Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
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A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

 

In Part 1 of this analysis, I described recent trends in Internet advertising and Internet advertising pricing models. In this part, Part 2, I introduce adblocking and describe its use, together with the two major controversies surrounding the use of adblocking software.

 

About Internet Adblocking

According to Wikipedia, “Ad filtering or ad blocking is removing or altering advertising content in a webpage.” Most browsers allow basic forms of adblocking through the Options or Preferences settings. And users have been using browser settings to block pop-up ads in particular for quite some time. However, the adblocking that has been discussed in the media lately involves using browser add-ons, which enable users to completely block out all ads, not just pop-ups.

This section starts with a brief description of how adlocking works, goes on to describe the benefits of using adblocking, trends in adoption of adblocking, and then ends with a discussion of the controversies surrounding the use of adblocking.

How Ad Blocking Works

in “Ad blockers: A solution or a problem?” Robert L. Mitchell describes how adblocking works from a technological standpoint:

Ad blockers are content filters that rely on predefined filter lists to identify and remove ads. They work by compiling lists of expressions associated with ads and using pattern matching to compare those against outgoing requests made by the user's browser.

Ad blockers may also block tracking scripts, which in turn prevent third-party ad networks from delivering ads to a user's browser by way of the publisher's site. "Before the page is rendered, Adblock Plus modifies it, strips off the request to the ad service or tracking scripts and injects CSS to repair the site so it doesn't look broken," says Till Faida, president of Adblock Plus.

Think of it as surgically removing the ads and then closing up the holes. To the user there's no evidence an ad ever existed.

 

The Benefits of Adblocking Software

Wikipedia describes the benefits of adblocking as including enhanced speed, security, and privacy:

To users, the benefits of ad blocking include quicker loading and cleaner looking Web pages free from advertisements, lower resource waste (bandwidth, CPU, memory, etc.), and privacy benefits gained through the exclusion of the tracking and profiling systems of ad delivery platforms. Blocking ads can also save substantial amounts of energy.

Another important aspect is improving security; according to some research, online advertising subjects users to a higher risk of infecting their devices than surfing porn sites. In a high-profile case malware was distributed through advertisements provided to YouTube by a malicious customer of Google's Doubleclick.

Users who pay for total transferred bandwidth ("capped" or pay-for-usage connections) including most mobile users worldwide, have a direct financial benefit from filtering an ad before it is loaded. Streaming audio and video, even if they are not presented to the user interface, can rapidly consume gigabytes of transfer especially on a faster 4G connection.

 

Trends in Adoption of Adblocking Software

“Adblocking Goes Mainstream: PageFair and Adobe 2014 Report” reports that as of the second quarter of 2014, 144 million users had adopted adblocking software (see Figure 12).

Figure 12

Based on a survey of adblock users, the PageFair and Adobe Report indicates that 27.6% of US Users use adblocking software, where adoption is greatest among 18-29 year-olds generally (41%), and male 18-29 year-olds in particular (54%) (see Figure 13).

Figure 13

When asked why they use adblocking software, almost half (45%) of Users reported using adblocking software to remove all ads, another 27% reported using it to block some ads, followed by 11% blocking for privacy reasons, and 8% for performance reasons (see Figure 14)

Figure 14

 

Controversies Surrounding the Use of Adblocking

Among the controversies surrounding the use of adblocking software, two stand out as being the most significant: (i) adblocking threatens ad-based Internet business models, and (ii) the dominant suppler of adblocking software relies on an ad-based business model.

 

Adblocking Interferes with Ad-Based Business Models

A large portion of Internet businesses relies on ad-based models, especially media companies and tech companies. In “The Internet's Original Sin,” Ethan Zuckerman explains that an ad-based model is so popular with tech companies because it is “the easiest model for a web startup to implement, and the easiest to market to investors.”

Advertising became the default business model on the web, “the entire economic foundation of our industry,” because it was the easiest model for a web startup to implement, and the easiest to market to investors. Web startups could contract their revenue growth to an ad network and focus on building an audience. If revenues were insufficient to cover the costs of providing the content or service, it didn't matter—what mattered was audience growth, as a site with tens of millions of loyal users would surely find a way to generate revenue.

The most basic objection to adblocking is that it threatens the large number of ad-based businesses on the Internet by preventing them from generating the revenues they need to run their businesses. More specifically, adblocking violates the “implicit agreement” between Users and Content Providers who provide content under ad-based business models.

Contrary to what many people might believe, ad-sponsored content is not “free.” Rather, under these business models, the price Users pay in exchange for being able to access content is their agreement to view ads. If viewers refuse to view the ads then Content Providers do not generate revenues that support their creation of content.

In “Ad blockers: A solution or a problem?” Robert L. Mitchell describes this issue in more detail.

Viewing ads is part of the deal if users want content to be free, says Freitas [Mauricio Freitas, publisher of the New Zealand Geekzone website for mobile enthusiasts,]. The use of ad blocking software breaks that implicit contract. What's more, he continues, the vast majority of visitors who use ad blockers aren't interested in making even a small payment in exchange for an ad-free site. Only 1,000 of Geekzone's 350,000 unique monthly visitors have been willing to pay $25 a year for an ad-free option, even when Freitas has thrown in other perks.



All parties share some of the blame for the current state of affairs, she [Irina Raicu, director of Programs in Internet Ethics at the Markkula Center for Applied Ethics at Santa Clara University] says. First, publishers err in telling users that their content is free. While vendors don't have an obligation to provide content without cost, they do have an obligation to be truthful and transparent about the bargain, which may include paying for that content by viewing ads and/or having their online activities tracked by the publisher as well as third parties. "Most consumers don't understand that they're paying with more than just their attention and time, and that bargain needs to be clarified," she explains.

In “Prisoners’ dilemma and web advertising,” Jacob Mandelson describes the same issue in more down-to-earth terms.

Many people find that web ads make their browsing experience unpleasant in various ways, so adoption of AdBlock Plus and other blockers have been increasing significantly recently. This in turn has web publishers worried, because they see all these visitors showing up on their sites with the ad blockers, so they’re not getting the ad revenue they planned on, and that means more red ink on their balance sheets. But when I turn ABP off, the web becomes intolerably hostile: Sites are slower, and when they do load they’re full of flashing ads and I get ad copy playing over my speakers and popping up over the text I came to the page to read. So now visitors are fed up, they block all that crap, and publishers can’t make their ad money, they shut down, visitors have no where to go, and everybody loses.

What happened? It was supposed to be visitors get “free” content because the publishers are ad supported, and this worked for a while. But this relies on the implicit social compact that visitors don’t block ads, which has as its unstated counterpart that publishers don’t make their ads so intrusive that visitors get annoyed by them. So I think we have a situation similar to a prisoners’ dilemma: visitors can defect by blocking ads, improving their own browsing experience but denying publishers their ad revenue; publishers can defect by showing intrusive ads, bringing in more revenue but destroying the visitors’ browsing experience.

Content Providers are particularly frustrated with Apple’s decision to provide adblocking software on iPhones and iPads. Recent trends show a strong move by Users away from viewing online content using desktop and laptop computers, and toward mobile (smartphone and tablet) access to online content. As this shift by Users has been occurring, so too has advertising been shifting toward mobile sources (see Figure 2 from Part 1). And just as mobile advertising has started to gain traction, Apple has decided to enable its Users to block that advertising. As Joshua Benton, in “A blow for mobile advertising: The next version of Safari will let users block ads on iPhones and iPads,” describes it,

This is worrisome. Publishers already make tiny dollars on mobile, even as their readers have shifted there in huge numbers. To take one example, The New York Times has more than 50 percent of its digital audience on mobile, but generates only 10 percent of its digital advertising revenue there. Most news outlets aren’t even at that low level.

If iOS users — the majority of mobile web users in the U.S., and disproportionately appealing demographically — can suddenly block all your ads with a simple free download, where is the growth going to come from?

And of course, Google, the King of Search, will be hurting as much as anyone by the blocking of mobile ads. More from Joshua Benton:

… Google makes more than 90 percent of its revenue from online advertising — a growing share of that on mobile, and a large share of that on iPhone. Indeed, Google alone makes about half of all global mobile advertising revenue. So anything that cuts back on mobile advertising revenue is primarily hurting its [Apple’s] rival.

In fact, Google went so far as to block the most popular adblock app, Adblock Plus, from its Android Store. Peter Eckersley reports on this in “Google Takes the Dark Path, Censors AdBlock Plus on Android”:

In a shocking move, Google has recently deleted AdBlock Plus from the Android Play Store. This is hugely disappointing because it demonstrates that Google is willing to censor software and abandon its support for open platforms as soon as there's an ad-related business reason for doing so.

Until now, the Internet and software development communities have relied on Google to be safely on their side when it comes to building open platforms, encouraging innovation, and giving users maximum choice about how their computers will function. But with today's news, that commitment to openness suddenly looks much, much weaker.

Google clearly has a vested interest in preventing people from installing ad blocking software like AdBlock Plus. But until recently, the company did an admirable job of leaving that matter aside and letting users make their own choices about whether they wanted to hide ads on their phones and in their browsers. Google established a reputation for building tools that put the interests of their users first. This new form of censorship is the exact opposite. It is not only a betrayal of the principle of openness, but a betrayal of the trust that people put in Google when they decide to buy an Android phone.

Google's stated reason for the ban is that the Android app allegedly "interferes with or accesses another service or product in an unauthorized manner." This policy is broad, vague, and arbitrary.

Despite Google’s efforts, however, adblocking is large and growing on Android devices. From “Adblocking Goes Mainstream: PageFair and Adobe 2014 Report”

The ease with which adblock plug-ins can be installed on Google Chrome, combined with the rapid shift of internet users to Chrome for browsing, are major drivers in adblock growth.

Over the last 6 years, Chrome has steadily captured mainstream browsing market share away from Internet Explorer (see ADI report). It is well known that Google’ s primary business is in online advertising; ironically, Google’s own browser appears to be bringing adblocking to the masses.

 

Adblock Plus’s Business Model Is Problematic

Adblock Plus provides software that enables Users to block ads on Content Providers’s websites.

Content Providers can choose to work with Adblock Plus to recapture ad revenues. In this case, Content Providers must eliminate all their “unacceptable ads” and replace them with only “acceptable ads” (Adblock Plus determines what is acceptable; acceptable ads are essentially nonintrusive ads). Adblock Plus will then whitelist the Content Provider and allow the acceptable ads to pass through the ad filters in Adblock Plus software, though Adblock Plus Users can still choose to block the ads by whitelisted Providers. Additionally, Content Providers must pay Adblock Plus a portion of the recaptured ad revenues. Robert L. Mitchell describes Adblock Plus’s business model in more detail:

The most controversial business model, put forward by Adblock Plus, offers to help publishers recapture ad impressions lost to its product by signing on to its Acceptable Ads program. To qualify, a publisher's ads must meet Adblock Plus' conditions for non-intrusiveness and pass a review by the open-source community before being approved. Adblock Plus then adds the site to its whitelist. Ads on whitelisted sites pass through Adblock Plus's filters by default (although users can still change the settings to ignore the whitelist).

The catch? Adblock Plus charges large publishers an undisclosed fee to restore their blocked ads.

Faida declined to disclose how his firm determines who pays or the fee structure, other than to say that it varies with the company's size and the work required to include the publisher's ads in its whitelists. Tim Schumacher, the founder of domain marketplace Sedo and Adblock Plus' biggest investor, says some companies have been asked to pay flat fees, while other contracts have been "performance-based" -- that is, linked to the volume of recaptured ad impressions and associated advertising revenue.

The controversy here is that Adblock Plus is effectively extorting Content Providers. From Alex Hern, “Adblock Plus: the tiny plugin threatening the internet's business model”:

“‘Shakedown’, ‘racketeering’ and ‘extortion’ are common terms publishers we've spoken with have used in relation to [Adblock Plus’s] ‘acceptable ads’,” says Sean Blanchfield of PageFair.

And the irony is that Adblock Plus’s business model depends on ad-generated revenues. Again, from Alex Hern:

The debate isn’t about the aims of Adblock Plus, but the tactics. “I do think there's something slightly sanctimonious about Adblock,” says Smith [Patrick Smith, of TheMediaBriefing]. “I wonder if they'd be more successful as a pressure group campaigning to make the web better, rather than a tollbooth for online content.”

“Ironically... Adblock Plus is itself funded by advertising, via the whitelisted publishers,” adds Blanchard. “Overall, I think it would be best for the Acceptable Advertising movement if an alternative business model could be found.”

Other controversies and tensions associated with adblocking will be covered in the next section, which describes the Online Adblocking Game.

 

Go to Part 3: The Adblocking Game

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