The Future of Targeted Advertising in a Cookie-less World

“It’s a big change,” says Guy Aridor, an assistant professor of marketing at the Kellogg School. “They’re trying to achieve a balance between allowing targeted advertising on Google Chrome and protecting consumer data, which have always been in tension.”

One of the ways that Google and others have tried to achieve this balance is by phasing out third-party cookies, which track users from site to site and collect the kind of granular data companies—and, increasingly, consumers—find so valuable. Instead, the idea is to classify consumers into cohorts and to only send advertisers cohort information instead of richer details about each individual’s browsing behavior.

So what will these new privacy standards look like, and how might firms adapt?

“It depends on the size of the company and their marketing strategy,” Aridor says. “Some might try to move back to non-targeted advertising, or at least stop relying on targeted ads so heavily. But a lot of firms are still dependent on advertising that uses this third-party tracking, including many small businesses that rely on the kinds of targeted ads that Facebook and Google have long provided. It’s the larger firms that might be able to find better solutions.”

When regulation starts to bite

Google’s Privacy Sandbox didn’t appear out of nowhere.

While the company might prefer to claim it’s looking out for users, its decision to focus on privacy was clearly inspired by the GDPR regulation passed in 2018 by the European Union. The GDPR has since become a powerful model for privacy laws across world, with tech giants adjusting their global strategies to comply with EU law to avoid the hassle of having to build separate data pipelines for each market. This “Brussels effect,” as it is known in the industry, is analogous to the impact California emissions standards have on U.S. auto manufacturers.

Furthermore, in 2021 Apple launched its own privacy protections on iOS—known as the App Tracking Transparency Framework (ATT)—that enabled consumers to opt out of sharing their third-party identifiers on iOS devices specifically.

There is already some evidence that these landmark regulations have been hurting companies’ bottom lines. In a recent paper, Aridor and coauthors looked at the impact of the GDPR on the online travel industry and found a 12.5 percent drop in the total amount of “observed data” companies could rely on, which ultimately led to a corresponding loss in advertising revenue for the online travel platforms. Other research has similarly found a loss of new customer acquisition and revenue in other industries after GDPR.

In subsequent research (currently under review), Aridor and coauthors studied the impact of Apple’s ATT on small-business advertisers and found that more-Facebook-dependent advertisers suffered significant losses within the first two years of the implementation of ATT. Without the use of third-party identifiers and reduced scale of data, it has been more difficult for companies to target specific consumers and to track the effectiveness of their ads.

“Clearly, firms are hurting on this front,” Aridor says. “In particular, small businesses. They just don’t have the customer base to engage in a bunch of different marketing actions by themselves.”

So while consumers worried about the invasion of digital privacy may cheer the efforts of Google—as well as Apple—the consequences may be more complicated. The ability of tech giants to shape the landscape of digital advertising might continue to raise questions about competition. After all, Google is facing a major antitrust case, one that reveals just how much Google and Apple together control our digital ecosystem.

“Apple and Google can always say, ‘We’re doing this for the betterment of consumers,’” Aridor says. “But they might be more interested in cementing their market power over the other big tech firms. This means that regulators have to trade off curbing the market power of these firms, maintaining a healthy advertising ecosystem that small businesses can use to acquire customers, and protecting consumer privacy.”

Finding substitutions

With less tracking and fewer ways to target individuals, companies may need to find new ways to reach consumers. So how will they advertise online in this environment?

“Some might return to non-targeted advertising,” Aridor says. “Which could involve shifting away from dependence on social-media advertising and targeted display advertisements.”

In his research on the impact of the ATT on targeted ads, Aridor found that social-media advertising from firms with high mobile usage among consumers, such as Facebook and TikTok, was most adversely affected by this policy, and that many firms’ solution was to advertise on the Google ecosystem instead.

“If they can’t target on Facebook, they’ll just advertise on Google’s ecosystem,” he says. “That’s some of the substitution we are seeing. However, despite this, we still find that more-Facebook-dependent advertisers have revenue losses, and so this substitution is imperfect.”

But advertising on Google still involves some targeting—and that’s what Google hopes to preserve. “ATT was stark—you either track or you don’t—whereas Privacy Sandbox is somewhere in the middle,” Aridor says. “I think the big question is: To what extent is targeting actually going to be degraded if you use cohorts instead of having consumers opt out entirely?”

For certain large companies, the end of third-party cookies might not change their marketing plans as much as one might think.

“When you visit the websites or open the apps of the really big companies—Nike, Amazon, Walmart—they also collect a bunch of information about you,” Aridor says. “So it’s not clear how much this particular change would impact them. They might be able to piece together their own first-party data to approximate what they’re already doing.”

In fact, in a cookie-less world, the purchasing data Amazon and Walmart gather from customers might leave these companies well positioned to benefit, as they can use their own websites and apps—their own digital properties—to sell advertising to brands, just as a media property would. After all, who knows us better than our local Target or CVS?

The end of DTCs?

The future of digital advertising depends on how firms respond to Google’s Sandbox, which the company plans to roll out over the course of 2024.

“Soon there will be more data that will give us a better sense for the long-term impact of this shift. Furthermore, researchers have started to track the gradual adoption of the technologies needed to power this change,” Aridor says.

But if giant retail companies stand to benefit from a shift away from third-party tracking, the opposite could be true for their digital-native competitors: direct-to-consumer companies.

“One theory is that the introduction of targeted advertising helped create these direct-to-consumer firms,” Aridor says. “Without social-media advertising, it would have been too expensive to do.”

The same goes for niche products, whose popularity, research has found, correlates with the rise of targeted ads in recent years. It’s easier for a company to make sweater vests for corgis when they know from granular data how to reach out directly to the people who’d want to buy them. And certain consumers might actually miss being targeted so precisely in non-advertising contexts—as they might, for example, if Netflix stopped giving personalized suggestions for what to watch next.

“From the perspective of regulators, it all boils down to a balance between the value of targeted advertising to firms on the one hand and consumer welfare on the other,” Aridor says. “For consumers, there’s the question of how to assign the correct value to one’s personal information. Then there’s the separate question of whether there’s value in being targeted—in other words, of seeing ads for products you might actually buy. Striking that balance is part of the challenge of designing the best internet.”