Ad Blocking: Redistributing Value within Digital Advertising

Ad Blocking: Redistributing Value within Digital Advertising

The Delta Perspective

Authors: Syed Raza and Alfredo Bandini

The traditional centers of market power and value generation are rapidly shifting within the telecommunications sector. Notably, exponential increases in mobile data usage, primarily through widespread adoption of OTT services, is coming at the expense of telcos whose traditional profit centers (voice and SMS) are experiencing long-term decline. Consequently, the sector is experiencing a major transfer of control and with it profitability from the telcos to digital players (see Figure 1).      

With video traffic expected to increase by c. 13x by the end of 2020, telcos will need to find ways to bear the burden of increased congestion on its networks. And though telcos are expected to invest heavily in deploying next-generation technologies and upgrading their transport, core and backbone networks, it is unclear whether they will be able to sufficiently monetise these investments1.  In this context, telcos will need to avoid the trap of becoming a simple access provider and will have to compete with digital service providers by providing value-added propositions to their customers. As part of an effort to counter the aforementioned secular trends, telcos are beginning to take advantage of the emergence of ad blockers, specifically network layer ad blocking capabilities that would allow telcos to share advertising revenues with ad networks and publishers.

Figure 1: Telcos’ declining user engagement
 
Notes: Connected people includes social media and OTT comms ; Media includes content, search & discovery and info and entertainment; Transactional / financial includes e-commerce, fintech and productivity (cloud, e-health, business apps etc..); 1 Global average; 2 US/UK today;
Source: Ofcom, Nielsen, Morgan Stanley Research, Delta Partners analysis
 

The Rise of Ad blocking

Ad blocking is the practice of users employing software (frequently built into browsers) to prevent advertising banners from appearing on their screens when surfing the internet. And while browser-based desktop ad blocking has been around for a while, the increasing usage of ad blockers nevertheless remains controversial and unpopular with stakeholders throughout the telecommunications, media and digital sector.

Opponents of ad blocking cite drops in advertising revenues, the dominant business model on the Internet, for digital publishers’ web properties as the main reason against permitting ad blocking.   Furthermore, ad blocking software has the ability to not only impact the revenue models of digital publishers but also that of digital advertising platforms owned by internet giants such as Google, Facebook and Yahoo. With c. 198 million users (increasing by c. 41% year-on-year) using ad blocking software today it is easy to understand how meaningful ad blocking can be to these internet companies. In fact, industry sources believe that as much as $22 billion in global ad revenues was blocked in 2015 alone2.

On the other hand, defenders of ad blocking consider it an essential user reaction to the emergence of increasingly sophisticated forms of surveillance-based marketing and questionable data collection methods. On a more fundamental level, defenders argue that by blocking ads, users and therefore telco providers are able to bypass clutter, reduce data usage and speed up page load times, particularly on mobile devices, which is the fastest growing mode of internet consumption. As recently highlighted in the New York Times (see Figure 2), ads were attributable to more than 50% of load time, data consumption and cost of serving a page in a cross-section of web properties owned by major publishers. This data suggests that ad blocking could have potentially positive impacts to user experience (through faster load times) and lower costs (lower data usage), albeit at the financial detriment of ad-dependent digital publishers.    

Today, despite mobile accounting for c. 38% of global web traffic, only 2% of all blocked ad traffic is on mobile3. That being said, mobile ad blocking is expected to increase rapidly in the coming years with increasing cooperation from handset OEMs and native solutions from software providers. An example of handset OEMs’ acceptance of ad blocking includes Apple’s recent release of iOS94, which allows content blockers to work on its devices5.  Similarly, emerging markets-focused browser developers have adapted their products to cater to their data-conscious user bases. UC Browser, the leading mobile browser in India, has released updates of its browser with the ad blocker setting set to ‘on’ by default. UC Browser believes that this and other data minimising settings allow its users to consume 79% less data than comparable browsers6.

Another notable addition to mobile ad blocking space is the emergence of ad blocking apps that are capable of blocking in-app ads. Prior to the emergence of these apps (e.g. Been Choice), mobile users were only able to block ads on mobile browsers. Given the dominance of app-based internet consumption, these ad blocking apps represent a real threat to all kinds of digital publishers, not just ones with mobile internet properties.

Figure 2: Impact of ads on web page data sizes and load times
Source: NY Times, WSJ, Seekingalpha, Delta Partners analysis
 

Ecosystem Responses to Ad Blocking

Given the current and future threat that ad blocking represents to the fundamental business models of many technology and digital media players, there has been variety of responses throughout the ecosystem.

Ad Platforms:  Google, the leading mobile ad platform globally (see Figure 3), has made a number of moves designed to appease advertisers and mobile users aggravated by invasive, non-relevant display banners. Notably, Google has made its Google Display Network (“GDN”) the first major platform where advertisers do not pay for an ad impression unless it is viewable. GDN is expected to switch all of its cost-per-thousand-impressions (“CPM”) priced ad campaigns to a viewable-CPM (“vCPM”) pricing model7. Arguably, this and other similar moves by Google have been done to optimise advertisers’ ROI as well as to ebb the flow of frustrated mobile users from adopting ad blocking.

Facebook, the second largest mobile ad platform, is exploring premium subscription-based services that would include ad-free content delivery to paying users. Additionally, Facebook has also been exploring higher ROI formats including native advertising methods, such as sponsored posts that fit naturally within the users’ newsfeeds. Interestingly, some analysts posit that ad blocking could be a net positive for larger players like Facebook, with blockers removing low-quality ad clutter from their platforms and advertisers diverting ad budgets towards native advertising and other high ROI formats that they specialise in8.

Figure 3: Mobile ad platforms market share
Source: NY Times, e-marketer and Delta Partners analysis
 

Publishers: Several publishers, such as Forbes.com, have denied access to users with ad blockers installed. These publishers, which have traditionally provided content free to users and depend on advertising to monetise their web properties, have blocked users with ad blocking software from accessing their content, stipulating that users must whitelist the website or pay a recurring pass-through fee in order to view the content with no (or very few) ads.  Many publishers are also exploring unblockable forms of advertising, such as sponsored content, to fill the shortfall caused from reduced display ad revenues. Interestingly, this has created a market opportunity for startups9 that work with publishers to help deliver ads that are undetectable by ad-blocking tools.

Ad Blockers: A number of large ad blocking developers, such as Eyeo, have built innovative business models designed to selectively pass-through ads. These developers, in return for a fee or a revenue share, selectively allow ads from paying ad networks (typically networks with substantial inventory in excess of 10 million impressions a month). Although such developers have been opportunistic to-date, they have begun to gain critical mass, indicating significant negotiating power (particularly when done in partnership with other ad blocker developers) when entering negotiations with effected ad networks.

Telcos and Network-Level Ad Blocking

Telcos have begun to enter the fray by utilising network-level ad blocking against specific digital advertising platforms. Recently, an emerging markets-based telco, utilising ad control software, decided to block ads (on both mobile web page content and in-app) from Google, Facebook and Yahoo’s ad networks across its regional footprint10. The move, among the first of its kind, is the first true example of a telco choosing to enter the ad blocking game by restricting access at the network layer.

The telco claims that its decision to block at the network layer was done to enhance customer experience (less on-screen clutter and faster load times) and also to help customers lower their data usage (thereby saving customers’ money). Critics of this measure point out that advertisers are able to go around this measure by paying the telco for access, implying that the telco’s primary motive was to extract revenue from the ad networks and in doing so gain customer value previously lost to digital players (e.g. Figure 1).

Other major telcos have also entered the debate with proposals designed to curb mobile ads. EE, a major UK telco, announced that it is launching a strategic review on whether to offer its users the ability to control the ads they see on their mobile devices. Similarly, O2, another UK telco, commented that it is in the “well advanced” stages of looking at technologies to block ads across their mobile network for its 25 million customers in the region11.  Similarly, other telcos in the US and Europe are considering alternative approaches to ad control, which may open another monetisation stream for them.  

One could argue that these announcements (and with it the threat of access-based ad blocking) are being used by these and other telcos to bring digital players to the bargaining table, something that has yet to happen in a meaningful way. And though telcos say that their primary motives for implementing network-level ad control is to enhance customer experience, the strategy has the potential ancillary benefit of being value redistributive which, for once, would favour telcos. In principal, ad control services sound great for both users and telcos. However, we believe that any approach must be accretive to users’ experience and, moreover, be consistent in implementation.  

Before implementing network-level ad controlling strategies, telcos will need to figure out the answers to the following questions:

  • How would a telco’s implicit customer contract for enhanced user experience be impacted in the scenario where a telco blocked ads from specific ad networks, but then revert ad access to pre-blocking levels immediately upon payment?
  • How do you expect ad networks or service providers to respond to network layer ad blocking (i.e. Google or Yahoo preventing a telco’s customers from using Google or Yahoo’s services)?
  • How would telcos address publishers’ access-based responses to ad blocking (i.e. would they block the telco’s customers from accessing their otherwise free content)?
  • How will regulators respond?
  • How will telcos keep on top of network-level ad blocking with publishers expected to evolve their anti-ad blocking technology and adapt new ad formats?
  • Will telcos have to adapt their ad blocking services when implementing it across different generations of networks (i.e. 3G and 4G)?
  • Given the changes already occurring within mobile advertising (i.e. new ad formats and monetisation models designed to enhance advertiser ROI and improve user experience) does the “enhancing customer experience” rationale become moot?

Conclusion

As Doc Searls poignantly wrote in the Harvard Business Review, “Internet users (desktop and mobile) see the boycott of digital ads as a transfer of power to them, a demonstration of individual agency in the online world”12.  Given the clear desire of many users to have superior customer experiences, telcos, rightly, see the momentum for ad blocking as an opportunity to re-engage customers with an evolved value proposition, beyond the provision of commodity-like access. Network-level ad blocking, if it gains momentum, can help telcos initiate a new dialogue with ad networks and publishers on value sharing. Doing so by pointing to telcos’ relevant arguments that upcoming investments, designed to support ever increasing levels of digital content consumption, need to be monetised adequately. Ultimately, we believe that telcos, ad networks and digital publishers, collectively, should collaborate to become inclusive, consumer-focused providers focused on delivering better customer experience.

1BAML Research, Global Telecom Equipment, Sept 2015
2Pagefair and Adobe Ad Blocking report, 2015
3PageFair and Adobe’s 2015 Global Adblocking Report
4As of January 2016, Samsung's Android browser also has ad blocking capabilities
5Also to be seen in the context of Apple and Google’s fight for mobile advertising and the expiration in 2015 of their deal for default mobile search via Safari.
6Frederic Filloux, “The Ad Blocking Industry: Global, Large, Threatening”, Monday Note
7Source: Google
8JP Morgan, Sept 2015
9Such as Secret Media
10In this case, Shine Technologies
12Doc Searls, HBR

About the authors:

Syed is a Manager in the Delta Partners’ Digital Practice in San Francisco. He has 15 years of industry experience in developed and emerging markets and a background in hi-technology, management consulting and investments. Syed holds an MBA from the Wharton School at the University of Pennsylvania, a MS in Applied Computer Science from IMT, India and a BS (Honors) from St. Stephen’s College.

Alfredo is an Analyst with the Delta Partners’ Advisory team in Barcelona. With a focus on strategy development, commercial strategy definition and digital mediation, Alfredo has project experience across Europe and the Caribbean. Alfredo holds a BS in Business Administration from Bocconi University and a MS in International Management from ESADE Business School.

Video

Customer Experience