The business of ad blocking: A Q&A with Adblock Plus lead investor Tim Schumacher

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Tim Schumacher, founder of Sedo.com.

Image credit: gagelmann.com

Entrepreneur Tim Schumacher, founder of the domain registrar Sedo.com, is the primary investor behind Adblock Plus, the free browser add-on that blocks Web advertisements.

Schumacher, 36, who left Sedo in 2012, is also the driving force behind Adblock Plus’ controversial business model, the Acceptable Ads program (see Ad Blockers: A solution or a problem?). Larger Web publishers must pay to be included in the Acceptable Ads whitelist, which lets approved sites slip by Adblock Plus’ filters. While Schumacher acknowledges that Adblock Plus' business model has been divisive within both the publisher and user communities, he thinks that it strikes an important middle ground between users who find intrusive ads unacceptable and publishers who need advertising to support their business.

I met Schumacher recently in Computerworld's offices, where he talked at length about the business of ad blocking and his goals for Adblock Plus.

How did you first get involved with Adblock Plus?

In 2009, when looking through our tracking of the advertising Sedo places on domains, I noticed that ad blockers were blocking the delivery of ads. I looked into that and saw this developer, Wladimir Palant, who had the largest ad blocker out there, and to my good luck he was in Cologne, where I was.

He felt a little uncomfortable with the power he had and wanted to find some sustainable way of facilitating a middle ground.

How did you discover that you had a problem?

The thing is that nothing looked wrong. But what tipped me off was when we looked at the difference between page serves on the website itself and ad serves. There was a discrepancy that shouldn't have been there. And that discrepancy is growing, especially in Germany, where the ad block rate is now around 15%. In the U.S. it's more like 5%. But in 2009 it was 5% or 6% in Germany.

What is your relationship with Eyeo, the business behind Adblock Plus?

I came in as the first business angel and I have been helping Wladimir shape the project into what it is today. I helped to form the company, hire Till Faida (co-founder and managing director), and structure the Acceptable Ads program.

What is the business model behind Adblock Plus and how do you as an investor expect to see a return on your investment?

The way we currently have the business set up it’s hard to say. But we are fixing something users think doesn’t work, and it’s a multi-billion dollar advertising industry. No matter what the final model we feel that there’s an opportunity here.

Currently we have Acceptable Ads contracts and the companies that contribute to our initiative provide a stable revenue source for us. The model is already working.

It’s not a classic venture capital case. I‘m not someone who says we’ll do three venture rounds and try to sell it to someone. We’re not going to grow this to a billion dollar company, but there’s a lot in there. We’re in there for the long run to fix a broken model.

Adblock’s fees scale with the size of the publisher. Does Adblock Plus charge based on the value of recovered ad impressions that a given publisher's site will get back?

Adblock Plus has been experimenting with different models. I can’t talk about specific contracts, but in some cases it was performance based and in other cases it was more of a flat fee. More that 90% of companies don’t pay at all.

There’s little in the Acceptable Ads guidelines in the way of specifics, such as what size ad is too big. So there’s no well-defined standard for compliance. Publishers must submit their ads and Adblock Plus makes the judgments. The community then votes it up or down. Is that right?

That is correct.

The Acceptable Ads program doesn’t leave advertisers with much flexibility because pretty much everything except textual ads is excluded. Even seemingly innocuous ads are blocked by Adblock Plus by default. Why not allow some ads through by default, or just let users block the ads they find offensive, rather than blocking everything?

That was how Adblock Plus started back in 2006. The filter list had to be individually configured. But it was an annoying process. And so communities of people said, we’ll do that work. We’ll create the filter lists and users can subscribe to them. And that’s what the current lists are.

But by allowing only textual ads you leave advertisers with few options for creating compelling ad content. That's far from a middle ground. You're not leaving them with any ways to innovate and be creative.

That is true.

Our position is pretty uncomfortable. On the one hand we get a lot of heat from publishers because we take away part of their revenue stream. On the other hand we get a lot of heat from users about Acceptable Ads. We wanted to introduce a least common denominator. In community discussion pretty much everyone agreed that a very strict [textual ads only] standard was something they could live with. That worked, as shown by the percentage of Acceptable Ads opt outs, which is in the low single digits. Some publications [such as Buzzfeed and NextWeb] are doing a good job experimenting with different packages of ads. When we see something where users say that's good, we'll put that in there.

Consumers watch television programs with advertising interruptions, but that same model, when transported to the Web,  would be blocked by Adblock Plus. Why?

Currently it would be. Acceptable Ads standards as we define them are in flux. There's one definition -- a very strict definition. But that could change. We want to give users control ...to say videos I don't mind but not Flash headers. That level of granularity is something we're still working on.

Critics accuse Adblock Plus of interfering in the business relationship between Web site publishers and their customers. Who is Adblock Plus, they say, that it should be the arbiter of what advertising is acceptable and not acceptable to their customers?

We are the advocate of the user. We’re trying our best to execute on the will of the user.

But the business model of having all users opt into the Acceptable Ads whitelist by default has also been controversial with the community that develops the filters that Adblock Plus uses. Eighty percent of our users say they would not mind a few ads if they would help publishers fund their content, as long as the ads are nonintrusive. There’s also little bit of a feeling of guilt. People do have a sense of right and wrong.

People who use Adblock Plus should vote with their feet and say OK, we don’t want to have the bad ads, but we’re fine with the other ones. But as always the silent majority doesn’t care about options and all that. So if we want to make this a success we need to make it opt out. That was why and we got a lot of heat, but to this day we believe that if we had made it opt in it would have been harder.

We want to educate people and tell them why we’re doing that and defend it to the publishers and the users, because both are complaining. But if users don’t like they can get the old Adblock back. All they do is press a button.

Is Adblock Plus profitable? Are you seeing a return on your investment?

The company has been breaking even. But I’m not saying this company needs to have a 30% return per year. The money I invested was fairly small. We’re well under $5 million. That’s nothing compared to a typical Silicon Valley startup. We got Sedo up and running with an initial funding of $500,000 and we grew that business organically.

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