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InContext / An inside look at the business of digital content

Ad blocking: No, we haven’t won.

February 16, 2017 | By Jason Kint, CEO—DCN @jason_kint

About a year ago, Josh Benton of Harvard’s Nieman Journalism Lab asked me how concerned I was about ad blocking on a scale of 1-10. I answered “eight or nine.” And one year later, the situation has not improved: As of today it’s still a nine.

In the spirit of transparency, I thought the time was right to look at where we are in terms of ad blocking, if for no other reason than I don’t want my silence on the topic to suggest that the issue is less dire than it was during the flurry of discussion around it in 2015. Since then, DCN has conducted research on the ad blocking ecosystem – some of which has been released only to our member companies. We have also posed many questions about Google, the ad tech ecosystem and the actual flow of the monies.

The state of ad blocking today

Unfortunately, the ecosystem remains every bit as murky. The ambitions and fate of those profiting and suffering from ad blocking (including Google) have not yet been fully revealed. But one thing is crystal clear: The companies that create original content are being hurt the most by ad blocking because it prevents them from monetizing the audiences they attract. And the two companies, now known as the “duopoly” are likely hurt the least.

As predicted, the adoption of ad blockers continues to grow linearly according to PageFair’s latest Ad Block Report. While the sky is not falling, the U.S. desktop penetration did grow from 15% to 18% last year and this number matters … a lot. Despite this growth, the IAB oddly recently claimed victory over ad blockers “rendering them toothless” and suggesting the risk of “network-level ad-blocking has virtually disappeared.” This kind of thinking is where things get dangerous.

We have won neither the battle nor the war. In fact, PageFair’s report—which we have every reason to believe—clearly points to the contrary. Frankly, it’s for this reason that I’m writing now in parallel to our continued participation and support with other organizations on the new Coalition for Better Ads.

The danger is real

Here are three reasons we need to remain focused on ad blocking in order to maintain our ability to monetize audiences attracted by high-quality content:

  1. The companies in the ad tech ecosystem—where many of the ad blocking issues are forged—have very little incentive to be concerned about ad blocking. Their collective migration to the latest ad tech craze, header bidding, has increased their inventory and revenue access by an order of magnitude. It’s also widely recognized to have increased latency, data leakage and other vulnerabilities. So potentially good for revenues, arguably bad for consumers. The additional inventory dwarfs any modest increase in ad blocking so the ad tech companies’ incentives are in many ways at odds with consumers and content creators.
  2. Consumers are shifting to mobile, where ad blocking penetration is estimated at an immaterial 1% in the U.S. However, the value proposition of a mobile ad blocker is significantly higher (heightened concerns for security, user experience, data charges, privacy). So it’s risky to expect penetration to stay at 1% given that it’s currently 60% in parts of Asia, where ad blocking is built into the browser. The same functionality is already available in the States (through the Brave and Opera browsers). And not incidentally: In China, mobile users know how to change the proxy servers on their phones, so I’d expect Generation Z may soon be doing the same, in droves. And this is just one of the numerous ways in which ad blocking may rapidly impact mobile apps.
  3. Network-level ad blocking concerns will likely grow. The number one goal of the new administration’s FCC is to throw out the net neutrality rules. Yes, there is a rational argument against the current regulation. However, nearly 100% of the public wants something in place that protects the neutrality of the Internet against blocking, throttling and other nefarious practices. I’m pretty sure it is not a good idea to fight the Internet. To the point of ad blocking, if the FCC rules are thrown out and not properly replaced by Congress, there is nothing to prevent a carrier (why hello there T-Mobile!) from launching its own ad blocking plan. Meanwhile, the most powerful trade bodies in our industry have yet to take a stand in support of net neutrality (other than DCN, which is not conflicted on the issue).
Burning questions

So now that we’ve established that victory has not yet been achieved against ad blockers, here are some of the questions keeping me up at night:

  1. The financial impact of ad blocking trails its penetration mostly because advertising supply greatly outweighs demand. As long as there is considerably more desktop inventory than demand, then the financial impact is mitigated. But what happens when it doesn’t?
  2. The largest advertising company in the world, Google, is virtually untouched by ad blocking. Google has avoided most of the impact by paying to be whitelisted – as they’ve publicly disclosed – giving them a privileged position that, as far as I know, none of the nearly 80 companies inside of DCN have. Let that sink in. When a monopoly gets to set the rules…
  3. Privacy continues to be the third rail in the industry. The CMO of the largest advertiser in the world, Procter& Gamble, clearly expressed this concern a few weeks ago. The Chairman of the largest media buyer in the world, GroupM, has also called out this same concern. Meanwhile, the industry is aggressively pushing to keep the bar as low as possible, while cloaking the rapidly increasing level of tracking in darkness. This is happening through policy, as much of industry pushes to remove the FCC privacy rules on ISPs. It’s also happening through technology, as tracking has moved into digital fingerprinting and server to server sharing of browsing history. I know many people want to ignore it, but what if data leakage in the ad tech ecosystem is actually the common thread across the performance, security, transparency and consumer privacy issues that have resulted in a loss of consumer trust and rising ad block usage? There are both industry advocates and executives who make this argument.
  4. Facebook has opted to engage in a tech arms race against the very same engineers who are paid by the ad block whitelisting program. Facebook continues to fight a desktop war against ad blockers by circumventing the technology. Almost all of Facebook’s ad revenue growth on desktop came as a result of this tech hacking, according to their CFO during their earnings call. In mobile, Facebook is aggressively shifting content experiences away from the open web, reportedly even ignoring their browser experience, so that they can keep consumers in their app and fight back against ad blockers. Who is monitoring this?
  5. Who owns the number two blocker, Ad Block? At the very least, it’s dubious that a company with undisclosed ownership can block this much advertising. At the worst, it’s a clear-cut antitrust or national security issue to have that much control in the hands of an unknown actor. Can no one solve this riddle?

In the face of this uncertainty and looming unanswered questions, industry leaders need to refocus on meeting the underlying consumer needs. Yes, many articles have been written and many committees created. However, I challenge the industry to work with us, to dig deeper into the dynamics of ad blocking. As much as you might want to believe ad blocking to be a 2015 meme that’s now under control, that is entirely incorrect. Sitting idle while one company, whether it be Ad Block Plus or Google, controls much of the current future ecosystem could be the most dangerous failure of the Internet yet.

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