The economics of the online business is difficult to comprehend, as it should follow the rules of basic rules of economics but in reality is actually something far more complicated. The disagreement I wanted to highlight today is the idea that ad-blocking software will cost publishers an estimated $21.8 billion in 2015.
Adobe’s and PageFair’s methodology is a little complicated, but essentially it took eMarketer’s digital revenue for each country and divided it by (1 – the ad blocking rate it estimates). This implies, in 2015, an 11.3% of total potential digital ad revenue will be lost due to ad blocks (or 3.6% of total potential ad revenue). It’s safe to say that these are meaningful numbers, especially when looking solely at digital ads. In context, this represents roughly 1/3 of Google’s total revenue (FY 2014).
When I was perusing my Buzzfeed this morning (it’s the weekend), I saw the following article, which believes the $21.8 billion number is overstated:
The crux of Alex’s argument is that the total potential digital ad revenue would actually be smaller due to the pressures of supply and demand. If the ads had run, there would have been more ad supply, demand would stay the same, and therefore the actual revenue will not reach the projected potential revenue. Basic economics.
Except there’s an issue with that, and it’s due to how publishers charge for digital space. Every ad campaign is charged in some form of “cost per impression,” whether it’s cost per thousand (CPM), pay per click (PPC), or any other form of impression. Advertisers still have poor visibility to digital advertising, but they can’t afford to ignore it as people continue to consume more media on computers, tablets, and phones. Instead, value is mainly in terms of how many people see or click on the advertisement. This is the fragile compromise advertisers and publishers have reached over many years.
My hypothesis is that as supply increases, demand increases as well, leaving prices about the same. Supply in this case is eyeballs or impressions, and demand is advertisers. As long revenue brought in is x% more than advertising money spent, advertisers will continue to buy space online. Because there is no consistent rule published on ad spending conversion (is it exponential?; Is it an inverse relationship at a certain point?; etc.), demand will grow with supply.
Of course, this is all hypothetical, and it would have been nice to see the study with a discount on total potential revenue for a conservative estimate. But even with a 25% discount, the estimated ad revenue lost is $16.35 billion, or 8.7% of total potential digital ad revenue. A meaningful number.
P.S. For 2015, I’m assuming $170.9 billion in digital ad revenue, and $577.8 billion in total ad revenue per WSJ’s numbers, which are derived from eMarketer. Assuming $21.8 billion of ad revenue is lost, potential digital ad revenue is the lost revenue + projected digital ad revenue, or $170.9b + $21.8b = $192.7b.