American Economic Journal: Microeconomics, Vol. 3, No. 4, pp. 1-34, 2011
This paper analyzes the effect of ad-avoidance technology on ad-supported business models.
Ad-avoidance technology is likely to degrade content quality and increase ad prevalence in ad-supported media, generally making firms and consumers worse-off.
- Media like broadcast television and newspapers operate by bundling content consumers value with paid advertisements.
- Ad-avoidance technologies (AAT) like digital video recorders (DVR) allow consumers to enjoy content without experiencing ads, degrading the bundling business model.
- AAT is most likely to be used by people who dislike ads the most; when they stop viewing ads, content providers increase ad saturation since the remaining viewers are less sensitive to advertisements. This, in turn, induces more AAT adoption, and a self-reinforcing spiral develops.
- The spiral will slow and stop when the content provider’s monetary gain from additional advertising time is outpaced by the loss of viewers brought about by the advertising.
- When AAT becomes available, consumers who purchase AAT gain by avoiding ads; the remaining consumers suffer through more advertisements and reduced content. Advertisers reach fewer viewers but at a lower cost. Content provider profits suffer greatly.
- AAT penetration, in the case of television, reduces niche program availability and overall program quality.
- Eventually AAT may result in fee-based content, but this will not occur initially.