Ads in the Age of AI

AI is going to fundamentally change ads and, with it, the internet. Smart investors, founders, and researchers will try and get a grip on that change early. The job of advertising won’t disappear, but how and when we access ads will. Let me walk you through where we are now and where we will be going.

Ads are more important than you think

The theory goes something like this: When you give something away for free, people will use it more. If users interact with your free service in a way that allows you to better target ads, you have made an incredible flywheel of growth (like Google or Meta).

This flywheel subsidizes the entire consumer internet. Video, social media, news, maps—all of these services rely directly or indirectly on advertising subsidies. 

Over the years, people have grown frustrated with the more unsavory aspects of ads—pop-ups and privacy invasions, to name two. I agree with much of the criticism. Ads can be intrusive and invasive, and the desire to maximize the time users spend on free services can lead to harmful addictions. I have written for years how dangerous ad models can be, so I’m not trying to defend them as some holy paragon.

However, the criticism misses some of what is integral about ads. There is a popular quote that has bugged me for years. You’ve seen it before: “If the service is free, you are the product.” No! Wrong! If the service is free, the clicks on the ads are the product. This is fundamentally different. A free service with ads is monetizing users’ actions, not users themselves. Clicks on ads are good because they reveal a genuine demand for the goods the supplier is selling. Users see stuff they want to buy. Ad platforms make money off the top. This is wonderful! Everyone wins in this transaction. In return, we get an abundance of cheap or free goods. This system has made lots of money for everyone involved: Ads have been between 1–2 percent of U.S. GDP since 1920—currently a $361 billion annual business. 

The ad engine is the heart of the internet. Every B2B transaction, SaaS app, and content website is reliant on the flow of user attention. Since ads subsidize essentially every step of the attention funnel, all digital services are reliant on them, directly or indirectly. In academic terms, advertising is the entrenched techno-economic paradigm that dictates how attention flows around the world. 

AI is going to change our ad experience and, with it, the internet. 

The AI-disrupts-ads argument is complicated

The question for AI is when it acts as a replacement for what would have previously been an ad. I would suggest that the closer a user goes to wanting a specific task done or question answered, the more likely it is to be replaced by an AI product.

Source: Graphic by the author.

The further to the right a product is on our scale, the more likely it is to be a purely LLM-driven experience. An easy example to grok is Google. Rather than getting 10 blue links from Google for a search request—where you have to click through multiple links to find the information you are looking for—you can use something like Perplexity, an LLM-powered “answer engine,” which will just answer your question. 

The problem is that this experience sends far less traffic to content websites and, by extension, surfaces way fewer ads. Look how many results there are for my search for “best tennis racket for noobs.” There is space for maybe one ad, and the links to sources are not very prominent. (Further down in the answer, Perplexity recommended specific rackets).