iOS 9 and the Rise in "Native Advertising"

Last week Apple (AAPL) introduced the latest iPhone operating system, iOS 9. This is first time a major mobile operating system has allowed ad-blocking. Software developers were on the spot with new apps snatching three of the top four App Store spots within 24 hours: names like Purify, 1Blocker, Crystal, and Peace (more of this later). Imagine, phone users, and lots of them, willing to pay real money, up to $3.99 apiece, to avoid being burdened by the nuisance of banner commercials encumbering their content. After all, obtrusive ads suck battery life, use inordinate amounts of data, have long download times that retard the speed of your phone, and often occupy massive amounts of precious screen real estate.

But wait. Does there exist a tacit accord between publisher and user; free content in exchange for the minor inconvenience of annoying sales pitches? Tens of thousands or more websites depend on promoting products as their sole source of revenues. Should we the users be forced to download unwanted megabytes to begrudge them a livelihood?

Marco Arment, software programmer, and Tumblr founder eloquently dismantles any moral obligations users may be encountering:

"Web ads are dramatically different from prior ad media...... They run arbitrary code on your computer, which can (and usually does) collect and send data about you and your behavior back to the advertisers and publishers. And there's so much consolidation amongst ad networks and analytics providers that they can easily track your behavior across multiple sites, building a creepily accurate and deep profile of your personal information and private business.
All of that tracking and data collection is done without your knowledge, and -- critically -- without your consent. Because of how the web and web browsers work, the involuntary data collection starts if you simply follow a link. There's no opportunity for disclosure, negotiation, or reconsideration. By following any link, you unwittingly opt into whatever the target site, and any number of embedded scripts from other sites and tracking networks, wants to collect, track, analyze, and sell you.
That's why the implied-contract theory is invalid: people aren't agreeing to write a blank check and give up reasonable expectations of privacy by clicking a link."

It turns out Mr. Arment is also the inventor of the number one selling ad-blocker, Peace. At least it held first place before Mr. Arment pulled the plug after two days. He claimed pangs of guilt for the ruthless nature of the software. He admitted that Peace was bunker buster bomb, destroying everything, good and bad. He lamented it was impossible to use a scalpel to remove surgically the tumors, and leave the good tissue (good ads) alone. Interestingly, maybe for the first time Apple has already issued 13,000 customer refunds. One must wonder how many purchases of Peace there were during its brief shelf life.

Some publishers like Washington Post and CNET are already blocking their content from visitors who use ad-blockers. Adblock Plus (over 300 million downloads, now on iOS 9) prevents full access to Washington Post's articles. Already, many other publishers are taking similar actions.

So already we have software to block ad-blocking. Then there will soon be software to block the programs that block the ad-blocking. It is an iterative process with endless permutations. It appears like an unending nuclear arms race.
But these publisher hostilities are a sideshow to the greater conflagration.
iOS 9 Mobile ad-blocking is a frontal assault on arch-rival Google (GOOG). This large torpedo is aimed directly at their various ad sales platforms: AdWords and AdSense. A guaranteed source of recurring income for Google in years past, Apple now proposes several million iPhone and iPad users be given a choice to browse ad-free websites.

This war is being fought over the mobile ad market. By a large margin, eMarketer reports, it is the fastest growing market segment expecting to register $64 billion in sales, up 60% from 2014 figures. The number is expected to catapult to $158.55 billion by 2018.

The enormity of the battle is hard to overstate. It is very probable that Google will take some action to stop the torpedo from a direct hit. 90% of Google's $69 billion in trailing twelve months revenue comes from its advertising platforms. Indeed, Google can build proprietary software to block the ad-block users. They have ample resources to pay off ad-ad-blocking software developers to whitelist (allow) their ads. At the end of the day, the mobile consumer will dictate preference by their clicks.

Remember, fifteen years ago when pop up ads became an irritant, and pop-up blockers are now desktop standard fare. iOS 9 is the start of a clear paradigm shift. So how might this brave new world look?

Most of the above mentioned mobile ad dollars were spent on intrusive banner ads. An alternative is "native advertising." Already underway, iOS 9 gives this transformation more momentum. Per Wikipedia, native advertising is "online advertising that matches the form and function of the platform on which it appears. For example, an article that was written by an advertiser to promote their product, but using the same form as an article written by the editorial staff." Think Buzzfeed's sponsored articles or Google's own ads on its search pages. Amazon's sponsored products are another example. An advertisement article written within the regular content of the web site is another common example. The concept is that this format is often seamless and has none of the excessive download times, tracking, malware, or privacy issues of traditional display ads.

As I mentioned in a previous article, the largest platform-agnostic native advertising platform is IZEAx. On a recent call with IZEA Founder and CEO, Ted Murphy, he explained that cost per thousand impressions (CPM's) has declined precipitously. Publishers are forced to put more ads on a page to get the same revenues. It seems that people are just getting fed up with how cumbersome browsing has become. We talked about the interminable download times of display ads compared to the minimal invasiveness of native advertising. He brought up Buzzfeed's ease of access: the site is 100% branded content with zero banner ads. iOS 9 will have a trampoline effect for IZEAx's revenues, which are expected to grow at near triple digits for 2015.

In the Darwinian world of internet advertising, publishers will adapt or die. Consumers, with choices now offered by iOS 9, will dictate that banner ads, while perhaps not going extinct, will certainly grow at a miserly pace. Business Insider estimates native advertising to grow from $7.9 billion in 2014 to $21 billion by 2018. It claims native mobile ads have click-through rates (CTRs) of an excellent 1%.

Ad-blocking has long been a part of the desktop landscape. According to PageFair, there are now 198 million active ad-block users worldwide- a 41% increase over a year ago. In the U.S. alone, there are 45 million ad-block users- a 48% increase over a year ago. By country, Poland, Argentina, and Sweden have ad-blocking rates of about one-third of their populations. Germany sits at 30% while the U.S., strangely to me, is only at 15%. It is estimated ad-blocking will cost publishers $22 billion in revenue in 2015. As the world overwhelmingly trends toward mobile, iOS 9 will cause ad-blocking to grow ever more rapidly. Publishers still need to advertise, and native ads are the way to keep the browsing experience a positive one.

What does this do to Google?

Google's 2014 market share for search is still a commanding 62% on desktop and a staggering 89% of mobile. While Google trumpets its self-driving car, make no mistake that it is advertising dollars (largely from banner ads or annoying autoplay videos) that fund what, for now, are no more than extra-curricular activities. Can iOS 9 have an impact and deprive Google of some of its floods of money? Yes, it can. While now it is only a trickle, if twenty or thirty million activations occur, Google may feel some real pain. I doubt Google will start shrinking anytime soon, but the growth rate may appreciably slow. iOS 9 is a big win for consumers with hopefully other mobile platforms to follow.