At first glance, Tuesday’s two big stories — Verizon’s acquisition of AOL , and Facebook’s official announcement of Instant Articles — have little in common. A deeper look, though, suggests that both are a consequence of an ongoing transformation of digital advertising that will affect nearly every consumer-focused services company.

Facebook’s Advertising Strength

There’s no need for me to dwell on the Facebook news; I covered it at length in March in an article called The Facebook Reckoning . In that piece I noted a significant problem with Internet advertising: ad inventory is ever-increasing, which means the rates for an undifferentiated ad spot are ever-decreasing; the best way to combat that trend is through better ads, better placement, better targeting, and better measurement.

Facebook is progressing on all these fronts: the company’s ad units are best-in-class , the targeting is frighteningly specific, and with its overhaul of Atlas the company is working to draw a line from Facebook ads to offline purchases. The vast majority of publishers, though, are in the opposite boat: mobile ads mostly stink, there’s no room for them on the screen (which leads to audience-antagonizing interstitials), and perhaps most problematically, it is much more difficult to target and track mobile users than it ever was on the desktop.

Cookies and the Rise of Programmatic Advertising

On the desktop, tracking is relatively easy: various ad networks will set a cookie in your browser that collects information about your travels around the Internet, and then use that information to serve advertisements based on your browsing history. That information was sufficiently useful that said ad networks were able to charge advertisers rates well above those charged by publishers who knew nothing about their audience, meaning the ad networks, with a few notable exceptions, could offer publishers more money for their ad inventory than the publishers could make on their own. This was a fundamental shift: instead of focusing on specific sites as a proxy to reach specific types of people — a model that was very much in-line with non-digital advertising like television — advertisers could instead focus on specific types of people directly.

This process has only grown more advanced: today users are identified not only by their browsing history, but also offline data like loyalty cards and other purchase histories, creating incredibly precise profiles. Advertisers can reach people based on those profiles through automated exchanges that use auction pricing and serve up ads in real-time, allowing for the collection of nearly immediate feedback on the campaign, making rapid iteration possible for the advertiser.

The Mobile Advertising Challenge

Programmatic advertising is not perfect: while the advertiser can specify the sort of content they don’t want their advertisement to be associated with, it’s questionable how well this works in practice; there’s also a mismatch between impressions (when an ad is loaded) versus the number of times an ad is actually seen ( Google says 56% of ad impressions are never seen). Mobile, though, has presented the biggest challenge: apps don’t share cookies.

Advertising networks have searched for some sort of common denominator that would allow them to track users in different apps; originally most settled on using a phone’s Unique Device Identifier (UDID), which the Wall Street Journal exposed as a privacy disaster in 2010:

“The great thing about mobile is you can’t clear a UDID like you can a cookie,” says Meghan O’Holleran of Traffic Marketplace, an Internet ad network that is expanding into mobile apps. “That’s how we track everything.”

Here’s a useful rule of thumb: the more giddy a quote from an ad network employee, the bigger the privacy violation for end users. To that end, both Apple and Google soon banned the use of unique identifiers, instead offering ad IDs that could be reset by users — or even turned off completely. 1 Advertisers have adapted, but the reality is that tracking users and measuring campaigns on mobile remains a lot more difficult than on the desktop, and that’s even before you consider multiple devices.

Tracking Users Effectively

This reality is at the core of Facebook’s value proposition to advertisers: target users, not devices. Sheryl Sandberg said on Facebook’s Q4 2014 earnings call in January:

If you look at how digital ads are being measured, they are being measured based on a cookie based world that assumes that people have one device, largely a PC. And that is not real, consumers have a phone, they have a tablet, they have PC’s as well and [we have] the ability to understand that one person to serve an ad and measure all the way through [to purchase] correctly.

Note the transition Sandberg is highlighting: the locus of tracking and measurement is shifting from devices to users. It echoes the shift in advertising from publishers to ad networks, which is to say from content to users. Targeting and serving ads to individual users is the goal, and, as Ms. O’Holleran excitedly declared in 2010, the holy grail is some sort of “super-cookie” that a user can’t turn off.

Facebook has this: it’s your name, and most of us have gladly handed over not only that but also our birthday, our history, our address, all of our friends, what we like, and more. Of course we’re logged in on our PCs, so that all of those Facebook ‘Like’ buttons can track our movement around the web, and Facebook is aggressively pushing developer products — including relatively highly paying ad units — so that our apps can keep an eye on us as well.

Google is dominant as well; I’ve long maintained that Google+ was more of a success than people appreciate: it unified IDs across Google’s properties and ensured most of us are always logged in. Google may not have the explicit user-provided data that Facebook does, but the company makes up for that with their extensive ad networks across both the web and inside of apps that not only display ads but also track said users.

Still, while both Facebook and especially Google have 3rd-party ad offerings, both — especially Facebook — are more focused on monetizing on their own sites. A whole plethora of ad-tech companies have risen up to fill in the rest of the web’s inventory, but no dominant player has emerged: until, potentially, now.

Why the Verizon-AOL Deal Makes Sense

AOL was a part of that plethora: while most people remember the eponymous dial-up service and “You Got Mail,” or perhaps know that the company is also the 4th biggest digital media property in the United States with nearly 200 million unique monthly users, Verizon was almost certainly interested in a much newer part of AOL’s business: its ad network. Over the last several years AOL has invested heavily, both through M&A and R&D, into its programmatic advertising offering both for its own sites and, more importantly, 3rd-party ones; it has also developed a particular expertise in video. This has made the company competitive in its ability to allow advertisers to target users instead of content, but the lack of an “AOL ID” puts a cap on upside, at least relative to Google or Facebook.

Verizon, meanwhile, knows a lot about its users:

• By virtue of being a paid service, Verizon knows users’ names, addresses, and even social security numbers (gotta run those credit checks!)
• Because they are a phone carrier, Verizon knows your location, something that is useful not just for serving ads but also for ascertaining whether or not they were effective (seeing a McDonald’s ad and visiting the Golden Arches soon after is a powerful signal)
• Because they are the ISP for your mobile phone (and for many customers, their home as well), Verizon doesn’t need a cookie or device identifier: they can set a “super-cookie” on their servers to track everything you do on the Internet, and that’s exactly what they’ve done 2

This is why the deal makes so much sense: AOL provides the technology to target individuals instead of content, and Verizon the ability to track those individuals — at least the over 100 million customers they already have — at arguably a deeper level than anyone else in digital advertising (for non-Verizon customers, AOL’s ad platform is still useful, albeit not as targeted; rates would be commensurately lower). The talk of this mashup joining Facebook and Google to form a “Big 3” of digital advertising is not unrealistic.

That said, this isn’t a grand slam either. While there is a lot to like about this deal, it’s doubtful Verizon would be doing it were they not facing long-term growth questions, and that’s not always the best motivation to enter an entirely new kind of business. Moreover, there is a very real culture question: an infrastructure company and an online media company couldn’t have more different approaches to business, based on a history of solving fundamentally different problems. This clash will only compound the difficulty in realizing the vision I just painted — a vision that Facebook and Google have still only partially realized despite having the best software engineers in the world. And, of course, there is the potential for consumer backlash: if my skin crawled while describing a dystopian future of perfectly tailored ads based on perfect information about my activities, I trust your reading it inspired a similar sensation.

The Re-ordering of Advertising

Describing what Verizon and AOL are shooting for is another way of depicting just how much trouble most publishers are in. Beyond the fact most publishers know precious little about their users, few are must-reads that attract users to their streams (as opposed to their links). Worse, even those with compelling streams don’t have scale even remotely comparable to what programmatic ad networks offer: for now the most prestigious sites are looking to monetize on direct sales to brands, but if programmatic offerings ever figure out how to guarantee premium placement that is actually viewed by the exact right customer those revenue streams could dry up.

Subscriptions remain an attractive proposition, but as the Toronto Star recently discovered , not all publishers are the New York Times or Wall Street Journal, which means many publishers will have to take what they can get. And, frankly, it’s hard to see them getting a better deal than Facebook’s Instant Articles offering:

• Publishers use their own publishing tools, meaning no interruption to their workflow; Facebook makes it look good (although publishers can augment the post) to the publishers’ specification — a New York Times article won’t look like a BuzzFeed article
• Facebook will share analytics data from Google Analytics and Omniture, and ComScore will count Instant Article visits as visits to the publisher
• Facebook is giving publishers the opportunity to sell their own ads and keep 100% of the revenue (although, given Facebook’s superior targeting capabilities, I wouldn’t be surprised if 70% of a Facebook sale ends up being worth more)

Meanwhile, most publisher websites will be increasingly reliant on programmatic offerings that care only about the site’s ability to attract a specific type of customer who a particular advertiser has bid on, a sure route to a meager existence predicated on driving page views.

It’s not just publishers who might struggle, though: two weeks ago I chronicled Twitter’s cloudy future given their relative lack of scale and under-developed ad offering, and while I stand by that, it’s kind of amazing that a few hundred million active users might not be enough; that certainly has to be a sobering thought not only for unicorns like Pinterest and Snapchat (although I’m bullish on both), but for any startup looking to monetize through advertising. It wouldn’t surprise me to see more and more companies taking yet another page from Asia and increasing their focus on e-commerce and online-to-offline transactions, but it might take a few failures to fully presage such a shift. Hopefully there will be sufficient publishers to document the change in approach.

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1. On the iPhone, Settings -> Privacy -> Advertising -> Limit Ad Tracking [ ↩ ]
2. You can now opt-out [ ↩ ]