A Dec. 2014 survey by PageFair revealed that 28% of U.S. Internet users use Eyeo GmbH's Adblock Plus, a popular ad-killing extension and app for major web browsers and Android.
41% of those users were millennials, who comprise a large portion of the critical 18 to 49-year-old demographic for advertisers. The survey also estimated that 5% of worldwide Internet users, or 144 million people, are using Adblock Plus. Ironically, most of that growth came from Google's own Chrome browser, which was designed to tether Internet users to its ecosystem.
Those figures are troubling for Google (NASDAQ:GOOG) (NASDAQ:GOOGL), the biggest seller of display ads on the Internet. Let's examine the financial impact of Adblock Plus and what it means for the future of Google and Internet advertising.
What Adblock Plus means for Google
Last quarter, Google's paid clicks rose 14% year over year, but cost-per-click (CPC) slipped 3%, indicating that ad traffic rose while revenue per ad declined. If Adblock Plus or similar programs shut down ads before they reach viewers, Google's paid clicks and CPC growth could suffer.
In 2013, Google booted Adblock Plus from Google Play, forcing Android users to manually download the app. A few months later, Google and other companies reportedly started paying Eyeo to "whitelist" certain ads. Eyeo earns 30% of the potential ad revenue from those unblocked ads, according to The Financial Times.
PageFair estimates that prior to that deal, Adblock Plus cost Google $887 million in potential ad revenue in 2012. Granted, that was equivalent to only 2% of its ad revenue that year, but it made sense to reduce future losses by paying Eyeo. However, Adblock Plus users can still manually configure the extension or app to block whitelisted ads.
PageFair also reported that Adblock Plus usage surged nearly 70% worldwide between June 2013 and June 2014. That rapid growth could give Eyeo a lot more bargaining power with Google, Yahoo, Microsoft, and other advertisers.
What this means for marketers
The majority of PageFair's surveyed Adblock Plus users expressed "some willingness" to receive less intrusive ad formats, yet they "strongly rejected" intrusive ad formats like popovers and interstitial (full-screen) ads which temporarily block out an entire site or app.
This strongly suggests that marketers should explore newer advertising methods. Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) popularized "friending" and "following" companies. Pinterest made it cool to "pin" brands, which led to the launch of "promoted pins" last March. The Gap and other companies have experimented with "geo-fencing" strategies, which deliver coupons to mobile devices when users approach physical ads at bus stops or other locations.
All of these strategies are smarter alternatives to old-fashioned text and display ads which can be killed by ad-blocking software. Yet not all marketers are embracing next-gen advertising solutions. As of last December, two groups of French publishers -- GESTE and the French Internet Advertising Bureau -- were mulling a lawsuit against Eyeo, on grounds that AdBlock Plus threatened their businesses.
No, ad-blockers won't kill Internet advertising
The rise of ad-blocking software won't kill off Internet advertising. Research firm eMarketer expects annual worldwide digital ad spending to rise from $160.2 billion to $213.9 billion between 2015 and 2018. As a percentage of total media ad spending, digital ads are expected to climb from 27.9% to 32.3% during those four years.
Instead, ad-blocking software should be considered a positive catalyst which will encourage stubborn advertisers to replace dated pop-up, banner, text, and full-screen ads for less intrusive advertising solutions.
The bottom line
Eyeo doesn't represent a massive threat to Google, but the changes that it heralds could hurt the search giant. If marketers spend more on social marketing solutions instead of simple display ads, Google could struggle to keep up due to the comparable weakness of Google+. Therefore, investors should understand how ad-blocking software could alter the business of Internet advertising.