The AI Era Has Arrived! Is There Opportunity for the Advertising Industry?

We are rewriting the content of the paper that won the Gold Prize at the Japan Advertising Association (JAAA) 45th Essay Contest, adding more illustrations, and presenting it as a 6-part series. The first installment explains "Why the Advertising Industry Has Opportunities Now." Please look forward to this series, brimming with hope to the point of excess.

Challenges in the Advertising Industry: Advertising is Always in Motion

Looking back at history, advertising has always "moved" alongside technological change. Consider the "four major media" advertising: newspaper and magazine ads were born from printing technology, followed by radio and TV ads emerging from radio waves and receiver technology. In recent years, the evolution of internet technology has drastically transformed advertising. While advertising agencies do not publicly disclose profit margins by media type in their financial reports, the trend shows that internet advertising profit margins are generally lower than TV advertising commission rates. Particularly for programmatic advertising, profit margins less than half those of TV advertising are not uncommon. This situation likely stems from the fact that while our advertising industry significantly contributed to creating advertising business models and shaping the advertising market when "television" technology emerged, platform companies (such as Google and Yahoo! for search-linked advertising) independently created advertising business models when "internet" technology emerged. Falling behind in adapting to new technologies reduces contribution, leading to thinner (or even nonexistent) profits. As the advertising markets for mass media and mass promotion—areas where the traditional advertising industry held strengths—mature, if internet advertising grows without the advertising industry retaining leadership, even if the overall advertising market pie increases, only the platform companies' profits will grow, not the advertising industry's.

However, technology continues to evolve, both now and in the future. According to the "Innovator's Dilemma" (※1) [Figure], where current strengths can become weaknesses due to technological evolution, the advertising industry's late entry into the internet was precisely because it excelled at traditional mass-media technologies centered on mass media. Similarly, platform companies currently strong in the internet will likely lag behind in the next wave of technological change. In other words, if the advertising industry can identify the next technological shift and "move" its advertising business model there, it can achieve significant growth, much like Google and Facebook have done.

So, what exactly is this "next technology"? This paper hypothesizes that it is "Artificial Intelligence (AI)," which has seen remarkable evolution in recent years. Moreover, according to economic theories recently developed by economists, this shift could represent a major upheaval comparable to the First Industrial Revolution around 1800. This suggests that significant differences may emerge depending on whether businesses adopt AI technology or not, and whether they can build viable business models around it. This paper aims to present, as concretely as possible and in the order of macro (economy and industry) → micro (service concept), the macroeconomic impact on society as a whole, an analysis of the current state of the advertising industry, a prediction of the advertising ecosystem in the AI era, and finally, a proposal for a concrete service concept (in this series, the economy will be covered primarily in #1 and #2, the industry in #3, and the service concept in #4 and #5). Ultimately, the goal is to contribute to the development of the advertising industry and, by extension, society as a whole by implementing this business model.

Macroeconomics and Advertising Expenditures: Economists Start Talking About AI

Since the evolution of deep learning became apparent around 2012, the "AI boom" has accelerated dramatically over the past year, with hardly a day passing without AI-related news. For example, in November 2015, news broke that Toyota would establish a new company in Silicon Valley dedicated to AI research and development, investing $1 billion (approximately ¥120 billion) over five years. On April 12, 2016, Prime Minister Abe announced the creation of the 'Artificial Intelligence Technology Strategy Council', gathering the best minds from industry, academia, and government to eliminate silos. On April 25, the Ministry of Internal Affairs and Communications, the Ministry of Education, Culture, Sports, Science and Technology, and the Ministry of Economy, Trade and Industry jointly held the 'First Joint Symposium on Next-Generation Artificial Intelligence Technology', with all three ministers delivering opening remarks. In Japan, not only academia but also national policy and industry have finally begun to move significantly.

While individual technological and corporate trends change too rapidly to delve into further in this article, we will focus here on "macroeconomic trends" that receive less attention in the news. The reason is that the advertising industry, like the financial sector, is heavily influenced by macroeconomic fluctuations such as GDP, and "Japan's advertising expenditure" also uses the ratio to GDP (around 1.2–1.3%) as a benchmark.

Thomas Piketty's "Capital in the Twenty-First Century" (※2), which became a major sensation in Japan two years ago, quantitatively demonstrated through economic history how inequality expands due to "r > g" (where r is the after-tax rate of return on capital and g is the economic growth rate). Within this work, he examines a "fully robotized economy." This is a world where machines (AI and robots) perform human roles in economic production activities, including intellectual labor (though Piketty cautions that a "fully" robotized economy is overly optimistic). Masazumi Wakabayashi, a leading Japanese economist at Waseda University, gave a lecture titled "Do Economists Dream of AI? 'The Great Divide' and the Future of the Economy" (※3) at the Research Institute of Economy, Trade and Industry in July 2015. This series explores the impact of AI on the macroeconomy, a field Wakabayashi pioneered research in. "Do Economists Dream of Artificial Intelligence? 'The Great Divide' and the Future of the Economy" (※3). This series will overview "AI's Impact on the Advertising Industry," based on the research (※4) of Tomohiro Inoue of Komazawa University, who was among the earliest to study AI's macroeconomic effects.

※1: Clayton M. Christensen (translated by Yumi Izu), The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail (Shosho, 2001)

※2: Thomas Piketty (translated by Hiroo Yamagata et al.), "Capital in the Twenty-First Century" (Misuzu Shobo, 2014)

※3: Research Institute of Economy, Trade and Industry, Masazumi Wakabayashi, "Do Economists Dream of Artificial Intelligence? 'The Great Divide' and the Future of the Economy" (July 13, 2015) ( http://www.rieti.go.jp/jp/events/bbl/15071301.html ), September 24, 2015.

※4: Tomohiro Inoue, Artificial Intelligence, Economic Growth, and Technological Unemployment: Will AI Take Our Jobs? Will a Future Where We Can Play and Live on a Basic Income Arrive? (Lecture Materials, 2015)