A WEB WITHOUT ADVERTISING

A WEB WITHOUT ADVERTISING THE IMPLICATIONS AND CONSEQUENCES OF ADBLOCKING TECHNOLOGIES ON EQUAL ACCESS TO FREE CONTENT AdBlock technologies are increasingly downloaded and used. According to a recent study by the Reuters Institute some 47 percent of U.S. Internet users now utilize ad blocking software [ ] for 18- to 24-yearolds, that number is even higher: 55 percent. This phenomenon is not limited to the United States. AdBlock Plus claims that since 2013, the popular browser plug-in has averaged 2.3 million global downloads a week. As a consequence, publishers are prevented from generating revenue. The success of AdBlockers calls into question advertisement acceptance, with a specific focus given to how Internet users feel towards online advertising. However, the value of advertising remains poorly addressed. It has value as a marketing tool but it also has value as a product in its own right. It is the revenue stream that keeps content creators and publishers afloat. The goal of this white paper is to assess what the advertisement-based business model brings to the web and what changing this model would imply in terms of content production, economic growth and equal access to content. A WHITE PAPER BY SECRET MEDIA JUNE 2015 www.secretmedia.com

TABLE OF CONTENTS Advertising s biggest issue: the value exchange perception gap I. Negative perception of Internet advertising based on misunderstanding of the advertising market II. Advertising has financed the greatest media in History: online media III. Advertising is a democratic model enabling equal access to free content from anywhere Financing the web: hopeless alternatives to advertisement I. Users remain deeply unwilling to pay for online content II. How much would it cost to finance online content through user payments? Improved advertising on both sides of the screen I. Misconceptions around privacy push users to install AdBlockers for the wrong reasons II. Targeted advertising means better advertising: Industry improvements are on the way

ADVERTISING S BIGGEST ISSUE: THE VALUE EXCHANGE PERCEPTION GAP The negative perception of Internet advertising is the result of a misunderstanding of the advertising market Willingness on the part of users to see and to be presented ads has shifted over the course of online advertising s history. In a thorough study conducted in 1999 by John Wiley & Sons, Inc. and Direct Marketing Educational Foundation, Inc 1, researchers interviewed consumers from different demographic groups, asking In general, do you like or dislike Internet advertising? The results indicated a rather neutral perception of online ads at the time: 38% liked online ads, 35% disliked them, and 28% felt neutrally towards them. The study found that: - The majority of users found online ads informative, entertaining, and useful for making decisions. - Very few users found online ads insulting, misleading, or offensive. - More participants felt that they could generally trust online ads than felt that they could not trust them. - Users felt that seeing advertising for a given product increased its perceived value. The results of this 1999 study indicate a generally positive perception and an overall willingness on the part of Internet users to be presented with ads. Twelve years later, another study conducted by Carnegie Mellon University 2 focused on the perception of online ads. When the interviewees were asked, What is the first thing that comes to your mind when you hear Internet Advertising? the most common response was pop-ups. This reveals a negative shift in online users perception of online ads. With this negative view of online advertising, it is no wonder that AdBlock, which allows users to remove all intrusive advertising from their browsing experience, has seen such a sharp rise in use. (Please see our last White Paper for more information on how AdBlock works). 3 Users perceive advertising as a marketing tool that has become increasingly insistent and invasive. Because advertising has remained the only viable source of revenue for publishers (discussed in more detail later on in this white paper), publishers have increased the presence of ads on their website. As a result, Internet users perceive advertising as a disturbance, and install AdBlockers to remove these ads. However, what users do not understand is that advertising is the very reason that they are able to benefit from free online content. 1 http://business.illinois.edu/shavitt/pdf%20files/surveyinternet_copy(1).pdf 2 http://repository.cmu.edu/cgi/viewcontent.cgi?article=1001&context=cylab 3 http://www.secretmedia.com/whitepaper/adblocker_whitepaper.pdf

A study commissioned in 2013 by the Digital Advertising Alliance and conducted by Zogby Analytics 4 revealed that the vast majority of U.S voters declared that they considered free content to be at least somewhat important to the overall value of the Internet. 63% of respondents felt free content was extremely important to the value. How can we explain this inconsistency of consumer demands? They no longer want intrusive advertising but they want free content. Internet users tend to consume online content as if it were owed to them, not as if it were the result of a business. Consumers seem to understand that brands are paying top-dollar for advertising space in order to market their wares, however, it is not understood that this advertising space is the product that finances the newspaper, magazine, or website which they are consulting. The implications of advertising on the overall financing of editorial content still remains poorly understood. Because online content is dematerialized, accessible from anywhere, at any time, the resources needed to produce it are less tangible in the minds of users than physical content. Internet users negative perception of ads prevents them from understanding that ads finance the online content they consume. Moreover, people producing most of online content do so in jobs that appeared with the very creation of online contents. This phenomenon being fairly recent, those positions, albeit filling up an important part of the job market, remain less well known than traditional jobs. Finally, content available online is a mix between professional content and user generated content (that is to say content posted on blogs, forums, or social media on a voluntary basis) - and although user generated content requires resources for web hosting and distribution, it is perceived as completely free for the majority of Internet users. 4 http://www.aboutads.info/resource/image/poll/zogby_daa_poll.pdf

Advertising has financed the greatest media in history: online media Since its birth in the 1990s, the global online advertising market has grown exponentially. In 2014, the global online advertising market amounted to almost $145 billion dollars, three times its 2007 value and 10 times its value in 2002. 5 Compared to other forms of media, the Internet s share of advertising budget dollars also continues to grow. In 2012, the Internet surpassed newspapers to become the world s second media just behind television. In 2012, online advertising accounted for 23.8% of ad spending. Today, its shares are projected to grow to 31.1% in 2017. Specifically in the United States, between 1996 and 2015, the online advertising market accounted for $344B, or almost the equivalent of the GDP of South Africa ($350B in 2014). Projections say that U.S. spending in 2015 will break a record. Thanks to this growing market, online media has also grown in volume and diversity. Multimedia now accounts for the vast majority of online traffic. While in the years 2000, online content was mainly found in the form of articles or static websites, today, online content has developed into many various forms: blogs, infographics, videos and social media. 5 http://www.emarketer.com/article/digital-ad-spending-worldwide-hit-3613753-billion-2014/1010736

Advertising is a democratic model enabling equal access to free content from anywhere. Because advertising generates an important volume of revenue, it enables high-quality content production that is accessible all across the planet. However, users located in developed countries generate most of this revenue. In recent years, 16% of Internet users located in Western Europe and North America 6 have accounted for 80% of the revenue generated by online ads globally. This is because the advertising markets are more active in Europe and North America and brands are willing to pay more for ads in these regions. The financing model in Europe and North America would not be possible in under-developed countries where the advertising markets are not mature enough. However, because the Internet is fully open, users in less developed countries can access the same content as those in developed. If the 16% of Internet users who generate 80% of global advertising revenues were to use AdBlockers, the online advertising industry would crumble. In addition to enabling equal access to high-quality content in all countries, the current advertising model also fulfills a democratic requirement of editorial independence. Today, brands go through distribution and commercialization platforms to distribute their ads on a variety of websites. Publishers also display ads from a variety of brands, through diverse distribution platforms. As a consequence, there is almost no direct relationship between a brand and the publisher that displays an ad and as such, no dependence. This system is by nature a guarantee that there is no influence from organizations on online media - contrary to many traditional forms of media. 6 This 16% comes from the United States, Canada, Germany, the United Kingdom & France

FINANCING THE WEB: HOPELESS ALTERNATIVES TO ADVERTISING Online users remain deeply unwilling to pay for online content To put it simply, consumers will not pay for content. According to a study by the Digital Advertising Alliance, 75% of people said that they preferred ad-supported content rather than having to subscribe to content. We will interpret this to mean that 75% of those surveyed would not be willing to pay for the content that they consume. The same goes for mobile apps - the Digital Advertising Alliance also revealed that 58% of people preferred free, ad-supported apps to those that required some form of payment. Moreover, when asked how many of their apps they would download again if they had to pay for them, more than 50% said they would not re-download any of them. The following graph shows the results of a question asked to over 100,000 Internet users in 27 key Internet markets. The question was: Which of the following content would you consider to pay for access online?. The Number 1 answer on a global scale was: none of the above. 7 7 http://globalwebindex.net/report-page

It is also interesting to note that purchasing power tends not to impact the will to purchase. High salaries do not incentivize user s to pay consistently more than those with low salaries. In 2013 in a study conducted in the UK, twice as many people who earned between 50-100k spent money on online content than people earning 25k or less. A year later in 2014, the proportion of those who spent money on online content in the 50 - $100k bracket dropped by 7% (from 18& to 11%), almost reaching the level of the poorest part of the sample (7% in 2014).

Beyond statistics, experience shows that people are simply not willing to pay for content. In a previous white paper published by Secret Media 8, we revealed the results of an experiment led by the startup PageFair. In their experiment, they gave publishers a tool to offer visitors to pay for online content instead of enjoying it for free. The proportion of site visitors who shifted from the free to the paying option was 0.3%. The unwillingness of users to pay for online content is even more important for online news. According to the Reuters Institute Digital Report of 2015, only "11% of Americans paid for online news last year. This survey shows virtually no increase in total news payers since 2013. The remaining non-payers overwhelmingly believe they would never pay, or pay only a small amount a mean yearly figure of $8. 9 The perceived value of online news is very low. As a consequence, online users are not willing to pay for it. Here is an enlightening example: The New York Times, albeit offering very high-quality content, had to roll back its offer of a $7.99 news-digest mobile app. 10 The journal, who did not see the number of subscriptions [it was] hoping for had to switch back to an advertising-based model. The New York Times is a particularly important example because it is one of the rare publishers that has actually been able to generate revenues from digital subscriptions (they have 910,000 subscribers generating $169M in annual revenue). Nevertheless, even they were forced to switch back to advertising on their mobile app. This trend is not projected to change, as the graph below demonstrates (extract from the Digital News Report from Oxford University) 11. In the U.K, the vast majority of Internet users are not willing to pay for content in the future. 8 http://www.secretmedia.com/whitepaper/adblocker_whitepaper.pdf 9 http://www.digitalnewsreport.org/ 10 http://techcrunch.com/2015/05/11/news-digest-app-nyt-now-drops-subscription-pricing-offers-brand-sponsorships-instead/ 11 http://www.digitalnewsreport.org/survey/2014/paying-for-digital-news-2014/

American media consumers do not seem to be willing to switch to a paid model either. According to a survey, 52% of people immediately leave a website when encountering a paywall (see graph below) 12. How would you react when you encounter a paywall? If neither users nor advertisers pay for content, who is going to pay? Online press could not be widely financed by governments: the risk of conflicting interests would put editorial independence at far too much risk. If 75% of users are unwilling to pay for content, awareness campaigns to encourage users to send contributions such as we have witnessed for Wikipedia could not finance the entirety of web content. How much would it cost to finance online content through user payments? In order to better assess the possibility of building another model that would not rely on advertising, we need to assess how much Internet users would need to pay for content. For the sake of hypothesis, let us assume that Internet users would be willing to pay for their content. In this hypothesis, we would also assume that users require the same level of quality of content, and that users wish for content to remain accessible from anywhere in the world. In order to maintain the same level of Internet content access, the overall population of Internet users (that is to say, around 2.7B people 13 ) would need to replace the $145B 14 online advertising market. On average, this cost represents $54/user/year. Extrapolating this amount on a global scale is not logical: $54 is completely unaffordable for the majority of people living in under-developed countries. If we are to calculate an average, it should be done on Internet users living in developed countries which corresponds 12 http://www.statista.com/statistics/238779/responses-to-enountering-a-paywall-in-the-us/ 13 https://fbnewsroomus.files.wordpress.com/2015/02/state-of-connectivity_3.pdf 14 http://www.emarketer.com/adspendtool

to the way ads are displayed, the majority being in the United States and Europe, as mentioned earlier. In order to simplify our simulation, let us make that calculation focusing on the United States as if it were a closed economy. If we take into account all advertising platforms (Google, Facebook, Yahoo, Twitter, etc), total advertising spending amounts to $57B in the U.S. (estimation: AdSpend Global). If we divide that by the 86.1M households that have access to the Internet, American households would need to pay $662 per year to access content on the web. Added to the cost of access to the Internet (around $600 per year), that is $1262 per year on average. According to the Broadband commission, the affordability threshold for Internet access is 5% of the monthly income. This means that in order to access the Internet and its content, American households would need to earn at least $25,240 each year. According to the most recent census, 29.3% of American households earn less than $25,000 per year, which means that 29% of the population could not afford an access to the Internet and its content. In an open economy with open Internet: how much should users living in developed countries pay to continue to finance an Internet that is accessible everywhere? Considering the statistic mentioned before that 75% of users are not willing to pay for content, should the other 25% pay for the rest of the world? Transferring payment of content to users means making it exclusive. This exclusivity would lead to a reduction by at least 75% of revenue for content publishers - assuming that the 25% of Internet users who say they would pay for content actually do so. Moreover, considering the cost of content production, quality content would only be accessible to those who can afford it, undermining the very founding principle of the Internet: open information for everyone. An Internet providing content paid for by its users would lead to a drastic drop in content availability. The available content would be reserved for the elite.

IMPROVED ADVERTISING: ON BOTH SIDES OF THE SCREEN The proliferation of AdBlock users holds out the threat of a web without ads, that is to say, a web with no revenue and the end of equal access to quality content for free, all across the world. In order to resolve this issue, it is of tremendous importance that the advertising industry improve the way that ads are displayed to users and address their fears and questions. It is of tremendous importance that the advertising industry improve the way that ads are displayed to users and address their fears and concerns. Misconceptions around privacy push users to install AdBlock for the wrong reasons Many AdBlock users chose to install an AdBlocker because they fear for their privacy. As we discussed in a past Secret Media white paper, AdBlock users motivations seem to follow the broader trend of fear of private data use. There is confusion between being exposed to ads, especially targeted ads, and having private personal data collected. Trackers that follow users historical browsing data may know the websites they visit and the products they look at but they never know who the user is. Furthermore, AdBlock is not meant to be a tool to protect personal data. On the contrary, AdBlock is paid to whitelist certain ads which do in fact gather a lot of private data - Google plain text ads for instance. There is no clear relationship between the concern for privacy and the willingness to opt for a non-advertisement based business model. Indeed, 51% of U.K adults surveyed by YouGov in March 2015 responded that they did not want to pay for privacy when using online services. According to the same study, 29% of consumers believed that they were mostly responsible for their online privacy. From these responses we conclude that Internet users value access to information over privacy or paying for privacy. Targeted advertising means better advertising: Industry improvements are on the way Ads are perceived as more valuable when they convey useful information, when they answer a question, or when they are entertaining. Users reject less valuable ads, which also negatively impacts brands and publishers: it means that their ads were poorly targeted. It is in the interest of both publishers purchasing ads and Internet users to have and receive better-targeted ads. For publishers and brands, targeted ads are twice as efficient as non-

targeted ones: they show a conversion rate of 6.8% (instead of 2.8% for traditional ads) 15. Targeted ads are also better for users, who receive pertinent information. AdBlock prevents the targeting of ads and when ads are not targeted, then ads are displayed randomly and publishers are not capable of determining whether an ad has been displayed to a user or if it was useful to him. Without targeting capacities, users risk being exposed to ads that do not interest them at all, and publishers can not control how many times the ad would be displayed to the same user. The online advertising industry has made considerable improvements in the past few years, in both the format and the targeting of advertising. The use of online behavioral data - and not personal data - is enabling these improvements. It is crucial that information on this gathering of data is shared with online users so that they can understand better how their information is used and why. 15 http://www.networkadvertising.org/pdfs/nai_beales_release.pdf

[ This white paper was written by Secret Media, a New-York based startup cofounded by online media experts who believe in making anything possible to help publishers produce high-quality content. ] www.secretmedia.com contact@secretmedia.com