Internet ads: they are pervasive, annoying, and always seem to interrupt what you’re reading.
You might think the best remedy would be to purchase an ad blocker for commercial-free browsing.
According to new research from Carson Family Professor of Business Miklos Sarvary, co-faculty director of the Media and Technology Program, that would not be the best course of action. Although your reading experience would improve, the decrease in advertising revenue could make it difficult for web publications to maintain an appropriate budget for content, which, in turn, might affect the quality of articles.
“We assume that ads make people unhappy, which is kind of true,” Sarvary says. “But if blocking them causes the quality of the content to decrease, it might wipe out the benefits of not watching ads.”
Sarvary, along with co-authors Zsolt Katona of the Haas School of Business at the University of California, Berkeley, and Aleksandr Gritckevich, a PhD candidate at the Business School, explored that relationship in a working paper titled “Ad Blocking,” which constructs a model that investigates the interaction between publishers and ad blockers.
Sarvary and his colleagues were interested in “whitelisting,” a practice ad blockers use to allow some advertising through their filters for a fee. “Ad blockers claim to be ‘quality controlling’ the ads and the non-intrusive ones can be let through,” Sarvary says. “In practice, what it means is that they are taking a fee from the publisher’s revenues.”
To ascertain the effect of ad blocking, Sarvary used standard applied game theory that simplifies and stylizes the attributes of different “players,” — publishers, ad blockers, and customers. “You need game theory because these are not independent decisions,” Sarvary says. “Everyone’s decision depends on another’s choice.”
In the research game, Sarvary first allows a publisher to invest in content at a cost and choose its advertising intensity. Then Sarvary introduces ad blockers that could block all ads for customers, which would leave publishers with no revenues. “What ad blockers do then is to tell publishers, for a fee I whitelist some ads,” Sarvary says. “How many ads are let through is a careful balance between providing enough benefit to consumers who see fewer ads, and letting enough ads through to make profit from the fee collected from the publisher.”
In equilibrium, consumers download the ad blocker to see fewer ads, publishers accept paying the fee to keep some of their ads whitelisted, and the ad blocker makes some profit from the fees. What is interesting however, is that consumers end up being worse off overall than in a world without the ad blocker. This is because publishers’ lower profit forces them to reduce the investment in quality. This loss of benefit for consumers more than erases the benefit of seeing fewer ads.
“There is a small segment of consumers who are better off — those who would not have consumed the content at all because they are so averse to ads,” Sarvary explains. “But on average, consumers are worse off.”
According to Sarvary, one way that publications look to subvert ad blockers is to rely on subscriptions as a main source of revenue instead of trying to increase the value of digital ads. “The advertising model has become less attractive in recent years within the digital environment,” Sarvary says. “This is mostly driven by the large amount of supply on an ever growing number of pages on the web. Ad blockers make this situation worse.”
Publications that have erected paywalls also sometimes offer customers fewer ads on the page as a subscription incentive.
Sarvary says that well-branded publications that appeal to more affluent customers such as The New York Times and The Economist are better positioned to draw revenue through subscriptions. “You take the people who are sensitive to ads, who are typically also less price sensitive, and offer them a different product,” Sarvary says. “This is not different from product customization.”