Though it looks like big vs small tech at first glance, poking into how ad blocker companies operate and their “whitelisting” programs will likely change your opinion, writes independent analyst Viggy Balagopalakrishnan
Disclaimer: The views expressed in this article are solely my own and do not reflect the views or positions of any organization with which I am affiliated, including my employer.
Last week, YouTube confirmed that it had launched a global effort to crack down on ad blockers. It was a pretty bold move from YouTube and unsurprisingly came under a lot of attack, including a 5,000-comment Reddit thread. There were also strong reactions from ad blocker companies who saw a surge in uninstalls following YouTube’s crackdown — they wished that Google/YouTube would play ball with them by participating in their whitelist program, instead of not respecting users’ wishes.
At first glance, you might be inclined to side with ad blocker companies — it’s David vs Goliath. It’s the small guy (ad blocker companies) being attacked by the big guy (Google). But when you actually poke into how ad blocker companies operate and their “whitelisting” programs, you might be less sympathetic. In this article, we’ll dive into:
- YouTube’s crackdown on ad blockers
- Ad blockers’ Acceptable Ads program and the advertising tax
- Quid pro quo of the internet and why ads are here to stay
YouTube’s crackdown on ad blockers
Towards the end of last month, YouTube started showing an aggressive popup as part of a wide crackdown. If you were viewing YouTube with ad blockers on, you would see a popup prompting you to either disable ad blockers or sign up for YouTube’s ads-free Premium offering.
This might seem like a bold move for the company, but if you look at YouTube broadly in the context of Google’s portfolio and the product’s position in the market, the rationale becomes clear.
Let’s start with YouTube in the context of Google. A few notes from its recent Q3 earnings call lay out why YouTube is a critical product for the company:
- Google’s Cloud division missed revenue estimates (in stark contrast to Microsoft’s Cloud business), while YouTube ad revenue reversed a year of decline and grew 12% year-over-year to $8B in the quarter
- Google is investing heavily in a multi-format future for YouTube, spanning across its standard video format, Shorts (TikTok-equivalent) and Connected TV streaming
- Funny but also useful — “YouTube” is mentioned 38 times in Google’s earnings transcript as compared to “search“ (34), “advertising” (15) and “AI” (149)
YouTube has also had several market factors work in its favour:
- After TikTok, most amount of time spent per day is on YouTube (35-50mins per day based on a couple of estimates) and is ~50% more than Facebook and Instagram
- YouTube has arguably the most successful creator revenue sharing model with 55% of ad revenue going to creators; in a past article about creator revenue sharing programs, we talked about how YouTube’s program continues to be the gold standard and other platforms’ revenue share percentage is nowhere close
- India banned TikTok in 2020, which has helped YouTube Shorts along with Instagram Reels have a dominant position in the market — I’d take the numbers with a grain of salt but Google reports that Shorts has ~70B daily views and ~2B monthly users
- Not a defensible data point but personally, I have started using YouTube a lot more — the quality of content is higher and it is less anxiety-inducing than short-form videos that change every few seconds
Considering the internal criticality for Google, and YouTube’s dominant market position, it is not surprising that it is starting to crack down on users that were not making money for the company anyway. What is interesting to poke at is whether this is materially beneficial to YouTube and if it is “fair” to ad blocker companies.
Ad blockers’ Acceptable Ads program and the advertising tax
Let’s get the materiality question answered quickly. It’s hard to get a precise number but based on a couple of estimates (1, 2), ~30-40% of users on the internet use an ad blocker. In other words, 3-4 of every 10 users are not monetizable for platforms like YouTube.
There is also a meaningful difference in adoption rates between countries — for example, 57% in Indonesia vs 51% in India vs 39% in the US based on the first estimate. Especially considering YouTube’s growth in India and its revenue growth in APAC, you can see how this gets material pretty quickly. It’s in the same vein as Netflix’s password-sharing crackdown — it’s an easy lever, relatively low risk and materially large upside if successful.
So, what are these ad blocking tools which users download to block ads? There isn’t clear market share data available but some of the big names are AdBlock Plus, AdBlock, uBlock, AdGuard, and Ghostery, who own most of the ad blocker tool market. Yeah, a handful of Davids taking on the big, bad Goliath (Google).
Here’s where it gets interesting – AdBlock Plus, AdBlock and uBlock are all owned by a single Germany-based company Eyeo. Note the subtle language on Eyeo’s home page – it’s not ad blocking, it’s “ad filtering” (which will tie in nicely with what comes next).
In 2011, the company that owns a large part of the browser market launched the “Acceptable Ads” program. The non-nefarious positioning is as follows:
- Not all ads are bad. In fact, many users are okay with ads as long as they are not spammy and meet certain guidelines (aka “ad filtering” instead of “ad blocking”)
- An independent Acceptable Ads committee will set up the guidelines for what constitutes an acceptable ad
- Publishers (for example, news sites or platforms like YouTube) can opt into participating in the program and be “whitelisted” — they just need to abide by the acceptable ads standards
- For any user installing Eyeo’s ad blockers, the acceptable ads whitelist will be allowed by default; users can go to settings and turn off all ads but the default (and defaults are extremely sticky) is that the whitelisted sites are allowed
- If you are a publisher that’s small, you don’t pay a fee. If you are a large publisher that gets 10M+ additional ad impressions per month due to participation in the Acceptable Ads initiative, you pay ~30% of ad revenue to the ad blocker
The generous interpretation is that ad blocking companies care deeply about the quality of ads and have therefore set standards to make ads less spammy on the internet, and the fee is just a way for them to sustain their business.
The not-so-generous interpretation is that these companies created “ad blocking” products, got a critical mass of users to adopt, and then created an arbitrary ad quality program. This program is now a mechanism to collect an advertising “tax”. If a publisher pays this “tax”, they can essentially bypass the ad blocking tools that these companies created in the first place.
I’m inclined to go with the not-so-generous interpretation, and here are a couple of pieces of information to back that up. First, the criteria set under the Acceptable Ads standard are fairly trivial:
Ads should always be recognizable as ads
There are strict sizes for individual ads, as well as the total space occupied by ads. All ads that are visible in the browser window when the page first loads must not collectively occupy more than 15% of the visible portion of the web page. If placed lower on the page, ads must not collectively occupy more than 25% of the visible portion of the webpage.
The only reasonable part of this is the percentage of web page occupied (ad labelling and ad sizes are already fairly standard). It does not address any other actual concerns around ads — like user privacy or quality of ad content. I asked ChatGPT to create a set of guidelines for ads that users don’t hate and it had a better answer (in other words,. a “committee” can come up with better standards if they tried ever so slightly):
If you aren’t convinced yet, here’s another piece of fairly damning evidence. In 2022, Eyeo acquired Blockthrough — an ad tech company that positions itself as a “market leader in ad block revenue recovery”, and now offers a more comprehensive set of tools for advertisers to target “hard-to-reach” consumers.
I’m not criticising its business strategy. I think it’s fair game for a smaller company to build a reasonably innovative product, and then come up with a monetization model to support that. What I disagree with though is the framing that this is a large company attacking well-meaning smaller companies, especially when the incentives that the ad blocker companies have set for themselves are counter to the goals their core products aim to achieve.
Quid pro quo of the internet and why ads are here to stay
We’ve talked about advertising in a few different contexts in past articles — whatever your feelings might be about ads, it is a dominant business model today.
Most news publications today run on ad revenue and only a small subset like the New York Times and Wall Street Journal have managed to pivot to subscriptions. The majority of Google’s revenue comes from ads, and that has remained so despite several attempts to diversify. Social platform companies all run on ads, and several of these platforms have launched successful revenue-sharing programs that pay creators.
Netflix’s ad-supported tier has been a key growth lever for the company and has brought in 15M new subscribers within one year of launch. ~50% of Disney Plus subscribers are part of its ad-supported plan.
Uber had its first ever profitable quarter, largely because of its ads business, which is now tracking at $1B+ in ARR. The story repeated itself with the Instacart IPO with advertising essentially subsidizing the cost of delivery and consequently improving the bottom line per order by 50%.
Not to dismiss any of the actual concerns that have been raised about ads — parts of the ads ecosystem did go too far (data consolidation in the hands of a few large companies, free flow of user IDs going to data brokers, limited ability for consumers to opt out of being tracked) but there have been major privacy interventions in the last few years which are bringing back some order (regulations like EU’s GDPR / California’s CPRA, Apple’s app tracking transparency changes).
Ad blockers, however, particularly the ones funded through initiatives like Acceptable Ads, neither solve any of these problems nor are they the kindhearted souls fighting for what’s right. YouTube vs ad blockers is a free market at play, and it might be time for a more independent standard that is not tied to how ad blockers make money.
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