The Adblock Dilemma

The other day, I loaded a video on YouTube, and was met with a 20-second advertisement.  “You don’t have Adblock?” my friend asked, astonished.  “You gotta download it.  Gets rid of ads,” he said, as if it were that simple.

adblock

Adblock users won’t see this!

Sure, if my friend uses Adblock, YouTube won’t notice, and he gets to avoid ads.  But what happens if everyone uses this logic?

  1. A significant portion of YouTube users—say, 10 percent—download Adblock.
  2. Advertisement vendors realize that their ads aren’t reaching as many people.  So, they’re not willing to pay as much to have their ads shown.  Perhaps a 20-second ad on a popular video used to fetch $1000, but now, only $900.
  3. YouTube’s losing significant revenue.  They might implement longer or more frequent ads, but this only causes more people to get Adblock, which causes the price of ads to slide further.
  4. Eventually, YouTube is making so little money from ads that they’re forced to change their business model.  They might reduce the size of their server network to cut overhead, increasing load times.  Or they might start charging for a YouTube Pro membership.  Users would have to pay to view videos over a minute long, or to view over 20 videos per month, or to upload.

And that’s how Adblock could ruin YouTube for all of us.  Looks like there really is no free lunch!

Of course, every one YouTube user is just a drop in the bucket.  If I downloaded Adblock, the chances that I alone would cause YouTube to change their business model are astronomically low.  So why don’t I?  Maybe it’s my sense of morality, or maybe I just can’t be bothered because I don’t mind the ads.

What I do know, though, is that I would support a ban on Adblock.  If we can all get together and make sure no one uses the software, we can ensure that YouTube stays free.  Thus I would support a law that would reduce my own freedom.

The general idea of Adam Smith’s “invisible hand” argument (1) is that, when people act according to their selfish interest, their actions simultaneously serve to better society.  For example, a man opens a bakery because he wants to make money.  He does make money, and he benefits, but so do all the townspeople who get to purchase and eat his delicious bread.  Collective action problems are the exception to this rule.  In these cases, when people act selfishly (buy Adblock), everyone loses (YouTube Pro).  The only way to solve the collective action problem is to enforce cooperation via the law (ban Adblock).  Interestingly, in collective action problems, collectivized decision-making (like the decision to ban Adblock) achieves the pareto optimum.  However, outside of collective action problems, collectivized decision-making causes market failure (e.g. unions).

The real question we should be asking is: what exact circumstances produce collective action problems?  Why do they arise in some cases but not in others?  Only in a collective action problem can an individual act such that he enjoys the positives of that action, but distributes the negatives among everybody.  And by distributing the negatives, the individual himself either greatly reduces his downside (like in pollution) or greatly reduces the chances of ever seeing a downside in the first place (like with Adblock–YouTube is probably not going to start charging anytime soon). I guess it’s the very ability to distribute consequences that permits the collective action problem.

References:

  1. Adam Smith: The Wealth of Nations
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6 comments on “The Adblock Dilemma

  1. Ben says:

    There are a couple terms which you have unwittingly referred to but which, as it turns out, have names. I’ll try to point them out.

    One of the basic ingredients of a standard market good is excludability, or the ability to block others from a good’s use. Bread is excludable; a clean environment is not. Goods which are non- or partially-excludable will be underprovided by the market (their provision will become a collective action problem) and the government accordingly must step in. More relevantly: AdBlock threatens to turn “the absence of ads” into a non-excludable good. (Excludability, here, interestingly refers to the ability to restrict an economic bad rather than the typical inability to restrict an economic good.) As a result, advertising could become unprofitable and ad-based internet video viewing could become underprovided by the market.

    Another great example of modern technology-induced non-excludability is the advent of music piracy. While free music is great (this man is guity), music downloading threatens to turn music production into a non-excludable good. In turn, it would become underprovided by the market and we’d all be left without (as much) music. Perhaps the government would be forced to subsidize the industry?

    Another important idea you’ve glanced upon is adverse selection. Here’s an example. In the market for health insurance, the people who stand most to benefit are in bad health; those with the least to benefit are the healthy. As a result, the ill are likely to over-enroll while the young are likely to under-enroll. Premiums will go up. But then, the imbalance will only worsen and premiums are likely to climb further. (Typical solutions might be (a) forced enrollment (i.e. Obamacare), which uniformizes the risk pool, but comes at the cost of moral hazard, (b) or price-discrimination based on pre-existing conditions, which will correct incentive imbalances but carries predictable moral baggage.) The phenomenon you mentioned, in which the increased presence of AdBlock-ers triggers more ads, further increasing their presence, is a perfect example of adverse selection.

    You also should know that the general type of collective action problem you suggested — in which an individual internalizes benefits while distributing costs — is not the only kind. In “positive externalities” (education is a canonical example), an individual bears all the cost while spreading all the benefits. These also induce collective action problems. Most generally, I think the phenomenon can be characterized the presence of externalized costs or benefits.

  2. Ben says:

    An unrelated point. It’s an abuse of terminology (at best) and incorrect (at worst) to call unions a “market failure”. Market failure refers to situations, like those encountered in the presence of externalities, in which markets do not produce the pareto optimum.

    The case of unions, however, is more of a “market disruption” than a “market failure”. It is because the market is being prevented from functioning, not because it is functioning, that the pareto-suboptimum result ensues.

    • Josh says:

      Firstly, I said that unions create market failure. I didn’t say that they themselves are a market failure.

      Secondly, though, I think that either could be seen as correct. You’re right that unions are a market disruption. However, remember that unions are created organically. They’re just as much a result of the free market as the will to pollute or to overfish. Thus, unions really are created because the market is functioning; the will to collude is an externality just like any other.

      The distinction between market disruption and market failure seems false. All externalities are caused by market failures and result in market disruptions. Of course, maybe I’m still just confused on the terminology.

      • Ben says:

        Very interesting point. Unions are created organically. The will to collude is an externality like any other. Government anti-trust laws in general, then, actually stand as a solution to a fundamental collective action problem: the desire to collude.

        I guess the point is that this externality-bearing “desire to collude” is so fundamental that people forget it. Referring to this desire (and its outcome) as a market failure, you imply the existence of a “non-trivial” externality-carrying force — on top of the fundamental one. Further, you imply that the cause of the failure lies with the latter and not with the former. This might raise some eyebrows.

        All in all, though, point taken.

  3. Richard says:

    Okay, first note this: YouTube has always been free to users. Or, more importantly, it has been free even during those times when it didn’t use the video-interrupting advertisements. It used to just use the normal picture advertisements which just sit at the side of the screen; like in Facebook. Although you could argue that as the company has increased its quality, its demands have gone up and thus its need for more lucrative advertisement campaigns has also increased, it’s not true that this needs to be realized in the form of ads which people block using Adblock. Other ads are less disruptive, and can still be used to gain revenue for the company.

    So, when Josh says: “Eventually, YouTube is making so little money from ads that they’re forced to change their business model. They might reduce the size of their server network to cut overhead, increasing load times. Or they might start charging for a YouTube Pro membership.” He might not be entirely correct. Why can’t YouTube make money just like Facebook, i.e. without disrupting the essential function of the Website. I don’t mean to speak well of Facebook, I just mean to say that other business models are available which won’t require charging users.

    “The general idea of Adam Smith’s “invisible hand” argument (1) is that, when people act according to their selfish interest, their actions simultaneously serve to better society.” I’m sorry to say that this is a common instance of an out of context neoliberal-esque Smith-touting which is starting to become a little tiring. Here’s the quote in the original from Book IV, chapter II, paragraph IX of The Wealth of Nations 1776:

    “By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

    So, the ‘invisible hand’ whose actions serve to help society depends, in Smiths view, on a pre-existing desire to preserve domestic investments rather than foreign ones. A ‘home-bias’ is required in Smith’s view to allow selfish behavior to better all of society. Smith says this is for security, but in the modern world there probably won’t be many security risks associated with outsourcing to foreign workers, so it’ll be done anyway, and there’s now no reason to think that selfish behavior will lead to a society’s good. In the case of YouTube, the security should be the loyalty of the users. Only when increased profit margins for the company are seen as more important than customer satisfaction should the need for ads which merit Adblock arise. The interests of the users are then threatened, much as the interests of the domestic customers are threatened when a company ships corporate investment elsewhere. It all comes down to this point, by Ben, in the comments section:

    “Goods which are non- or partially-excludable will be underprovided by the market (their provision will become a collective action problem) and the government accordingly must step in.”

    This is only a problem in a society where people are so alienated from their labour that they would cease to provide their services to society if they weren’t turning massive profits. The mindless drive, among most many service providers and business people, to acquire capital is what makes people no longer provide services when they can’t get rich from it. People are so alienated from their work that they value the returns they get from it more than doing the work itself. The problems go much deeper, sadly, and in the view of someone like Karl Marx, the result is that people eventually become alienated from themselves. They become the inauthentic plastic people whom somebody like Marx would like to liberate and change, and somebody like Nietzsche would probably like to destroy.

    • Josh says:

      Maybe I’m misreading it, but it seems that Smith is citing support of domestic industry as just one example of the general principle that, when people act according to their personal best interests, society benefits too. Of course, the geopolitical issues of that time aren’t relevant anymore, but the principal still stands. Smith goes on to say, roughly, that those who benefit society most are those who act selfishly. Moreover, those who truly act unselfishly are rare indeed, and it’s easy to talk those individuals out of such behavior. He’s saying, somewhat facetiously, that there’s probably no true altruist, but society does just fine, and in fact thrives, thanks to the selfish behavior of its constituents.

      Increased profit margins for the company? Loyalty of the users? I’m not sure what principals are guiding your logic, but in my view, YouTube runs a business. The product? Videos. The price? An ad. Users are welcome to watch the videos, so long as they pay the price, by watching an ad. If they watch the video without watching the ad, they’re effectively stealing.

      You talk about intrusive versus non-intrusive ads. Sure, YouTube might turn off users with intrusive ads. But this doesn’t merit use of AdBlock. Likewise, a business might turn off users by raising the price of their products. But that doesn’t mean that the customers are now allowed to steal the product.

      You talk about increased profit margins for YouTube. What about survival? If customers steal YouTube’s product, YouTube can no longer survive. That simple. Even if YouTube did want more profit, that’s YouTube’s freedom; it can run its business however it likes. Again, no decision by YouTube merits stealing by YouTube’s customers.

      You seem to envision a world where YouTube loves its work so much it operates by charity, and gives its videos out for free. But who pays for YouTube’s servers? I’m just confused. Please clarify.

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