Apple Has Declared War on Ads. Will It Change the Advertising Business?

Apple has turned ad blocking from a feature only geeks cared about into a force reshaping advertising. Here are six questions it raises.

Regular article

Over the past month, digital advertising has run into a big problem, and the problem comes from Apple.

On September 16, Apple began rolling out its latest operating system, iOS 9, to hundreds of millions of iPhone users. Along with the new system's features came a wave of ad-blocking apps from third-party developers.

Paying up front for apps has gone out of fashion, and the feature carries the clumsy name Safari Extension, yet the lure of getting rid of ads proved too strong. One of these apps, Peace, climbed to number one on the paid chart, leaving casual games behind.

Before and after using AdBlock

Apple's move is a bad omen for the advertising business. Over the past year Apple sold 259 million iPhones, nearly monopolizing the high-end phone market. Add the more than 200 million people already using ad-blocking plug-ins on their PCs, and soon hundreds of millions of people will be dodging websites' ads.

Media sites that depend on ad revenue, such as The Washington Post, have fought back with technical measures, while a debate continues over whether doing so is unethical, or even illegal.

The effect of mobile ad blocking on China is still unfolding, but stripping out video ads has already caused trouble. This month iQIYI sued Sogou, demanding compensation for losses caused by Sogou's browser blocking video ads.

Which ads will actually be affected?

Ad-blocking software already has 200 million users worldwide, but not every ad will be affected.

If a site owner manually places an image ad or a hyperlink in a web page, for example, the software cannot yet filter it out.

But that is not how most ads get placed today. The real delivery channel is the ad platform, which pulls together tens of thousands of websites. Through these platforms, advertisers can put ads on dozens or hundreds of sites at once, instead of contacting each site one by one as they did with newspapers and magazines.

Beyond convenience, ad platforms offer advertisers a bigger benefit: precision. Because a platform tracks users across every web page it reaches, it builds up a picture of where you live, what you like, how old you are and so on. Advertisers can then use software to target specific groups of users directly.

This was a major change in advertising in the internet era. Running ad platforms has become one of the main sources of revenue for Google and Baidu, and tens of thousands of websites live off these platforms. Baidu's ad network alone has 800,000 registered websites, and 58.com once got 50% of its revenue from it.

Convenience has a cost. To work with every website, ad platforms use links and formats that follow regular patterns, and these are exactly the ads that blocking tools can kill. According to Ghostery, an ad- and privacy-protection service, it can identify and block 997 ad plug-ins alone, including the ad platforms of tech giants such as Google, Baidu and Amazon.

Why is killing ads so popular?

Ad platforms are clearly an invention that favors advertisers; more than 90% of the Google empire's revenue comes from them. For users, though, they are no friend.

The most visible result is that these ads are ugly. In magazines and on television, ads are usually carefully produced to fit the medium's brand. Ad platforms stress ads that run anywhere, but no single ad can suit thousands of websites. So ads whose style clashes completely with a site's content end up on your screen.

On top of that, every ad platform requires websites to add tracking code (a "tracker") to their pages to follow users.

The obvious problem with tracking is privacy. You may trust that US-listed companies worth hundreds of billions, such as Google and Baidu, have the incentive and the means to protect your privacy. But nobody knows how many years a small or midsize ad platform will survive, and even if it wants to keep your secrets, it may not be able to.

Even if you don't care about your privacy, these trackers force a phone to load more content when it opens a web page, which slows the page down and burns more data and battery.

The tech site The Verge published an article on this, arguing that these online ads are why websites are so unpleasant to use today. Ironically, a developer tested that very article's page and found that the article itself was only 75KB, yet the page loaded 9.5MB of data, nearly 130 times as much. The extra was mostly ads and tracking code.

Bloat from ads has become the norm on websites. Monday Note sampled the home pages of 20 news sites and found 500 trackers in total, most of them used for advertising.

On a laptop with a broadband connection, trackers may not make much noticeable difference. On a phone, people have far less patience. According to Fast Company, 40% of internet users give up on an e-commerce mobile site if it takes more than 3 seconds to load. Patience on phones really is limited.

Who is blocking ads?

According to the research firm Pew, mobile ad spending reached US$19 billion last year. Fighting this huge market has now drawn many players.

As early as 2011, Eyeo, a company based in Germany, launched a browser plug-in called AdBlock Plus. Back then it was not easy to use: you had to find it, download it, install it and then subscribe to specific filter lists. Even so, AdBlock Plus won more than 100 million users, and relatively active internet users at that.

On iOS 9, Apple has lowered the barrier for ad blockers. Using one is now much like using any other app: you download it from the App Store and switch it on.

Building such a Safari extension isn't hard for developers either. Lei Wang, the developer of an app called Ad Terminator, told QDaily that he built it in just 3 days of spare time.

Thanks to Apple's enormous global user base, the developer Dean Murphy made US$70,000 in net revenue in one week from his app Crystal.

But ad blocking on iOS goes beyond that blue-circle-on-white icon on your home screen. Apple now lets developers block web ads inside their apps. Say a friend sends you a web link in a chat app: when you open it, the app calls up the Safari browser. The app's developer can now have ads blocked on the pages in that browser.

To make pages load faster, more developers will probably block ads on outside pages within their own apps, with no action needed from users.

Besides Apple, some browsers have built the feature in directly. Sogou, for example, offers a function in its browser that skips through pre-roll video ads, which is why iQIYI sued it this month. Sogou was not the first, though. In February last year Maxthon launched a similar function, but within a week the major video sites had blocked it and it stopped working. Ads are, after all, an important source of income for video sites.

Even software such as 360 and Kingsoft Antivirus, and routers such as Xiaomi's router and HiWiFi, have started selling themselves on this, promising to kill ads for you.

Nor would it be surprising if Chinese Android makers, which are outside Google's control, one day turned on ad blocking by default in their phones. Saving battery and data is always a good selling point for standing out, and standing out is what they crave most.

Can getting rid of ads be a business in itself?

AdBlock Plus is an open-source project, yet Eyeo, the company behind it, has still managed to turn a profit. Eyeo maintains a whitelist that lets "acceptable ads" on some websites display normally. Getting on that list, of course, costs money.

Other apps that use AdBlock Plus's blocking rules also receive a share of the revenue. In this way Eyeo has extended its influence.

The Financial Times even reported that Google, Amazon and Microsoft had given in and become Eyeo's customers so that their ads would display normally. Eyeo argues that this lets companies that care about the ad experience make money, and that maintaining the whitelist costs money too.

According to The Next Web, Eyeo is in talks to buy Purify, the current best-selling ad blocker in the App Store, for US$250,000 in cash.

On the Chrome browser, AdBlock, a plug-in with 40 million users, announced early this month that it had been bought by an unnamed buyer and would start supporting "acceptable ads." This newborn ad-blocking market is already consolidating.

Once ad blocking spreads, who loses?

The first to lose are site owners who live on ad revenue. Ads that cannot be displayed or tracked earn nothing.

All the revenue of the ad platforms tied to these websites is also at risk. According to a Goldman Sachs report, Google's mobile ad revenue reached US$11.8 billion in 2014. Yet Google looks heavily dependent on Apple devices: 75% of its mobile search revenue comes from iPhone and iPad users.

Baidu is China's counterpart. In the second quarter of 2015, its online marketing revenue reached 16.227 billion yuan (about US$2.617 billion), a full 97.9% of total revenue, and the vast majority of that is advertising.

Advertisers will feel little effect in the short term. If an ad is not displayed, or not tracked, they do not have to pay for it.

The problem is that once web ad trackers are killed, advertisers can no longer reach specific groups of users. That includes the most desirable ones, iPhone users, who on average are willing to spend US$624 on a phone, while the average Android phone sells for only US$185.

Without precise tracking, advertisers will also have to spray ads around, which will drive costs up. Niche products in particular will find it harder to survive.

So if ad blocking is taken to its extreme, the whole internet built on a "free + ads" business model will be caught up in it, and the market affected would be worth tens of billions.

What does this mean for the future of advertising?

If ads on ad platforms can no longer pay their way, other forms of advertising will inevitably catch on.

Native advertising is one. It is inserted directly into the feed of regular posts, so it does not interrupt browsing, and ad blockers cannot block it. That is why advertisers and site owners are keen on it.

After The New York Times launched native advertising in February last year, its native ad revenue reached US$18 million that year, 10% of its digital ad revenue.

BuzzFeed, founded only in 2006 and backed by A16Z, one of Silicon Valley's top venture firms, shows almost no ad windows on its site, because nearly all its revenue comes from native ads.

Baidu also launched a native ad platform in April this year. But because native ads still require custom content, an ad network may not be good at them.

The bigger change will be where ads go. In the future you may no longer see ads on web pages. But in social apps such as WeChat and Facebook, which hold your attention for tens of minutes every day, ads will be untouched. Whatever blocker you use, the ads in official accounts and Moments will still appear in front of you.

Once their own ads suffer, websites will depend even more on publishing their content on these platforms, even if they must share the money with Tencent and Facebook.

Ads in these apps, which capture people's time on their phones directly, are already growing fast. 72% of Facebook's revenue comes from mobile app ads, a business that had barely started 3 years ago. Ad blocking will speed up the transfer of control over advertising from "search engine + ad platform" players such as Google and Baidu to Facebook and Tencent.

Power in online advertising is shifting, and the shift cannot be stopped. Apple will make it happen faster.