Why Ad Blockers Are Spurring a New Technology Arms Race

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Apple’s launch of its new mobile operating system, iOS 9, has spurred fears that the economics that have propped up web publishers and advertisers since inception will be upended.

With the iOS 9 rollout on September 19, Apple added support for ad blocking in its Safari browser. While Safari doesn’t have a lot of market share on desktop, the browser has good footing on the mobile front courtesy of the iPhone’s success.

More importantly, Apple’s support for ad blocking software will make those applications mainstream. On September 21, the top selling app in Apple’s App Store was Crystal, an ad blocking program. Purify Blocker, a rival to Crystal, was No. 4. More recently, Apple removed some ad blocking apps from the App Store  due to security and privacy concerns. The removals centered on apps that install a root certificate that allows app developers to see encrypted traffic from users. The company has said that it is working with app developers to get the apps back in the store.

“Ad blocking has gone mainstream,” says Peter Fader, marketing professor at Wharton. “The move to ad blocking is symptomatic of the fact that we can’t take a business practice like advertising from another domain and assume it will work in an online setting, too.”

According to David Hsu, a management professor at Wharton, the Internet’s ad blocking woes aren’t unique. “This issue transcends media,” says Hsu. “Think about Tivo and various types of technologies that allow consumers to skip [television] advertising. Whether it’s radio, TV or online, there is technology available to get the content but not the ads.”

Ad blocking software, which filters code and web addresses associated with ads and prevents them from being served, has been around for years, but is starting to hit critical mass. Ad blockers are typically used to thwart disruptive ads that interfere with page loads and prevent sties from collecting data about users’ browsing behavior and other information such as demographics. A report by Adobe and ad serving technology company PageFair estimated that ad blocking will cost publishers nearly $22 billion in 2015.

“The move to ad blocking is symptomatic of the fact that we can’t take a business practice like advertising from another domain and assume it will work in an online setting, too.”–Peter Fader

Kevin Werbach, a legal studies and business ethics professor at Wharton, says ad blockers wouldn’t be popular if publishers and advertisers didn’t go too far. “Most people don’t have a problem with online advertising, but when it becomes overwhelming and degrades the quality of the web and mobile experience, they will eventually rebel,” notes Werbach. “There’s a tragedy of the commons here, with so many trackers and ad networks piling on top of each other behind the scenes for the same page.”

Adobe and PageFair estimated that there are 198 million active ad block users globally, up 41% from a year ago. In the U.S., ad blocking active users hit the 45 million mark, up 48% from a year ago. PageFair said in its report that “not only has ad blocking continued its fast growth on desktop, but it has also leaped onto mobile in Asia, and will soon go mobile in the West with the upcoming launch of content blocking on iOS.” A similar report by comScore and SourcePoint, which provides technology to counter ad blockers, found that one in 10 Internet users in the U.S. and U.K. block ads.

Lightening the Load?

However, ad blocking isn’t perfect. In some cases, ad blockers eliminate content from publishers and interfere with e-commerce sites by removing images and data.

In response to the ad-blocking trend, on October 7, Google announced an initiative called the Accelerated Mobile Pages (AMP) project. The project, which has 30 publishers signed up so far, aims to speed up mobile web pages with code that enables companies to create lightweight pages. These faster pages would have ads, but they would load faster, and any formats that slow load time wouldn’t be allowed. Google’s David Besbris, vice president of engineering for search, said in a blog post that publishers need to consider AMP and making pages lighter. “Every time a webpage takes too long to load, they lose a reader — and the opportunity to earn revenue through advertising or subscriptions. That’s because advertisers on these websites have a hard time getting consumers to pay attention to their ads when the pages load so slowly that people abandon them entirely,” wrote Besbris.

Meanwhile, the dire predictions of publishers’ losses by Adobe and PageFair have touched off a series of follow-up reports from analysts. Wall Street firm UBS said in a research report that fears of ad blocking are overblown and may result in $1 billion in lost revenue instead of the $22 billion projected by PageFair. J.P. Morgan issued a report arguing that Apple’s move to enable ad blocking isn’t much to worry about: Safari only has about 4% of desktop market share and about 23% for tablets and mobile. Goldman Sachs chimed in by predicting that Apple’s move to support ad blocking will ultimately reorder the web monetization ecosystem in favor of Apple, Google and Facebook.

Pinar Yildirim, a marketing professor at Wharton, says ad blocking is an important issue, but its impact over time is hard to evaluate because of the potential arms race that is brewing. “It is hard to imagine that ad blocking technology will go into widespread use without publishers reacting to it,” she says. “It is hard to sustain a free-for-consumers online publishing system. Advertising has traditionally been the way consumers receive services of all kinds at no subscription cost, in exchange for their attention and exposure to offerings.”

“It is hard to imagine that ad blocking technology will go into widespread use without publishers reacting to it.”–Pinar Yildirim

Indeed, some publishers such as CBS show messages to consumers who use ad blockers stating that they can’t watch videos unless they turn their filtering software off. Video service Hulu will replace commercials with unskippable messages that urge viewers to turn off ad blockers. (Hulu offers the option of an ad-free subscription service.) Other companies are paying ad block developers to be white listed so their ads can be seen.

Other publishers, such as News Corp. and The New York Times, have taken a wait-and-see approach with ad blocking countermeasures. In an Ad Age opinion piece, Internet Advertising Bureau CEO Randall Rothenberg called ad blocking “robbery, plain and simple — an extortionist scheme that exploits consumer disaffection and risks distorting the economics of democratic capitalism.”

The Great Debate

However, according to Fader, in adopting a stance like Rothenberg’s, publishers risk making the mistakes of the music industry, which used lawsuits instead of innovation to eventually move to a download and then subscription model. “It’s absurd to think that publishers have the right to hold users hostage, prop their eyeballs open and get them to watch ads,” he says. “There’s a lot of finger pointing, but most of it is missing the point” that the advertising industry has impinged on the customer experience.

Hsu agrees. “No matter what you think of ad blocking, there has to be some discussion around what’s prompting the demand for them in the first place Twitter ,” he says. “These blockers have been around, but now people are more incentivized to use them. The decision all depends on how relevant versus annoying ads are.”

In the middle of this debate about ad blocking is Apple and its motives. Apple isn’t enabling ad blocking in apps, which obviously benefits the company and its App Store. On the surface, Apple appears to be giving ad blocking a push to take money from rival Google, which relies on advertising for its revenue.

“It’s in Apple’s self-interest to support ad blocking. Apple is not dependent on advertising,” says Fader. “This move will create better competition, better ads and new business models. Google also won’t be hurt, because it will be proactive and help advertisers in the long run.”

Hsu agrees that Apple is clearly aiming at Google by supporting ad blocking, but it is also fueling a real discussion about how the industry needs to evolve. “This move is forcing content providers to up their game and cut back on all the clutter out there,” says Hsu. “If everyone is relying on the ad model, many are going to have to go back to the drawing board.”

Fader predicts that like the music industry, publishers will adjust and form new models that revolve around subscriptions and better forms of advertising. “Ten years from now, we’ll look back and see how naive we were about advertising.”

Werbach agrees that new models will emerge, but the core promise of advertising supporting free services won’t go away. “At the end of the day, sites will find ways to monetize, even in a world of ad blockers. We’ve seen this pattern before, with pop-ups, large roll-overs and other intrusive advertising techniques that went away when users pushed back. There will be limits, but the basic deal in which users access services for free because of advertising support hasn’t fallen apart.”

A Time for Experimentation

Yildirim points out that as publishing models change because of ad blockers, advertising prices are likely to become volatile. But ultimately rates could rise depending on how publishers collect data to reach consumers in new ways, she says. Fader agrees. “Data use has to get better,” he says.

“At the end of the day, sites will find ways to monetize, even in a world of ad blockers. We’ve seen this pattern before.”–Kevin Werbach

Fader notes that new forms of advertising are likely to emerge. For instance, so-called native ads, which is messaging created by advertisers that is labeled as advertising but is produced in the same format and style as the publisher’s content, is expected to become more popular.

“Native advertising is one example, but there are lots of other models to try,” says Fader. “The answer is lurking out there somewhere, and we will see advertising that’s presented in new and effective ways. These experiments spurred by ad blocking will add up over time and bear fruit.”

One thing is clear, says Hsu. The search for models and responses to ad blocking is just beginning. Hsu also predicts that a new cottage industry around eluding ad blockers will emerge, with white lists that allow certain ads through but not others. It remains to be seen how the debate over what constitutes a “good” versus “bad” ad plays out, he says.

Werbach is optimistic that “the market will reach an equilibrium [because] the ad blockers need to monetize as well. We’re already seeing Ad Block Plus agreeing to white list some sites that compensate them. As long as this isn’t a philosophical issue for users, ultimately companies have an incentive to work things out.”

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