I’m just back from an extended Xmas break and have been enjoying getting back into the news flow and thinking about markets and opportunities. The juiciest titbit this morning is undoubtedly the news that upstart French ISP Free is now shipping ad-blocking software and hardware to its customers with defaults set so all ads are blocked. Free has 5.2m subscribers and is the second biggest ISP in France, making this a significant move.
Free’s motivation for blocking ads is to re-open the debate about ISPs charging content providers to carry their content. Network operators have long been sore that they make slim or no profits because they have to carry so much traffic for Google whose profit margins are huge, but regulators insist that they treat all content the same and won’t allow them to charge content owners for transit or for priority treatment (i.e. they insist on Net Neutrality). Blocking ads throttles the revenues of content owners like Google and might force them to start discussing carriage fees.
My purpose here isn’t to revisit the arguments on favour of net neutrality (I’m in favour) but to observe that ad-blocking might shift the balance of power in the struggle between content owners and ISPs and to note that it is a dangerous game that Free is playing. The interesting thing about ISPs blocking ads is that it can be dressed up as a pro-consumer move, reversing the positioning of the net neutrality debate where content owners were the consumer’s champion offering free services that were threatened by money grabbing ISPs. The reality of course is that for the ecosystem to work everybody needs to make at least a small profit, otherwise they will cease business. In theory the market is the mechanism which determines prices in such a way that everyone earns a fair return on their investment, but in practice there market inefficiencies are commonplace and regulation is often required. Then, once you have regulation, companies are operating in the court of public opinion as well as in the business of providing products and services, which can result in companies like Free taking actions which take money out of the ecosystem overall without any direct benefit to their own financials.
I just checked the NYT for an update and the latest news is that the French government has ordered Free to stop blocking ads. I guess that puts the genie back in the bottle for now, which is a good thing. Without ads the many, many, companies would suffer (including quite a few in our portfolio) and the internet as we know it would disappear. I acknowledge that many people’s privacy concerns aren’t adequately addressed in the current setup, but I don’t think the situation is so bad that we should wreck the entire web and start rebuilding from scratch.