Comment by asoneth | Hacker News Reader

Comment by asoneth | Hacker News Reader

Parent Full thread

> Because all their competitors have to pay the same tax, it's just a status quo.

That may be correct if every company spends similar amounts on traditional advertising, but this isn't true. In reality, such a tax would hit companies with larger traditional advertising budgets harder, and make some companies choose to shift some of their marketing spend to other communication methods.

For example, I work for a company that has a small advertising budget with no traditional advertising. We have a website, publish papers, and occasionally have a booth at a conference. Some of our competitors have significant advertising presence in trade magazines, social media, news sites, etc. Therefore this tax would impact them more than it would impact us.

More importantly for the purpose of the tax, it might shift our competitors' behavior. Ad buys that were of marginal utility to the company before would be even less cost-effective so either advertising platforms would lower their prices or the company would not buy the ad. In some cases this lower price would make it no longer profitable for the platform to display, eliminating the ad enteriely.

Yes, you're describing the slight drop in demand I was referring to that could occur. And there are definitely other of companies who spend their marketing on things other than traditional advertising.

But most ads you see are for consumer products. Coca-Cola, cell phones, soap and shampoo, cars, fast-food brands, toys. These don't have anywhere to shift to. Dove soap isn't going to switch to reaching people by newsletter. They'll just pay the tax and pass on the costs to consumers. The vast bulk of advertising simply wouldn't change at all.

And like I said, even with a slight drop in demand, the main effect would be to lower advertising prices, not reduce advertising space.

> These don't have anywhere to shift to.

Advertising spend is elastic, even for consumer products. Companies don't commit to a certain level of advertising regardless of cost, they carefully evaluate the ROI of each advertising buy. The primary purpose of the proposal to increase the cost of ads is to reduce the ROI of advertising and therefore reduce the amount of ads across the board.

For example, Coca-Cola has competitors that spend significantly less on advertisements, which is a major reason store brand cola often costs less. Same with Dove, I see far fewer ads for store brand soap or brands like Dr Bronners. Same with fast-food chains like McDonalds which spends about an order of magnitude more on ads than many of their competitors.

Brands that advertise heavily typically charge a premium to cover the cost of their advertisements and many customers are willing to pay more for heavily-advertised products. But consumer preference for advertised brands is not unbounded. If Dove soap costs 10x more than store brand soap to cover the increasing cost of their advertising budget then more consumers will switch to store brand soap no matter how many Dove commercials they see. Therefore, Dove must calibrate their advertising budget to balance the cost of advertisements against the expected premium they can charge over their less-advertised competitors.

(Whereas something like a tariff on raw materials would affect companies more broadly -- it's a lot easier for a car company to run half as many ads than to make a car with half as much aluminum.)

> the main effect would be to lower advertising prices, not reduce advertising space.

Edited to note that the prices charged by advertising platforms cannot go lower than the cost to deliver the ad. It costs money to run a search engine, create TV shows, or construct a billboard, so if it the price a company is willing to pay for an ad on that platform goes below a certain point then the advertisement is no longer economically viable and does in fact disappear. Possibly forcing the ad-supported service to adapt (e.g. paid video) or disappear entirely (e.g. billboards).

I think we're making different assumptions around magnitude.

I'm assuming that taxes on advertising would be in line with or even a bit higher than most other taxes, like 20% or maybe even 50%.

You're talking about taxes maybe around 10,000% to multiply the price of Dove soap by 10x, if Dove currently spends 10% on marketing.

Yes, at that level of course advertising disappears and advertiser-supported businesses fold. But if that were the desired outcome, I don't think a government would bother with taxes. They'd just ban advertising.

But if we're talking about a tax like 40%, I don't think consumers would ever notice a difference in the amount of advertising. Products would just cost a little more and advertising rates would be a little less and ABC will just make slightly cheaper TV shows to offset it. You'd still have 8 minutes of commercials for every 22 minutes of content.

> I think we're making different assumptions around magnitude.

I don't think so. I used an extreme example to make the effect obvious, but a 20% tax will have a similar effect at a smaller magnitude.

> Products would just cost a little more

The point is that this increase is not uniform. Consumer product advertising budgets already vary by an order of magnitude from less than 5% of sales revenue to more than 25%. This already results in price disparities e.g. between white-label products and brand-name products. Therefore, brand-name products for which advertising is a nontrivial fraction of their budget will experience an increase that is an order-of-magnitude larger than generic products. This will alter consumer purchasing decisions and force companies to respond.

Every brand considers advertising ROI carefully e.g. at what point will an extra dollar spent on advertising yield less than an extra dollar of income. Taxing ads simply shifts this equilibrium point.

Reply on news.ycombinator.com