ad blocking and potential impacts to the market

“But since you’ve been gone, I can breathe for the first time.”

Kelly Clarkson – Since You’ve Been Gone

My best friend has always been heavy on the Internet.  He told me once that his life was better without advertising and blocking ads made him feel like he could breathe for the first time in his lifetime.  What I found out is that he’s not alone.

Ad blocking is controversial. By definition, it is the altering or removing of advertising content in a webpage, app, etc.  About a third of all Internet users worldwide have used ad blocking software on one or more personal devices.  This software is most popular in Europe and globally between ages16-24.  However, ad blockers can impact the user experience because the amount of code and javascript needed to block the ads is heavy. Some of the blocked advertisements include banner ads, text ads, sponsored links, sponsored stories and video pre-roll ads.

So why do people use ad blockers?  Personal data is being used by companies.  People are being tracked. Some 91% of Americans feel like they’ve lost control over the way their personal data is collected and used. Advertisements are mixed within and sometimes over content.  Pop-ups and pre-roll video ads are occurring so frequently that it makes you want to close you laptop and call it a day.  People simply hate the principle of advertising and only want a faster, premium media experience with no tracking.

But why do companies rely on advertising?  It’s simple, they offer you a product that is most of the time free and need additional revenue streams to help keep the lights on. Google is an ad network and for the better part of their existence continues to build platforms needed to support publishers of content like CNN.com or service providers like Pandora. For some this additional revenue stream helps make payroll and building new product.  But companies now are beginning to remove advertising as a part of the user experience and working on new ways of monetization.

So here’s how it works with an ad network.  First, a rev share deal between ad network and publisher is agreed to which always favors the ad network.  Then, both technical teams work together to ensure the appropriate code is working and delivering ads as intended.  Using Google as an example, their ad engine then takes over and serves thousands of video and display ad campaigns which are placed on your website or app. You even get the option to filter the ads by category or actual advertiser. Then when the ad is clicked, you generate revenue and get a high-level data report about your audience and performance. On average a publisher makes around $0.30 cents a click depending on the type of ad unit. This model is called cost-per-click or CPC but there are other forms of payout known as CPM (cost-per-thousand), CPL (cost-per-lead) as well as others. Google’s revenue this year will be north of $70B and whether publishers and apps will admit it or not, have adtech companies to thank at some point along the way.

Overall user behavior has changed and the majority of time spent now is on SmartPhones and in apps, not in a browser. Every publisher who has a website now needs an app and a mobile friendly site. Having an app initially meant more security and less ad blockers.  Apps then started using ad networks in the same fashion for their website. However, with Apple’s release of iOS9 on September 16, 2015, they now allow the ability to download ad and content blockers.  Install rates surged and mobile ads were immediately blocked.  Then three weeks later on October 9th, 2015, Apple removed those same ad blockers from the apple store which had been blocking ads on Facebook and other third party apps.  Talk about a change in direction and a problem nowhere close to being solved.

Ad blocking software will lead to nearly $22 billion in lost advertising revenue this year – representing a 41% rise from 2014.  Google lost an estimated $6.6B in 2014 because of ad blocking.  Now they pay companies who block ads like AdBlock Plus to become whitelisted. Only a few people know the revenue streams of these companies because they are all private so I don’t want to put a number out there.  However, it is no secret that these small, ten person start-ups dedicated to ad blocking take very large revenue streams away from thousands of small and large businesses, while collecting the install fees from the user and under the table deals with Google and others to be whitelisted.

So here are my thoughts on where this may go.

  1. Publishers block content from people who use ad blockers.
  2. You start paying up for content.
    • Micropayments – Publishers make you pay pennies for each type of content like reading an article or YouTube video. 
    • Subscription models – The end of free Internet and you pay a monthly fee like the WSJ, Netflix and Spotify.
  3. An advertising apocalypse occurs, led by Apple.
    • Apple decides to embed their own ad blocking technology into future software releases, killing all direct and ad network advertisements.
  4. AdBlocking become a relevant business model with strong adoption rates.
    • Companies decide to keep advertising and pay ad blockers under the table to be whitelisted on an impression basis.
  5. Native ads continue to takeover which is an $8B business this year.
    • More forms of unique, newsfeed driven ad solutions as shown on FB are very hard to block. .
  6. FB becomes the new browser and ad blocker.

As ads continue to be blocked, revenue will be impacted and could start hearing this topic brought up on earnings calls soon.

Disclosure:  I hold positions in Facebook, Apple and Netflix.

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ad blocking and potential impacts to the market

Investing in adTech and applicable investment principles

“It’s funny how time fly, I’m just having fun, just watching it fly by.”

Dr. Dre – The Watcher

High returns with low risk is the key in any stock pick or investment.  One should at least understand this much.

I thoroughly enjoy the stock market and would consider myself as close to proficient as the Dreyfus model will let me be.  Friends and colleagues ask me all the time what they should be investing in. Before the barrage of questions ensue, I try my best to collect as much information as possible about the person to help prepare for a future discussion. Things like what they do professionally, talk about, interests or even what they enjoy doing on their iPhone. When the question comes, I always lead with the following questions.

Me:  What tech products or services do you routinely use or could not live without?  

Person:  I love Facebook, Netflix and Amazon.  

Me:  Do you own any of these stocks?

Person:  No.

Not much to it, right?  I didn’t talk P/E ratios or valuations and confuse the hell out of the person, all I did was ask the person what they liked.  The KISS principle also gave me an opportunity to hear about companies for the first time which I may have missed out on previously.  Year-to-date across the three stocks mentioned, there have been upward spikes of 127% in Netflix, 75% in Amazon and 18% in Facebook and over the past three years 571% in Netflix, 124% in Amazon and 381% in Facebook.  If you don’t have Kevin O’Leary’s voice from Shark Tank in the back of your brain saying “I like making money” then this article won’t do it for you.

So what prevented an investment for many in some of these obvious breadwinners?  I’ve heard it all.  I have a family, recently married, too old for risk, don’t understand or would rather spend it in Vegas.  Vegas, really?  All it takes is a little dedication to due diligence into companies you are passionate about, trust me.  Here are my key starting points for first time investors.

  1. Will the demand continue to climb exponentially for the product?
  2. Is the CEO’s middle name execution and last name Darwin?
    • Think Jobs, Musk, Zuckerberg, Bezos
  3. Can you remain patient enough to achieve big returns?

So my point to you is like the song – don’t be a watcher, be a do’er.  We experienced a month in the stock market, late August through September, where a really great buying opportunity was presented.  Technology stocks were not the only great buying opportunity as every sector was hit hard.  Even stocks with exponential growth and continually beating earnings were hit 30%.  This allowed investors another great time to buy more in positions that follow the above principles.

Even though Google and Facebook aren’t publicly know as “adTech” companies, they are. The revenue from their advertising technologies is absolutely the engine running all of their other projects, exclusive company parties and futuristic ideas. Continue to stick with FB and Google and ignore the field.  Competitors to the stocks above like Cable, Twitter and eBay will most likely be playing catch up for another three years and at that point too late.   We currently are watching an adtech phenomenon, where Google and FB dominate like Tiger Woods did when the field of 240 other golfers were just that far behind him.  All I’m saying is open an online brokerage account start putting money to work.  Pick some obvious winners and try using some of my principles.  The hardest part is first buying stock and then holding for a couple years.

Disclosure:  I hold positions in Netflix and Facebook.

Investing in adTech and applicable investment principles