|---|---|---|
| Declining ROAS and increasing CPM | Advertisers pulling spend from inefficient platforms | ✔️ |
| SMBs moving ad budgets to alternatives | Word-of-mouth, affiliate, influencer marketing, etc. | ✔️ |
| ID verification policies emerging | Governments/platforms pushing for stricter verification | ✔️ |
| Major platforms lobbying for ID laws | Evidence suggests push for industry-wide bot crackdown | ❌ |
| Demand for transparency in ad reporting | Advertisers want real humans, not inflated bot impressions | ❌ |
| Increased AI obfuscation complicating targeting and detection | Ad platforms burning R&D cash to chase AI detection | ✔️ |
| CPM continues rising despite falling conversion | Indicates inefficiencies are increasing, not decreasing | ✔️ |
| Platforms forced to disclose real user counts (vs. bot inflated) | Could tank valuation or prompt large-scale ad pullback | ❌ |
| Advertisers negotiate lower CPM or pull spend entirely | Slams ad rev directly | ❌ |
| Snap posts major EPS decline alongside stagnant/improving ad metrics = thesis confirmation | Snap drops post-earnings while Meta/Google tread water = confirmation of fragility vs giants | ❌ |
I'll look to confirm the minor catalyst via earnings. If they report an increase in customer acquisition cost, or mention some sort of hardships in customer acquisition that's my confirmation.
TL;DR
> Bot traffic is increasing, AI is getting better at hiding itself.
> More bots = More ad impressions & less conversions
> Higher CPM and ROAS with less conversions means less advertisers spending money on online ads
> companies like snap with no other significant income streams will be hit hardest
Q&A
Q. Why don’t they just implement it instead of lobbying for it as a law?
A. If one platform does it, they lose their users to the competition. If all platforms do it they all win
Q. More bots means more impressions, better to make more money right?
A. No, short term its a fun metric, but you're really just lying to your customers. Once advertisers see that a huge portion of their impressions aren't converting they're going to find a platform that has better conversions.