Would You Block Online Ads Just to Make Your Internet Company More Money?

You probably wouldn't ask for more ads in your Internet. But would you be happy if your ISP or mobile carrier decided to block them for you until it got its piece? This strange scenario may come to pass if Israeli start-up Shine Technologies can make its promises real.

Earlier this week, The Wall Street Journal's Christopher Mims broke the story: Shine's AdSight could give wireless carriers the ability to monitor and intercept ads on their networks in real time, and the company claims to be in talks with carriers around the globe to implement this technology. Shine's end goal is pretty simple: Wireless carriers don't get any of the estimated $140 billion that will be spent on online advertising in 2014 -- an amount surprisingly close to the $171 billion that will be spent on TV ads -- and they want their cut.

Source: Calabritto (Blogspot).

In his article, Mims notes that industry experts he reached out to on the matter widely think this idea is "insane," because any effort to interfere with the free flow of data across the Internet would raise the ire of American and European regulators. Shine counters by claiming that the degree of control it offers wireless carriers makes AdSight above-board, with users offered the chance to opt in or out before carriers set about blocking ads.

Shine CMO Roi Carthy reached out to me after my Twitter response to Mims' article caught his eye, and he agreed to answer some questions about Shine and its plans. I asked Carthy why carriers should differ from utility companies, which provide electricity without demanding a piece of what that electricity helps create. He told me:

Carriers, much like any other business, and certainly no less than Internet companies, have a right to manage their own strategy, innovating on it when they see fit. They also have a right to evolve their self-perception.

The fact is that carriers are not comfortable being "dumb pipes," no matter how convenient it is for companies that do business on top of their infrastructure. They have been looking for ways to evolve past that phase of their lives and into the next one, being "bright pipes." This is what we're seeing.

Carthy and Shine distinguish the "bright pipes" strategy as one more akin to the revenue-sharing model of the major online ad networks. Google (GOOG -1.10%) (GOOGL -1.23%) generates billions of dollars from ads shown on other websites through its AdSense network and also pays out billions of dollars in revenue-sharing fees to website owners for their use of its network. In this decade alone, Google has paid out nearly $50 billion to its network websites -- Google calls this "traffic acquisition costs," and it typically amounts to nearly a quarter of its ad revenues.

This comparison seems reasonable on the surface. Like Google, mobile carriers and ISPs provide the technological backbone on which many others might build value-added services. In Google's case, it's an ad network. In the carriers' case, it's the connection that lets you access that ad network in the first place.

But the argument starts to fall apart when you consider the logical conclusion of this line of reasoning. If a carrier has the right to demand a cut of ad revenues, should it not also have the right to demand a cut of e-commerce revenues, or service revenues, or even a cut of every single one of the trillions of dollars sent across the "dumb pipes" of the Internet every year?

It also seems strange to argue that ISPs and mobile carriers don't get a big enough piece of the pie when many, at least in the United States, rank among the largest companies in the country. The seven companies with more than 5 million U.S. data subscribers (wireless or high-speed Internet) combined to serve more customers than there are people in the United States. More importantly, their combined revenue from serving up data to these customers was hardly small -- it's larger than the GDP of Colorado:

Sources: Company annual reports. *Totals combined for both wired and wireless access if both are offered.

By comparison, online ad revenues in the United States were $42.8 billion last year, which is less than either Verizon or AT&T's connectivity-related revenues alone. And according to analytics firm Internet Retailer, these companies made more money than all of America's e-commerce combined -- last year, e-commerce sales reached $262.5 billion in the United States. The 10 largest companies in the world by online ad revenues are all American companies, and their combined revenue last year, including non-online sources, still falls short of the $276.1 billion earned by America's seven largest Internet and wireless providers:

Sources: eMarketer and YCharts. 

The tradeoff
The existence of technologies like Shine's AdSight serve more to highlight the conflict between connectivity providers and major online companies than they do to level any perceived imbalances in the playing field. Some consumers may want to block ads, but it's unlikely that they'd want to do so for the sake of holding Google and Facebook hostage to their wireless carrier. Advertising isn't popular, but it's the trade-off online users have largely agreed to in exchange for a vast range of free services. To access these services, users agree to pay their ISP and wireless carrier upwards of hundreds of dollars a month, and carriers evidently feel that their piece of the pie is still too small.

Would you accept ad-blocking technology if you knew it would go away when Google and Facebook paid your carrier what they wanted? Would you be OK with the racket if it were more under your control? Does Net neutrality guarantee you'll have to see ads you may not want? There are a lot of questions raised by the potential for carriers to block the ads our favorite services want to show us, but they may not be the questions that Shine wanted us to ask.