Industry Observations

Making Money Out of Thin Air

Lately Jeremiah Grossman and I have been talking a lot about online ads: they’re annoying, they are often offensive and sometimes come with unexpected malvertizing. In these discussions we have also spent quite a bit of time talking about the various ad blocking technologies. Especially in light of the fact that Eyeo, the company that runs Adblock Plus, is ironically reportedly being paid by Google to allow its ads, this is becoming an interesting landscape to focus on. When we asked Google about the dollars paid to Eyeo, they said they would not disclose this information.

One thing that struck us as slightly odd are the numbers that Google reports making per year in online ads specifically compared to the size of the market reported by the IAB. There’s a several billion dollar discrepancy there (the IAB reported around ~$35BN in 2012 and Google said ~$43BN in ads in the same year). I suppose this could be explained in a number of ways, but during the mental exercise of trying to figure out how you make $8 billion dollars more than the entire industry is reporting, it occurred to us that there must be more going on here than meets the eye. It turns out the IAB only reports U.S. numbers and Google only makes ~55% of its money in the U.S. so that easily explains that. No mystery there, and thank you to Google for having clarified for me.

However, while attempting to think through the business model a bit, Jeremiah and I came up with a few interesting theories.

One of the possible reasons Google makes more money than the IAB estimates is simply that Google resells inventory for other people third party advertisers in a bidding process. when Google itself doesn’t have inventory available. Perhaps Google takes a piece of the pie, and therefore money from the advertiser, but it doesn’t count it as an extra click, and therefore may not report it to the IAB. It’s unclear.

Another An interesting possibility is that Ad Blocking might actually be working to Google’s advantage in some regards for CPM (display or pay per impression) type ads. There are two variants of this ad blocking issue. The first variant is where Google injects external code provided by third parties when it runs out of inventory. The theory was that Adblock Plus may not block Google’s code from running, but it might block the third party whose code has been injected into the page by Google. That would cause a reporting discrepancy, because from Google’s perspective the space was sold, even if an ad was never viewed. Around 15 million users use Adblock Plus, and Google estimates it loses $887M a year in Ad Blocking, even including the ads that Adblock lets through – so these are some big numbers we’re talking about.Google said that Ad Block Plus doesn’t whitelist Google’s display ads (I would assume this means only CPC ads are whitelisted), so it’s unlikely this particular theory is true. No dice there – or, at least, nothing interesting to report there today with how things work. On to the next!

However, the second possible variant of this ad blocking issue occurs when someone uses something like “Element Hiding Helper for Adblock Plus” a Greasemonkey plugin which allows the an Google search advertiser’s webpage page to load (and the CPM ad) but then hides the DOM element. From Google’s perspective the ad loaded, and the customer is charged, but in fact no ads were seen by the roughly one million people who use that plugin if they configured it to block said adsthat user. There are many similar plugins out there that modify DOM to remove ads and they can be configured in various ways, so it’s really unclear what the size and scope of that problem might be. Barring any form of client side verification of an ad having been viewed, this is a tough problem to even detect. But the fact of the matter is that it’s very likely a lot of ads are being counted as viewed by Google, when they actually weren’t. This is all speculation, of course, but these discrepancies might be worth billions.and therefore CPM advertisers are being charged erroneously. I was informed that approximately 1% of Google’s advertising revenue is CPM, though, so this isn’t necessarily a massive windfall

Editor’s Note: Portions of this blog, including the headline, were edited by the author on Sept. 10 following dialogue with Google spokespeople and again on Sept. 30 following additional conversations with ex Google staffers.

  • Justin

    Very interesting! Does the $35BN value encompass all business reporting in to the IAB? If so, then the discrepancy is even larger than $8BN since Google’s $43BN is just for Google, right?

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