Advertising is Undersupplied
"[I]f you think about what percent of GDP is advertising today, I would expect that that percent will grow."
https://stratechery.com/2025/an-interview-with-meta-ceo-mark-zuckerberg-about-ai-and-the-evolution-of-social-media/
Why is advertising undersupplied? Producers bear the cost of figuring out who to show an ad to and what to show them. The worse you are at either, the more you must pay per 'action.' The worse you are at finding the audience and the creative, the more you pay to shoot blanks. The compelling thing is that better targeting and creatives are also optimal for the publisher in that they reduce the consumer's disutility from seeing an irrelevant ad, which means they can show more ads.
"If you think about the pieces of advertising, there’s content creation, the creative, there’s the targeting, ... and there’s the measurement and probably the first pieces that we started building were the measurement to basically ..."
https://stratechery.com/2025/an-interview-with-meta-ceo-mark-zuckerberg-about-ai-and-the-evolution-of-social-media/
Targeting:
"Over the last 5 to 10 years, we’ve basically gotten to the point where we effectively discourage businesses from trying to limit the targeting. It used to be that a business would come to us and say like, “Okay, I really want to reach women aged 18 to 24 in this place”, and we’re like, “Okay. Look, you can suggest to us…” ...If they really want to limit it, we have that as an option. But basically, we believe at this point that we are just better at finding the people who are going to resonate with your product than you are."
https://stratechery.com/2025/an-interview-with-meta-ceo-mark-zuckerberg-about-ai-and-the-evolution-of-social-media/
Creatives:
"it’ll always be the case that they can come with a suggestion or here’s the creative that they want, especially if they really want to dial it in ... we’re going to get to a point where you’re a business, you come to us, you tell us what your objective is, you connect to your bank account, you don’t need any creative, you don’t need any targeting demographic, you don’t need any measurement, except to be able to read the results that we spit out."
But most of all, what suppliers want is the ability to launch an ad in a profitable manner, where the benefit from an action is greater than the cost. Google:
"Target CPA bidding in Google Ads is an automated bidding strategy that helps you get as many conversions as possible at a specified cost per action (CPA)."
https://support.google.com/google-ads/answer/6268632?hl=en
See also Cost per result goal by Meta.
As targeting and creatives get better, the cost of an action (for the publisher) will lower, conditional on the content (audience), which is the last lever (for increasing profits)
"Number two is basically growing engagement on the consumer surfaces and recommendations. So part one of that is just get better at showing people the content that’s out there, that’s effectively what’s happening with Reels. Then I think what’s going to start happening is that the AI is not just going to be recommending content, but it is effectively going to be either helping people create more content or just creating it themselves."
https://stratechery.com/2025/an-interview-with-meta-ceo-mark-zuckerberg-about-ai-and-the-evolution-of-social-media/
From the consumer perspective, 'better creatives' may mean artificial differentiation or duplicitous messaging. Under those circumstances, consumer surplus could be lower. However, advertisers face some costs of sharing duplicitous ads, as consumers may share these ads publicly, resulting in reputational losses. If we are able to institute constraints on these dimensions (and model them), then better targeting is likely to lead to an increase in consumer surplus through product entry, with more producers incentivized to produce niche products as they can finally sell them profitably, and through better matching (in that consumers choose a product that is better suited for their needs).
p.s. If better targeting leads to lazy consumers who search less, it could reduce consumer welfare.
p.p.s. How do AI Agents fit into all of this? If people start using AI agents to shop for them, the value of ads may decrease. There is a funny sort of equilibrium that we may get to, with AI agents trying to appropriately pro-rate AI-generated targeted content (which can exist outside of ads if agents disclose who they are shopping for) to get the user the most apt product.