Adblock’s Ad Campaign Means Trouble for Internet Stocks

by Adam Benjamin | September 5, 2013 12:22 pm

More than 20% of internet users block online advertisements, according to a recent report.

PageFair reported that the average ad blocking rate[1] was 22% for the sites it surveyed, and reached as high as 65% for some sites. One of the best-known services is Adblock, a browser extension that blocks everything from banner ads to preroll YouTube advertisements. The app recently caught a lot of attention by announcing a crowdfunding campaign … for Adblock advertisements.

While the irony of that was lost on no one except Adblock, the campaign has been an unmitigated success. Adblock has more than doubled its $25,000 goal, and still has 19 days left for the campaign. Having reached its original goal, the service is next targeting $150,000 for a full-page ad in The New York Times. If that works, founder Michael Gundlach wants to spend $4.2 million on a Super Bowl spot.

But all of this ad blocking is bad for business … well, some of them, anyway.

Ars Technica has a straightforward explanation[2] as to why ad blocking is so harmful for websites like itself. Basically, a lot of websites make their money by displaying advertising, and get paid by views, not clicks. So even if you’ve never clicked on a banner ad ever in your entire life (liar), installing an ad-blocking service is still hurting those websites.

But those websites aren’t the only ones at risk. Companies that generate most of their revenues through advertisements have a lot to lose if ad blocking becomes even more widespread. Google (GOOG[3]) is the most prominent example, because so much of its money comes from advertising. The company posted $12 billion in ad revenues[4] for Q2, which was 85% of overall revenue that quarter.

Yahoo (YHOO[5]) is already facing pressure for its advertising revenue, so any further troubles could be especially problematic. The New York Times reported[6] that advertising revenues took a steep hit in Q2, as display revenue dropped 12% and search revenue fell 9%.

But those companies are huge, posting quarterly revenue in the billions of dollars. Even if Adblock manages to haul in enough cash for that Super Bowl spot, it’s tough to imagine the extension becoming widespread enough to fundamentally change the way Google operates. But it’s less difficult to imagine the potential effect on social media sites like Facebook (FB[7]) and Twitter.

Much like with Google, Facebook makes nearly 90% of its money[8] through ad revenues (increasingly from mobile devices). If Adblock ravaged the company’s income statements, what would that do to the website? Would features be stripped away in the next of the site’s constant iterations? Or would Facebook be forced to adopt a subscription model, where users pay a monthly fee to connect to their friends?

A subscription model seems unlikely, especially given Facebook’s promise that it “It’s free and always will be.”  But if Adblock started eating away 20% or more of the company’s revenue, the results would be devastating.

So if you eventually see an ad for Adblock in The New York Times — or during the Super Bowl — take a second look at your internet stocks.

Adam Benjamin is an Assistant Editor at InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/09/adblocks-ad-campaign-means-trouble-for-search-and-social-sites/

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