Behind the buzzword: Identity
The necessary bridge between cookies and post-cookie advertising
Last year digital marketers in the US spent somewhere in the neighborhood of $125 billion to try to reach consumers with the right message at the right time and influence a purchase decision. Globally that number rises to north of $332 billion (and both numbers would have been higher in a non-pandemic year). Enabling these connections are tiny text files stored by the browser on your various devices, the backbone of an industry worth hundreds of billions of dollars per year. And they’re going away.
Those tiny text files – cookies – are really about identity. Put simply, to be able to target advertisements to users, advertisers need to know who it is they’re targeting, what their interests are, and, ultimately, how likely someone is to turn into a paying customer.
Peter Steiner’s prescient cartoon, published in the New Yorker on July 5, 1993 and deserving of its own Wikipedia page
Cookies were never designed with advertising in mind. They were meant as an easy way for websites to preserve state: to “remember” your name and login credentials or enable subsequent pages to load with the correct personalized information, that kind of thing. Advertising has simply been piggybacking on those capabilities since the days of the first banner ads.
From a consumer’s perspective, advertisers’ desires to identify us easily manifest in various creepy ways. In spite of retargeting’s commercial success, the thought that consumers are being tracked or followed around the internet by those shoes they looked at the other day doesn’t sit well with them. The value exchange of being signed in to Google or Facebook all the time seems clearer to consumers, who understand that they must somehow tell the platform who they are in order to see their friends’ photos on Facebook or have their route home personalized in Google Maps. As a result, walled gardens have been able to build up quite a moat of willing fully authenticated users. On the open internet side of that moat, things aren’t quite so rosy: The value proposition of signing in to your local news site may be less clear, especially if the site has sacrificed customer experience (pop-ups, chumboxes, and autoplay videos with sound on are all popular choices) at the altar of advertising revenue survival.
Why is identity important now?
Identity enables the marketing and advertising systems we have today. This general premise – know who you’re messaging – has long been a foundation for marketing. But a confluence of factors have given this age-old concept a new sense of urgency:
Impending technological changes: Google announced in January 2020 that it would withdraw support for third-party cookies in Chrome, the world’s most widely used browser, in 2022. Also in 2020, Apple said it would force app developers and marketers to get consumer consent before using its Identifier For Advertisers (IDFA). These developments have created a timeline for change and challenges for marketers and publishers that use these identifiers for monetization, ad personalization and targeting, remarketing, measurement, attribution, and frequency capping.
Walled garden spend consolidation: In 2019, the triopoly Google, Facebook, and Amazon took about 80% share of the digital advertising market, according to GroupM. That range approached 90% in 2020 as the pandemic drove a massive shift in eyeballs, consumer spending, and ad dollars to digital channels. For the first time, the triopoly took a majority of all US ad spending in 2020. As spending continues to flow to walled gardens, the open internet is left without good options. Users are always fully authenticated and logged-in on walled gardens, unlike on the rest of the open web where pseudo-anonymity reigns.
Regulatory activity: When announcing their plans to restrict or eliminate third-party cookies and IDFA, Google and Apple cited the specter of privacy regulation and consumer expectations to justify the decisions. The world’s strictest privacy regime – the General Data Protection Regulation in Europe – went into effect in 2018, forcing companies around the world to comply if they wanted to conduct certain types of business with European citizens. This in turn drove a wave of innovation of companies incorporating privacy as a key element in design. The US has no federal privacy law, only a patchwork of state-level laws that restrict to some degree the collection and sale of consumer data for marketing purposes.
Where is the pulse today?
As with most industries, advertising and marketing moves through cycles. It’s interesting to watch clients in different geographies react to identity and privacy. In North America, companies have generally taken a seemingly more lackadaisical approach: “In the absence of federal-level privacy legislation, this may feel like a problem we’ve already solved or can afford to solve later.” There isn’t the level of urgency in North America that these issues warrant. A lot of the innovation taking place around identity solutions is a direct result of GDPR, along with similar regulatory actions we’re seeing around the world. Companies are more likely to be actively pursuing or have an identity solution in place in the EU.
In North America you often come across companies that have done some identity exploration, perhaps of a cookie-based device graph or mapping solution. Those that were very early to be aware of this problem are likely to feel that they solved identity, but those early solutions no longer cut it.
Let’s call the current state of identity considerations Identity 2.0. This phase is marked by a new technological paradigm. New technologies such as data clean rooms are creating excitement in the space and providing a way for large marketers, agencies, and publishers to enrich their first-party data with insights from walled gardens in a secure, privacy-safe way.
A Band-Aid approach to identity won’t work. We can’t simply rename cookies something else (hello, various forms of device fingerprinting) and expect the whole system to keep working as-is. Identity in 2021 really means the rearchitecting of the very foundation on which digital advertising sits.
Not a one-size-fits-all solution
While we often talk of identity rather monolithically, identity on the open web really presents a spectrum of solutions. And as with most things in advertising and marketing, what you need largely depends on which side of the market you sit and how big you are.
Brands are increasingly aware of the challenges of personal data sets. They are considering security, data leakage, and use cases beyond marketing and advertising for customer-level data. This is especially pronounced in certain verticals: Identity for a bank may mean a specific compliance requirement such as financial services’ Know Your Customer (KYC), which is much stricter than what marketers consider as identity.
On the high end of the brand scale, large marketers with big budgets are a natural match for data clean rooms. As companies bring more of their customer data online, including personally identifiable information, the impact of breaches and unintended access weighs heavily and can potentially bring about hefty fines (not to mention the cost of loss of consumer trust). The main buyer also often extends beyond marketing – a chief data or chief information officer role – so security becomes a key consideration. In addition to security, data clean rooms also meet another key requirement: privacy. These environments offer control to users who are attracted by the idea that data can be shared without physically moving it anywhere. That’s a new concept: You don’t have to hand over to someone your entire data set for matching purposes and hope none of it leaks. This isn’t a cheap solution, so access to data rooms will be restricted to large agencies, marketers, and publishers with generous budgets and the internal resources to be able to use these tools. Unsurprisingly, walled gardens (Facebook, Amazon, and Google) all have marketing-focused solutions here in play, competing with neutral infrastructure vendors (many of which won’t be familiar to a martech buyer but are household names for CTOs and CIOs).
For smaller brands and budgets, single-channel walled garden solutions seem to be sufficient. We believe that a mid-market of vendors will begin to emerge to help smaller marketers use data clean rooms, although it’s possible that these vendors will also be dominated by walled gardens. What this group of marketers and agencies really needs is something akin to easy-button types of solutions that automate and optimize placements and performance. These smaller players are more likely to be concerned about overall ease of use than who will be the vendor for underlying feature-by-feature capabilities. (Perhaps they won’t perceive identity as a key differentiator but rather something that will be solved or bundled by a trusted technology partner.)
Publishers are looking to retrench from competing with platforms on scale to a more nuanced offering that activates their own unique first-party data. Audiences composed of anonymous readers or outsourcing login info to a platform are being replaced by asking users to register and sign in whenever reading (even if there’s no subscription to pay). This, of course, works well for premium, Tier 1 publishers that command sizable audiences and have the resources needed to implement. Like their big -brand counterparts, multimedia conglomerates have their pick of options and most include some type of clean room consideration. For anyone outside of that group, the answer seems to be some variant of a shared ID/login coop like the recently announced NewsPassID for local news organizations. If you’ve already been scarred by some variant of unsuccessful publisher co-ops, we’ll understand and share your skepticism at the viability of these solutions. Perhaps now is the time this approach will finally work.
Technology companies, spurred by GDPR and other privacy regulations and structural changes like third-party cookie deprecation, are innovating out of a system that was never really meant to be the backbone for so many commercial transactions. However, as mentioned, this isn’t technology vendors’ first rodeo with identity.
Identity 1.0 largely revolved around device graphs. Key considerations were probabilistic vs. deterministic approaches to identification and match rates, but this wave was still based on cookies and cookie pools. Even in this newer Identity 2.0 world, the solution seems to revolve around common IDs. While initially it seemed every vendor had developed its own ID schema, we’re now at the “few viable candidates” stage and operating toward independent industry organizations acting as the ultimate custodians of the identity layer. One example is Unified ID 2.0, a hashed email-based identifier that has gained widespread industry support; its future, however, was recently called into question when Google said it wouldn't support email-based identifiers. But buyer beware: While product marketing materials will happily tout post-cookie solutions, the actual technology of the various “alternatives” may still rely on cookies and fall far short of that stated promise.
Common pitfalls to avoid
Practical mismatch: What companies need to implement immediately will diverge from what they will need longer term. Many companies will lose the ability to run basic advertising operations when third-party cookies are sunsetted, and the short-term patch they will need to function is different than what they will need for their overarching identity solution, especially if identity needs to stretch beyond just marketing use cases.
Favoring existing vendors: If you already have a relationship with a vendor and they tell you that they can also solve for identity, you’re naturally inclined to believe them and expand the contract rather than try to push a new one through your procurement department. But existing vendors won’t necessarily be the best fit for identity needs. As we’ve outlined above, some solutions are a perfect fit for some client types but have a rather square peg, round hole effect for others. Understanding and documenting your organization’s needs is an important step that’s easy to overlook.
Lopsided stack: Ad tech and mar tech stacks are evolutionary and often contain solutions that should belong in different generations of software. We often come across teams with top-notch data warehousing capabilities but are also using, say, off-brand CDPs and niche, small-footprint DSPs because when they bought them, the respective spaces weren’t as mature as they are today. This creates challenges across an organization’s ability to execute. Consequently, layering a next-gen identity solution over a lopsided stack won’t yield desired results (through no fault of the identity solution) and can leave the impression that the identity solution is not performing as planned. Don’t be surprised if identity conversations reveal problems that need to be addressed elsewhere.
If you’d like a more in-depth analysis of this space, let’s schedule a call.
One question
Given the compressed timeline of cookie deprecation and the variety of solutions available, how do you structure viable tests of different vendors and solutions?
Dig deeper
Ana’s recent panel with Adform and InfoSum on the future of identity (part of Adform’s Identity Week)
LUMA Partners’ 2020 Market Report (with identity as one of key themes driving M&A activity)
Thanks for reading,
Ana & Maja
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Who we are: Sparrow Advisers
We’re a results oriented management consultancy bringing deep operational expertise to solve strategic and tactical objectives of companies in and around the ad tech and mar tech space.
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Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.