Ad blockers: A solution or a problem?

It's a cause. It's a curse. It's just business. Ad blockers take a bite out of the $20 billion digital advertising pie.

Ad blockers can make websites cleaner and faster for users, but they can also take a nasty bite out of advertising revenue. How popular are they, and what can site publishers do about them?

For Mauricio Freitas, publisher of the New Zealand Geekzone website for mobile enthusiasts, ad blocking software has been a major headache. Last year his site lost more than one quarter of its display ad impressions because of visitors running these increasingly popular -- and free -- browser add-ons that filter out advertising before users ever see it. "We serve about two million page views a month. The impact on our revenues has been significant," he says.

Viewing ads is part of the deal if users want content to be free, says Freitas. 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.

And some believe that today's ads aren't as obnoxious as yesterday's. "We all hate the dancing monkey and display ads that blink at us," says Mike Zaneis, senior vice president at the Interactive Advertising Bureau (IAB), a trade group that represents publishers and ad sellers. "Do you see larger ads, or sponsored ads today that take over the entire page for three seconds? Absolutely. But they're not the spammy, irrelevant messages that most of us think of from five years ago." The problem for publishers, he says, is that most ad blockers don't just block annoying or intrusive ads -- they block everything.

How ad-blockers work

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.

Because they interrupt communications with third-party ad networks, dedicated tracking blockers such as Disconnect also block ads from those sources. Disconnect does so by examining the host name for any outgoing browser request and blocking requests to hosts associated with ad networks that track users' activity across the Web. But the intent is to block tracking, not ads, says co-CEO Casey Oppenheim, and these tools still let through "first-party" ads produced by the publisher.

On the other hand, there are publishers who agree that users of ad blockers have a point about obnoxious ads. "We are all frustrated and upset when we go to a quality publication and see ads for flat belly diets or pop-under ads," says Erik Martin, general manager at Reddit, which uses a limited amount of display advertising.

He thinks that people are being pushed into wanting to use ad-blockers. "There's a whole generation that doesn't even see most of the ads on the Internet, and the industry has put its head in the sand about dealing with it."

In fact, Till Faida and other distributors of ad-blocking software see their mission as a cause. Faida, president of Adblock Plus, the best-known ad blocking software -- the business claims to have 60 million users worldwide -- says ad blockers empower users to combat a rising tide of intrusive and annoying ads. "People should have the freedom to block what they don't like," he says.

But ad blocking is more than just a cause. It's a business, a rapidly growing one that's taking a bite out of the multi-billion dollar market for online search and display advertising.

Billion-dollar blockers

The stakes for publishers (including the publisher of this site, IDG) and advertisers are high. In the first half of 2013, advertisers spent $20.1 billion on Internet advertising in the U.S., including $6.1 billion on display advertising, according to the IAB's Internet Advertising Revenue Report (PDF). Adblock Plus claims that about 6% of all Web surfers in the U.S. run its open-source software, mostly in the form of Google Chrome and Firefox browser add-ons and extensions.

Currently, publishers that cater to a technically savvy audience, such as gaming sites, seem to be getting hit the hardest. Niero Gonzalez, CEO of gaming community Destructoid, is seeing a block rate between 36% and 42%. "Ad blocking hurts the small enthusiast sites the most," he says, and adds that he's not sure the old revenue model based on display ads will ever recover.

Gonzales has conducted an ongoing dialog with his customers since discovering the problem last March, and says that, in general, visitors to his site tend to fall into one of three camps: "One says advertising is evil, another says I don't want to do [ad blocking] so give me an option, and the others just don't care." When he presented an option for an ad-free experience, less than 1% of his 4 million unique monthly visitors signed up for the $2.99/month subscription.

And as the number of ad-blocking software downloads continues to climb, even sites that serve a less technical audience are starting to feel the effects. Most publishers don't want to speak on the record for fear of alienating their customers, but a recently departed executive with one publisher in Alexa Internet Inc.'s ranking of the top 100 listing of global websites says that between 4% and 8% of the business' traffic -- its sites generate over one billion page views per month -- is being blocked. "It's a ton of money," with lost revenues in the millions of dollars, he says.

The business of blocking

Ad blocking has become a business opportunity, and the publishers and advertising networks publishers aren't happy about it. "You have a third party disrupting a business transaction. They are throwing a monkey wrench into the economic engine that's driving the growth of the Internet," the IAB's Zaneis says.

Ad blocker vendors are pursuing a range of different business models, some of which have attracted money from angel investors and venture capital firms that hope to profit as the adoption of the tools continues to expand.

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. Currently, 148 publishers participate in the Acceptable Ads program; 90% of participants in the program aren't charged at all, Schumacher says.

And getting into the Acceptable Ads program isn't easy. According to Adblock Plus, it rejected 50% of 777 whitelist applicants because of unacceptable ads; the overall acceptance rate stands at just 9.5%.

[[To find out more about Adblock Plus, check out our interview with Tim Schumacher.]]

Adblock Plus has stuck a deal with at least one marquee customer -- Google signed on as a paying customer in June 2013. The deal covers its search ads as well as sponsored search results on Google and its AdSense for Search partner sites.

Since those search ads are mostly text-based, qualifying for the program was less difficult than for publishers that rely on display advertising. The deal ensures that Google's search ads will appear on affiliate sites even when other ad content is blocked. A Google spokesperson declined to discuss the terms of the deal or whether it was "performance-based," but the potential upside for Google may have made the deal a no-brainer. Last year the company earned $31 billion just on ads published on its own websites. If Google were to recapture even 1% of that amount from ads blocked by Adblock Plus, the deal would deliver a huge return on investment, according to Ido Yablonka, CEO of ClarityRay, a company that helps publishers deal with ad blockers.

Who pays for blocked ads?

Who is left holding the bag when ads don't get delivered? It's almost always the publisher.

Unfortunately, publishers may not even know their ads are being blocked until they see a downward trend in advertising revenues and start comparing total ad impressions to page views.

With first-party ads - those sold and delivered directly by the publisher -- the publisher loses money on every blocked ad impression. Advertisers have their own methods for independently verifying the number of impressions generated over the reporting period.

If the ad blocker prevents a third-party ad network from receiving a call to deliver an ad, the ad never gets delivered, it's not counted, and again, the publisher doesn't get paid.

One challenge for advertisers and publishers is that ad verification tools don't always account for blocked ad impressions, says Ido Yablonka, CEO at ClarityRay. Verification companies may track ads by embedding code within them -- or the verification code may be served separately. But if the ad blocker creates a situation where the ad server never receives a call for the ad, such as in the third-party ad network scenario described above, there may be nothing to track. The ad request is never made to the third party ad network, and no ad is delivered. From the ad networks' perspective it's like that visitor to the publisher's site never existed. They're not tracked, so publishers may not even know that they've lost the revenue.

There's another side effect, too, says Niero Gonzalez, publisher of the website Destructoid: "Ad blockers block our internal analytics, so we're being hindered in understanding what our readers find interesting."

(Google appears to be less comfortable with the encroachment of ad blockers in the mobile space, where ad revenues are skyrocketing, according to the IAB. Last March Google removed Adblock Plus from its Google Play store.)

"It would almost be malfeasance for them not to sign onto this," says Zaneis. "But what about the businesses that don't make billions of dollars a year?" Small publishers may lack the technology to know whether or not their ads are being blocked or to put up countermeasures, he says. Schumacher concedes that Adblock Plus needs to do a better job making publishers aware of the problem, as well as its solution.

Reddit, which (as previously mentioned) uses only a small amount of display advertising, was one of the first publishers approached by Adblock Plus and became an early participant in the Acceptable Ads program. "We never paid them, and we wouldn't do that if they did ask us," says Martin.

On the other hand, the former executive at the Alexa top-ranking site said an Adblock Plus representative told him he had to pay even though Adblock Plus agreed that the publisher's ads were acceptable and should not be blocked. "If we didn't pay they would continue to block us. To me it seems like extortion," he says.

Faida says Adblock Plus needs money from big publishers to support the program. "Larger organizations that want to participate must support us financially to make sure that the initiative is sustainable," he says. "The idea is, despite the growing rate of ad blocking, for websites to still have a way to monetize ads."

Finding a middle ground

If Faida feels any sense of irony that his business model seeks remuneration from publishers that have suffered financial damage inflicted by a product his business distributes, he doesn't show it. Rather, he frames the argument in terms of moving away from the current "black and white approach," where all ads are blocked, to "finding a middle ground."

But where is the middle? What constitutes an annoying ad is subjective, but Faida says Adblock Plus has worked with the open-source community to develop and publish its acceptable ad guidelines. "Ads must be static -- no animations or blinking banners, they must be separated from content and clearly marked as ads," he says.

That's not viable, says Rob Beeler, vice president of content and media at AdMonsters LLC, a research and consulting firm that serves advertising professionals. "It's technically possible to adhere to their guidelines, but the CPMs [cost per impression] I would be able to get would be so low that it probably isn't worth it to most publishers."

Is ad-blocking ethical?

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