Tags: ad | blockers | publishers | clicks

Ad Blockers Doom Many Publishers to Chase Clicks

By    |   Thursday, 18 June 2015 06:23 AM

I know what you're about to say: "Megan, every time you write about journalism, it's all doom and gloom. Why don't you provide a look at exciting new business models in journalism that can survive the transition?"

How do I know you're about to say this?

Because I am about to ply you with the Grim Media Statistic of the Week: "Some 47 percent of US internet users now utilize ad blocking software. For 18- to 24-year-olds, that number is even higher: 55 percent."

That's right: Almost half of all Americans are blocking some or all of their online ads. And the younger and tech-savvier you are, the more likely you are to use such software. Ad-blocking used to be something that a handful of dedicated geeks did; now, it is very, very mainstream. If this trend continues, we are looking at the future of online journalism, and the future is broke.

Of course, primarily subscription-based services will not be affected much by this (though they should also be worried: the same research report indicates that only a minority of users are willing to pay even a pittance for online news).

And not all ad-supported sites are in trouble. Buzzfeed and Vice already lean heavily on "native advertising" that's harder to block. Hulu refuses to play unless you watch the ad. Advertising within mobile apps is (at least currently) safe from the dread blocking technology. But old-fashioned websites that rely heavily on selling display ads for their revenue? Ubiquitous ad-blockers spell big trouble for them ... and that's a lot of websites, including quite successful ones. 

But half of the users are still seeing ads, so what's the big deal? It's a math problem. Increases from a high base are much worse than increases from a low base. (A similar problem pertains to marginal tax rates.) 

Let's do that math so you can see what I mean. What's worse from a media outlet's point of view: a 10 percent increase in ad blocking software when 10 percent of the market was already using one, or a 10 percent increase when 50 percent of the market was already blocking ads? 

We can make this more clear by asking another question: If you depend on ads for revenue, how much do you have to grow your page views in order to offset the readers you lose to ad blockers as more users install them?

Let's say that you have 1 million readers who each view your page 100 times a year, for a total of 100 million annual page views. Now let's say that you can sell ads on only 90 million of those page views, because 10 percent of your users are using ad-blockers ...  and then another 10 percent of your readers adopt ad-blocking software, knocking your total ad- worthy pages down to 80 million. How much growth do you need to replace the ad displays you just lost?

The answer is that you need to grow your total page views to 112.5 million, because eighty percent of that will give you the same 90 million page views worth of display ads that you were able to sell before. Either you need 125,000 new readers, or you need your current readers to up their consumption by 12.5 percent.

But that was the old days, before the blockers caught on. Now let's say you started with 100 million page views from 1 million readers — but 50 percent of them have ad blocking software. 

What happens if a further 10 percent of the readership adopts an ad blocker? How many more page views do you need to get?

Well, you used to be selling ads on 50 million pages; now that's been knocked down to 40 million. In other words, you just lost 20 percent of your revenue. How much do you need to grow your pages just to get that revenue back? You now need 125 million page views, or 25 percent growth in either your readership or the numbers of pages each visitor views each year.

As ad-blocking software comes to dominate the market, the companies that rely on display advertising will have to run faster and faster just to stay in place. This sort of math explains Ernest Hemingway's description of how bankruptcy happens: "Gradually, then suddenly." As you near the end, a trend that once looked manageable begins to accelerate rapidly.

Now, as I noted last week, this does not foretell the instant doom of journalism. There are other models for making money off of journalism, like subscriptions and conferences and native advertising. There are mobile ads, though frankly, I'm not so bullish on those. Ad-blocking software may become more like ad-vetting software, keeping the displays from being too obnoxious, or companies may figure out how to get around them. 

But if it's not the death knell, it's certainly an urgent warning. After all, the way you keep out of bankruptcy is to heed the warning signs when you're still in the "gradually" part, rather than waiting for "suddenly."

Yes, I too use an ad-blocker, not to avoid seeing the ads, but because without an ad blocker, it now takes Web pages forever to load, which is a liability. Note that I am assuming that ad-blockers will cost sites revenue even if advertisers are technically paying for blocked impressions.

Advertisers are not stupid, and they will factor the percentage of users who block ads into the amount that they are willing to pay for said advertisements. Of course, markets are not perfectly efficient, but over any reasonable timeframe, it's hard to conjure a scenario where most people are blocking ads, but advertisers still pay sites the same amount of money to carry them.

Theoretically, you could offset that by charging higher rates per ad. Practically, given that ad blockers are most likely to be used by desirable younger demographics, this seems fairly unlikely to me.

To contact the author on this story: Megan McArdle at mmcardle3@bloomberg.net
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Thursday, 18 June 2015 06:23 AM
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