Ad blocking becomes $22B headache for online video providers, advertisers

by Samantha Bookman

Why is ad blocking taking off? That's easy: Consumers love it. The majority of video and display ads are removed from their browsers. And without ads bogging down processing speed on their computers, tablets and smartphones, their devices run much faster.

That leaves online video providers that derive their revenue from advertising in a bind: Ads on their players aren't being seen, and they're not getting paid because of it. At the same time, no one wants to significantly inconvenience their viewers. Can a balance be found that keeps ads playing without chasing away audiences?

How ad blocking works

The technology behind ad blocking isn't new. Ad-blocking software checks Web pages as they load for specific criteria -- such as elements labeled as ads, cookies or known trackers like Google Analytics, or JavaScript. (Ad blockers typically reference massive "filter lists" to identify these elements.) The program then tells the browser not to load those elements. In many ad blockers users can opt to allow certain things through -- for example, if they want to keep Facebook and Twitter widgets functioning on a page so they can share the content, they can add those exceptions.

Ad blockers can also simply block the domains of known ad exchanges or networks, effectively filtering out just about any kind of advertising including online video ads, display ads, widgets and even native ads.

PageFair report cost of ad blockers in US

Economic cost of ad blocking in the U.S. (Source: PageFair / Adobe)

For online video providers whose business models depend upon advertising, ad blockers are bad news. That's one reason why, as mobile online video begins to take off, ad blocking is shifting from an ancillary concern to a key issue for the industry.

How bad is the problem?

According to PageFair, which tracks ad-blocking of display and video ads in partnership with Adobe, advertisers stand to lose as much as $21.8 billion in revenue in 2015 worldwide, and could nearly double in 2016 to $41.4 billion.  In the U.S. alone, ad blocking use grew 48 percent between Q2 2014 and Q2 2015, representing 16 percent of the population or about 45 million active monthly users.

The severity of ad blocking on OTT video streams appears to vary widely. According to Rafael Urbina, CEO of Batanga Media, about 5 percent of paid ad views on content in its Brazilian market have been blocked using ad blocking software.

However, Brightcove, a service provider that offers cloud-based online video delivery to numerous large-scale OTT providers, has had reports from clients that 50 percent or more of their video ads are being blocked, Brightcove CEO David Mendels told FierceOnlineVideo.

Apple's new DevKit starts an ad-block app frenzy

In mid-September, not long after Apple announced that its latest release, iOS 9, would include the capability for developers to implement ad-blocking technology, a $3 app called Peace shot to first place among paid apps within a day after its release on the App Store, temporarily displacing Minecraft and Plague from their perch atop the chart.

Purify, another ad blocker for iOS, landed in the top 10 as well, along with Crystal and Weblock; all block video and display ads in the Safari browser on devices using iOS 9. AdBlock Plus, an older ad blocker initially developed for PC browsers by EyeO, continues to rank highly across platforms including iOS, Android and desktop computers.

The ad-blocking gold rush seems to have surprised even Apple. Another app, Been Choice, which uses deep packet inspection and pattern matching to block ads within apps, was removed from the App Store on Oct. 9 along with ad blockers that use similar methods. (Google banned ad blocker apps from its Play Store in 2013.)

"The fact that ad-blocking apps rose to the top of the App Store charts shouldn't have surprised anyone, least of all app and mobile game developers," said Shane Schick, editor of FierceDeveloper, who explored the impact on the app development environment in a recent op-ed (which I am shamelessly plugging here, because if you're not reading Shane's developer news, you should be).

Consumers are exposed to thousands of advertising messages per day in various forms, according to a MediaPost article, and can spend the equivalent of two years of their lives watching television commercials.

But it's not the frequency of ads that have users moving to block them; it's the havoc that most ads wreak upon the user experience.

eMarketer ad block rates

Estimated worldwide ad blocking rates. Gaming tops the list of categories in which ad blockers are employed by users. (Source: eMarketer)

Users may not mind putting up with the occasional ad, but they're not so happy about excessive and obtrusive advertising, ads that don't relate to them, and perhaps more unnerving, the intensity of tracking that takes place -- a significant privacy issue.

"Ads annoy and interrupt us. They track us, follow us around and report back on our behavior. And they slow down page loads, making us wait…and wait…and wait for what we want. Can you blame people for wanting to block them?" said Paul Berry, founder and CEO of Rebel Mouse, in a Relevance op-ed.

Users "are fed up by the distractions, the leaping past interstitials, the often-bungled attempts at delivering ads via algorithms and the relentless retargeting of ads across their smartphone, tablet and desktop," Schick said.

In that environment, it's likely not surprising that users have no problem employing wholesale ad blocking software to escape a cluttered browsing experience and get their device's performance back.

Even without ad blockers, viewers don't want to watch too many ads. For example, Batanga Media's Urbina says, skippable pre-roll video (such as YouTube's) has users pressing the "skip" button about 90 percent of the time. "So users have strong feelings around video.  … If you hit them right, it's good, but that's not the vast majority of users," he said.

Let the Wookiee -- er, the consumer -- win

While user irritation at online ads -- and many variants of ad-blocking software -- has been around since the Internet's star rose, advertisers haven't historically paid a lot of attention to either factor. However, with consumers increasingly in the driver's seat when it comes to online video, they stand to win this battle. And this isn't the first one they've gained the upper hand in.

"There's a lot of cleanup that the digital industry is going through now," said Ashwin Navin, CEO and co-founder of Samba TV. He compared the problem of ad-blocking software to the rise of the DVR and its effect on traditional TV ads, as it enabled viewers to fast-forward or even skip commercials. "The consumer won that battle," Navin said. The DVR remains ubiquitous, and broadcasters and cable operators have had to exercise more flexibility in allowing viewers to fast-forward or skip through ads.

With the OTT video market on a continuing growth track, monetizing content through subscription alone isn't going to cut it for all providers, said Brightcove's Mendels. "Amazon, Netflix, even HBO Now and other similar (SVOD) providers are all doing great. But people don't take into account that if you take all the content that's available or will be available into an SVOD model [subscribers] would be paying 10 times more than they are now. A huge amount of content is supported by ad-driven business models."

That means that ad blocking is a "fundamental problem that the industry must solve in a good way for publisher and consumer," he said.

Rebel Mouse's Berry sounded a similar note, saying that "publishers and brands can't be mere destinations or unwelcome interruptions. They need to acclimate to the media ecosystem they now share with their readers and consumers, who live their lives in the feed, expect great content to find them and demand to have a voice in the conversation."

Heeding an industry wake-up call

Targeting users with ads via their search terms is a go-to method for many video sites including YouTube and Amazon, but advertisers need to up their game to avoid irritating users.

That's not ice cream

Ice cream and unicorns: Harmon Brothers' viral ad for Squatty Potty.

As Berry noted, ads in general need to improve -- something a few ad firms are already doing, such as the Harmon Brothers, creator of attention-grabbing YouTube ads for Poo-Pourri and Squatty Potty that have YouTube viewers staring at the screen as long as three minutes.

Marketing firm Molio, a Fierce 15 winner which spun off from Harmon Brothers-founded Orabrush, constantly measures how its ads perform on YouTube and elsewhere and adjusts them throughout the campaign for length, content and other factors.

A recent webinar hosted by Jeffries and featuring Sourcepoint co-founder Matt Adkisson emphasized that advertisers and publishers need to join forces. "Until recently, there was no impetus for the publishing community to work together to establish a cohesive distribution network. However, with ad blockers being released on iOS the industry received a wake-up call, recognizing the need to work together," the research firm said in an investor note.

There are indications that the ad blocking software developers themselves want to help the advertising industry, as well. Dean Murphy, developer of Crystal, partnered with EyeO to allow ads that fit the "Acceptable Ads" criteria through the app's blockade (users have the option of turning the feature completely off, however). He told tech blogger Samantha Bielefeld that his reason is "to make it a less hostile app for publishers while still empowering users to block and whitelist the content of their choice. I love a lot of the sites affected by ad-blockers, just not all of the ad networks that support them."

After shooting to number-one in just a few hours, Peace was pulled off the App Store by its author Marco Arment, who said in a blog post that "Ad blockers come with an important asterisk: While they do benefit a ton of people in major ways, they also hurt some, including many who don't deserve the hit."

While neither move made fans of the ad-blocking apps very happy, Murphy and Arment's decisions both signal that app developers, and probably many online video viewers, are willing to compromise with advertisers and content distributors to get the videos they want. However, advertisers will have to work much harder to learn where and why viewers draw the line on ads.

Ad blocking becomes $22B headache for online video providers, advertisers