Apple Ad-Blocking Software Fears Hurt Google Stock - Fears Overdone?

  • Apple announced that its Safari browser will now allow ad-blocking extensions during the launch of iOS 9.
  • At first glance this appears threatening to Google and its core ad revenue.
  • A closer look at the problem, however, reveals that the effect on Google's revenue will be quite limited.

Google Stock Hurt By Apple Ad-Blocking Software Fears

Apple Ad-Blocking Software Fears Hurt Google Stock - Fears Are Overdone

News that Apple (NASDAQ:AAPL) has finally made good its promise to allow the use of third-party ad-blocking extensions on its Safari broswer during the launch of its latest operating system, iOS 9, has been received with some degree of trepidation by ad companies such as Google (NASDAQ: GOOG) and Criteo (NASDAQ :CRTO). Google shares have slid about 2.5% since the announcement hit news feeds, while Criteo shares are down 4%. Criteo is a company that provides companies with targeted ad products, and has been at the forefront of the industry-wide shift from display advertising to programmatic advertising, which is reflected in the Criteo's strong earnings numbers reported in early August.

Even though shares of both companies are holding up quite well to the news, it’s important to get a good perpective on the real threat for Google and its future growth. It’s also important to note that shares of both Google and Criteo sold off by a bigger margin the first time Apple made the announcement about two months ago, with Criteo shares being hardest hit after tanking close to 10%. The investing world, therefore, recognizes the magnitude of the threat posed by Apple’s move. But just how big is the threat for Google?

Ad-blocking Software Growing In Popularity

The use of ad-blocking software is not anything new. Many internet users already use the controversial software on their browsers to block ads in order to save their data and battery power while creating a cleaner browsing experience. A recent report by Adobe and PageFair revealed that 144 million Internet users, or about 5% of all users, employed ad-blocking software in their browsers in 2014. While that number does appear too alarming, the disturbing fact is that ad-blocking software users grew 70% Y/Y in 2014, indicating a rapid proliferation of the practice.

Indeed, ad-blocking apps such as Crystal, Blockr, Purify, and Peace quickly jumped to the top of the most downloaded apps on App Store when Apple released the new OS, prompting the makers of Peace to withdraw the app due to nagging issues about the morality of using ad-blocking software in the first place. But it’s fair to say that other ad-blocking developers most likely do not harbor such moral qualms.

Why Google Wont Be Hurt As Bad

There are two major mitigating factors for Google that will lessen the blow of ad-blocking software on the company's growth:

  1. The rise of Google Chrome and the Fall of Safari Browser

Ad-blocking software will not in any way affect browsing done via the Chrome browser or the core app, both of which are quite popular. To make matters even better, the combined Chrome and stock Android browser market share has been steadily rising, and now stands at 46%. In contrast, Safari has seen its market share decline from 31.2% a year ago to 22.9% currently.

StatCounter-browser-ww-monthly-201408-201508 - Copy

Source: StatCounter

Both Safari and Android browser has also been losing market share to Google Chrome, which is encouraging for Google since Chrome is the second most popular desktop browser after Internet Explorer.

 

StatCounter-2

Source: Venture Beat

2. Ad-Blocking Not to Affect YouTube

Google has four main ad platforms: AdSense, AdWords, DoubleClick, and YouTube. Safari’s ad-blocking software will not affect YouTube, which is quickly emerging as one of Google’s fastest growth drivers.

The fact that ad-blocking software will not affect YouTube ads is very good news for Google’s future prospects. YouTube’s ad revenue reached $4 billion in 2014, 33% higher than the prior year. Morgan Stanley estimates that YouTube and Google Play will account for almost 25% of Google’s revenue in 2020 up from around 12% currently. Google is planning to introduce important changes to YouTube to make it an even more attractive ad platform for marketers. One of the most important is to start using its core data to deliver targeted ads on YouTube instead of its current practice of only using DoubleClick data. This will allow YouTube to command much better CPC rates. During its latest earnings call, Google blamed falling CPC rates on YouTube, whose low quality of content and poor targeting make it difficult for the platform to command premium CPC rates.

Barclays estimates the overall effect of ad-blocking software on Google’s top line will be limited to 2%-3% of the company’s revenue. But with YouTube and Google Play expanding so rapidly, Google, and its investors, might not feel the pinch too much.

Cover image source: Flickr/Brionv

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