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Ad-Blockers And Market Niches

Published on October 10, 2015

Following the heated debate that Apple has unleashed around ad-blockers and the whole monetization model of media outlets on the Internet, I felt there was a lot to unpack. I started going down the topic and found myself overwhelmed with ideas about why and how we've got here in the first place.

This is my attempt to put them all together β€” therefore these are not original ideas, but bits and pieces I scrapped from different outlets, put them together in a way that makes some sense in my mind.

How We Got Here

Before the Internet, at any given region or country, certain media formats dominated the space and tended to monopoly because of two things:

  • Barriers of entry: think of a newspaper, in order to print and deliver the thing, you had to own the presses and the distribution channels. Which account for a massive upfront investment that made it really difficult for new competitors to enter the space.
  • Advertisers followed the money: in an era where precise ad targeting, such as Google Ads, was not possible, advertisers allocated their budgets to the channel that had more reach.

That created a really interesting phenomenon that has become the underlying journalism's foundation: the editorial side became decoupled from the responsibility to make money. Huge deal. Which made possible things like investigative journalism and put the focus on the quality of the content, leaving financial tensions aside.

Ultimately this environment was defined by the nature of the channel and the constraints under which operated β€” which were basically three:

  • Limited space: the available amount of space was determined by the medium itself. In the case of the newspaper, the limitation was obviously the physical form factor of the product.
  • Limited reach: because of its physical nature, the distribution had certain constraints in itself. A newspaper, for example, a low margin item with a built-in 24-hour expiration date, didn't make economic sense to distribute across the world.
  • News selection: because of the separation of money and content, journalists became the ones who decided "what is news". On top of that, editors determined what made it to the cover page, having also the ability to decide "what is important".

The Internet

Then the Internet comes along and flipped all these assumptions on their head, opening the possibility of a new breed of publications developed and optimized around this new paradigm. Which by nature, was diametrically opposed to the one we just described:

  • Unlimited space: on the Internet, there is no limit on the amount of space available for the news. Therefore, the marginal cost for an additional page becomes virtually zero.
  • Unlimited reach: newspapers were tied to its own geographic region, but with the Internet, the addressable market becomes literally the entire world. More importantly, though, is that everybody had access to this new "feature" because there were no barriers to entry β€” as distribution had, for example.
  • Hyperlinks: in my mind, this one gets a special mention given that everybody seems to take it for granted, but it shouldn't. Because of the hyperlink, individual stories can now be accessed without visiting the home page, which fundamentally it implies that front pages don't matter anymore. Similar to what happened to the CD as a unit when songs could be purchased or streamed independently. But back to news, this means that social links become far more important when it comes to raising awareness.

Altogether it created a new environment where old newspapers, with obsolete print-centric cost structures, were simply not prepared to compete. On the other hand, new online-only publications, built around these new Internet dynamics, quickly spread across the web.

Free from the aforementioned constraints, plenty of these new online publications popped up, they all wanted in. Regardless, in their attempt β€” lacking the domain knowledge to assess what worked on this new medium β€” they all inherit the monetization model that newspapers had been successfully using during the old days.

They simply placed ads alongside the content in the way newspapers always did. Turns out though, online ads don't work exactly the way its physical siblings do. Online ads are, by nature, inherently deflationary because of the unlimited amount of space available on the Internet.

This begins to explain the tricky monetization dilemma most online publications are currently facing, that ultimately, ends up hurting content quality.

Ben Thompson put it in better words in his article The Facebook Reckoning:

This resulted in a bit of a prisoner's dilemma: the optimal action for any individual publication, particularly in the absence of differentiated ad placements or targeting capability, is to maximize ad placement opportunity (more content) and page views (more eyeballs), even though this action taken collectively only hastens the decline in the value of those ads. Perversely, the resultant cheaper ads only intensify the push to create more content and capture more eyeballs; quality is very quickly a casualty.

Mobile

In the midst of this painful transition, yet another remarkable event took place: enter the mobile era.

Mobile was not only built on top of these three Internet assumptions, but it actually went further, embraced them, and took them to its most extreme form.

Mobile means a computer in our pocket, all the time. This is a huge philosophical departure from the PC era, and it comes with a new set of implications. Before mobile came along, we actually went to a computer, with intent, only when we needed something. Mobile radically changes this idea, because mobile is omnipresent, always with us.

In other words, mobile still fulfills intent, but on top of that, our relationship with mobile has also extended to a new space: it is what we do while we are not working.

It fills empty moments, boredom. Checking out what our friends are up to while waiting in line, or reading the news as we commute. These empty moments mean attention, the most precious resource advertisers crave for β€” and mobile revealed a whole new dimension in terms of attention.

Yet monetizing attention, of course, comes at a cost. If online ads were already a deflationary proposition, because of the infinite space, mobile made it even worse:

  • Poor ad quality: unlike a PC, which has a lot of screen real estate to display ads alongside content, content on mobile necessarily takes up the whole screen β€” which ultimately leads to a worse experience for the reader.
  • Clicks are expensive from a user experience perspective: not only do PCs typically have faster broadband connections to download assets and more powerful processors to render pages, but they also have multiple windows and tabs β€”Β mobile do not.

Thus a formula that wasn't even working on the desktop, mobile just made it worse.

Then publishers and advertisers were charged with the hurdle to fix this advertisement mess, which had to be done through one of these paths:

  • Sell or display more ads: which is problematic because of the prisoner dilemma situation outlined above.
  • Sell more effective ads, that better engage the viewer: which would result in better conversion rates, that somehow would fix the infinite space, ever deflationary situation β€” so that's good.
  • Sell better-targeted ads that reach the advertiser's target audience: which would address the reach problem, because leveraging targeting capabilities ads would only be displayed to the people that are supposedly interested β€” which is also good.

Yet the latter assumption was enabled through the massive social media platforms that emerged alongside mobile, and with them, the idea of online identity.

Although we've always had an online identity built up from cookies in our browser since forever, social media platforms were able to refine our profiles to an insane extent.

There are many reasons for that, such as the ownership of the device that came along with mobile β€” desktop computers were more likely to be shared among families, but most importantly, because of the amount of information we were willing to share with these platforms in exchange for the "free" product.

It all set up the stage for a new wave of the online advertising model that has proved more effective β€” and profitable β€” across all platforms.

In this new environment, the Internet allows publishers to reach people at a more specific level and with great detail. Thus targeting them in a way it wasn't possible before. Which means that it is easier to reach a particular segment, but it's more difficult to stand out among the crowd.

Internet-Enabled Niches

All this 1.500-word explanation was the drumroll to get to the place where I could make the final point.

The result of having this profound knowledge of our users means that as publishers or entrepreneurs for that matter, we end up with far more niches to tackle. Entire hidden, unserved communities become addressable all of a sudden. The most obscure interest becomes now visible and is waiting for new businesses to serve them.

But wait, there is counter to that. At the same time, capturing each niche takes now more effort. Your message has to be more personal, more focused, and people expectations rise when it comes to being reached.

It makes me truly optimistic about the new possibilities being open for new business to create products and services around totally unserved, unaddressed markets. When your reach is literally the entire world, there are no such things as "small markets" β€”Β because when a market becomes large enough, percentages don't matter anymore.

This idea of niches and the amount of effort required to capture each niche, tells the story around the way advertising has evolved alongside the Internet and the challenge it presents to incumbent companies to adapt their structures to compete in this new era.


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