Disclosure: I’m Kyle, CEO of Sphere. This article was compiled by myself and my two cofounders after spending the last year interviewing hundreds digital publishers, non-profits, and users.
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Very few people like ads. If you do, consider yourself an outlier. For those that don’t like ads, your internet is about to get worse. Potentially a lot worse.
As a side note, if you don’t use an ad blocker, you should. Even the FBI recommends using one¹. Ads expose you to scams and threats, but also impact your ability to focus because they are monetizing your attention. They even burn your cell phone battery because something like 40% of the data you download is just ads.²
But even if you already use an ad blocker, here’s our prediction: you are going to see a lot more ads. On top of that, these ads will be more annoying, less relevant, and your ad blocker will become useless against them.
The TLDR is:
1. Subscriptions are declining because people increasingly hate subscribing
2. Ad revenue is declining due to increased privacy, over supply, middlemen and ad blockers
Over the next few years, everyone from small websites to large will feel the squeeze, but the real loser will be you and me. The rest of this article is going to walk through why.
Subscriptions are declining
Netflix switched to an ad driven model two months ago in response to lagging subscriptions.
There was a lot of talk about how people are sharing logins, but the real underlying reason is that Netflix now has competition, which is pushing down the value of their subscription. Most users would rather see ads than subscribe, which means companies pursuing subscriptions have to create very unique and engaging content to get subscribers. Now that Netflix is competing with a number of other streaming services, it’s unlikely that they will ever go back to the dominance they once had. It’s now a race to the bottom for price, and ad-supported models are the inevitable end, because user’s think they are “free”.
Newspapers have been going through this problem for decades. Prior to the internet, newspapers thrived because delivery of papers geofenced competition. But after the internet came around, the only differentiating content newspapers delivered was local news. Millennials (like myself) don’t subscribe to newspapers like older generations do, largely because there are ad-supported versions elsewhere on the internet. Social media put the last nail in the coffin with the rise of citizen journalists, which has further reduced the value of local news.
Because of these trends, most tech and media media giants now solely rely on selling your data to advertisers: Google sells your search history, social media behemoths sell your posts and interests, and even Amazon now sells your order history. Pew Research conducted a study that showed how advertising is on track to dominate revenue in the newspaper economy³:
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While subscriptions are dying, there is one bigger problem.
Ad revenue is Declining
Switching to ads should have been a positive trend for media companies’ bottom lines, but the advertising economy is changing rapidly. There are a lot of reasons for this, and I’ll break this into a few sections.
- Supply is Outstripping Demand
The advertising industry is simply a marketplace of companies selling ad space and companies buying that space. Like any other market, if supply increases faster than demand, the price of an ad will go down, as will the revenue of the site supplying the ad.
Netflix adopting an ad-supported model is a prime example of this. There is now a whole new supply of advertising space that didn’t exist before. If demand stays the same, or simply doesn’t increase at the same rate as supply, the price of an ad will go down. And this is what we see. More and more sites are adopting the advertising model and flooding the market with supply.
On the demand side of the market (e.g., advertisers such as Nike buying ad space), we see issues as well. Ad demand fluctuates with consumer spending. The more users spend, the more ads companies will buy. While the pandemic was a positive bump in online spending, that has fallen off steeply. This may be a temporary trend, but it nonetheless will impact the next few years.
2. Increased Privacy
There’s a larger reason pushing ad revenue down: increased privacy. Advertisers pay for the ability to target users and privacy is directly at odds with their ability to do so. The logic is that if privacy increases, platforms cannot track your behavior, and therefore cannot provide advertisers with targeted ad slots. Advertisers will pay less for non-targeted ads because they don’t want to spend money blasting their ad out to people who are not interested in their products.
The end result is that if you stop tracking users, the price of advertising will inevitably decrease. This is exactly why Facebook (Meta) lost somewhere around $230 billion in market cap when Apple made it harder for them to track users.⁴
To this end, regulation has completely changed in the last few years. GDPR, CCPA, and Apple’s App Tracking Transparency have forever altered how sites can monitor and track us. This is inherently a good thing, but the consequence most people don’t think about is that it drives ad prices lower, which in turn means lower revenue for websites. This inevitably leads to some disturbing patterns, because there are hundreds of billions of dollars at stake.
Going forward, it’s likely that media companies create technology that can track you in ways we don’t understand, and therefore cannot regulate. While privacy is generally a good thing, these changes may result in bad outcomes that may be worse for us.
3. Middlemen
This one is easy. Zooming out, there are two types of ad-supported sites on the internet: those with their own ad platforms (Meta, Google, Amazon), and the rest of the internet, which has to rely on these platforms to monetize their content. Everyone wants to be their own platform because otherwise they have to pay a middle man to get ad revenue.
It used to be that sites could negotiate directly with advertisers for payment and skip these platforms, but now advertisers only want to go through programmatic channels (like AdSense). This is because programmatic ad platforms allow advertisers to target specific types of users across many sites. As such, websites are taking an increasingly smaller cut of every ad sale as the ad platforms suck up all the revenue. The result is that sites are making less revenue from ads.
4. Ad Blockers
Lastly, let’s talk about typical ad blockers.
If you use one, you’ve likely hit the “Please turn off your ad blocker” pop-ups. Many people leave when they see this, but concerningly, this experience is spreading. These ad block detectors used to only be on very large sites like CNN, but have now trickled down to smaller publishers.
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Admiral, one of the most successful startups, just sells an advanced ad block detectors.
Ad blocker usage has been slowly growing over the last 15 years and estimates say that around 20–40% of all internet users have an ad blocker enabled.⁵ This means that websites are losing out on 20–40% of their potential ad revenue. This problem is not distributed equally across the internet.
Sites with their own ad platforms (as discussed earlier) do not have to worry about ad blockers. This is somewhat complex, but the gist is that if users have an ad blocker, platforms can still charge for impressions. This is not the case with sites that do not have their own ad platform. Impressions are measured by third party HTTP calls, and a user’s ad blocker will stop this. The end result is that ad blockers are screwing smaller sites far more than platform ones like Facebook.
Imagine if you were a website publisher and could instantly recover 10% of your ad revenue by removing ad blockers. It could be the difference between staying alive and shutting down. Companies like Admiral, BlockThrough, and others have capitalized on this movement and I expect this trend will continue. Historically, websites did not want to turn on ad blockers because doing so usually resulted in users abandoning their site. The reasoning is that websites wouldn’t care if users had an ad blocker because websites tried to drive users to subscribe instead. The problem now is that subscriber rates are falling so sites are getting itchy feet to solve the adblocker problem once and for all.
The Perfect Storm
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The chart above shows the CPM (cost per 1000 impressions) for Facebook over the last 3 years⁶. Typically, this has been growing at a steady pace, but 2022 saw about a 30% reduction in value.
All of the forces we talked about above are combining in the next few years to draw down the price of ads, resulting in declining revenue for sites. One author went as far as calling it “the subprime attention crisis.”⁷
Unfortunately, the real loser here is going to be you and me. Companies will adapt and make changes to survive. They will all very likely resort to one (if not multiple) of the following tactics:
- Pushing more ads
- Making ads more annoying
- Removing ad blockers
You can see how the internet could get very miserable, very quickly. We will likely see more ads, which, thanks to privacy initiatives, will be less relevant and more annoying. On top of that, your ad blocker will be less effective in removing them. If you think your ad blocker is immune, think again — even things like Pi Hole and other DNS blockers are getting targeted by ad block detectors (I know this because I use them).
While these are already happening to some extent, they will continue to get worse as economic pressures mount. But there’s more: less funding to content creators means subpar content. Clickbait, factual errors, or missing depth are all outcomes of poorly funded newsrooms. 70 million Americans now live in a county with either no local news organization or only one. News deserts (places with no news), have increased by 40% in the last 2 years.⁸ As we go into another very controversial presidential election, this is a recipe for disaster. Citizen journalism is not going to be able to fill the gap.
A stab at the solution
Warning: this section promotes my company
One thing we found on this investigative journey was that when you visit any ad-supported page on the internet, you only generate about $.004 in revenue for that site. Not even a whole cent. This is an incredibly small amount of money.
How much is your attention and mental energy worth to you? How about your page load speed, privacy, or not having to fiddle with an ad blocker? If you could pay a website a half a cent, would you do it?
I suspect not most people, but for the people who want to exit the ad blocker war, we built a browser plugin that pays websites to remove ads when you visit them. Since we are paying websites directly, you’ll never hit another “ad block detected” banner. We can even operate alongside your existing ad blocker, just for sites that have ad block detectors. No, we are not a cryptocurrency company and we are not collecting your data. Our goal with Sphere is to give you an alternative to the ad world.
If it seems interesting, sign up at https://sphereapp.tech/
References
- Even the FBI says you should use an ad blocker https://techcrunch.com/2022/12/22/fbi-ad-blocker/
- Ads eat half of page loading time https://blogs.opera.com/news/2017/05/ads-eat-half-page-loading-time/
- Share of newspaper advertising revenue coming from digital advertising https://www.pewresearch.org/journalism/chart/sotnm-newspapers-percentage-of-newspaper-advertising-revenue-coming-from-digital/
- Facebook Parent Loses More Than $230 Billion in Market Value, Biggest U.S. Stock Market Drop in History https://variety.com/2022/digital/news/meta-facebook-loses-200-billion-market-cap-1235171085/
- Adblocking penetration rate in selected countries/territories worldwide as of 3rd quarter 2021 https://www.statista.com/statistics/351862/adblocking-usage/#:~:text=Adblocking%3A%20penetration%20rate%202021%2C%20by%20country&text=This%20was%20followed%20by%2041.7,users%20said%20they%20used%20adblockers
- Facebook Advertising Costs by CPM https://revealbot.com/facebook-advertising-costs
- The SubPrime Attention Crisis https://www.amazon.com/Subprime-Attention-Crisis-Advertising-Originals/dp/0374538654
- News deserts in America https://www.usnewsdeserts.com/wp-content/uploads/2020/10/News-Desert-Report-2020-FAQs.pdf