The Online Industry Is Losing $8 Billion a Year, and Ad Blocking Is the Least of Its Worries

IAB report looks at the impact of bots, malware and more

IAB says correcting flaws in online ecosystem would add $8.2 billion each year Photo Illustration: Dianna McDougall; Source: Getty Images

Ad blocking is costing the industry $781 million a year—yet makes up only a sliver of the total $8.2 billion lost to major problem areas including bot traffic and content piracy.

Those stats come from a new report released today by the Interactive Advertising Bureau. The report, "What Is An Untrustworthy Supply Chain Costing the Digital Advertising Industry," was commissioned by the IAB and conducted by Ernst & Young.

According to the study, the IAB found three main causes that make up that $8.2 billion figure:

Ad Blocking & Malware

The IAB considers the adoption of ad blockers to be a side effect of the spread of malicious software, or malware, which costs a total of $1.1 billion in lost dollars. The IAB estimates $781 million of that is from consumers installing ad blocking software. Costs associated with investigating, remediating, and documenting direct incidents of malicious advertising total $204 million, with another $17 million spent each year to hire third-party vendors to help with monitoring ads served to identify malware.

Invalid Traffic

The IAB argues "non-human traffic," or bots, create more than half the losses, around $4.6 billion.

The majority comes from fraudulent traffic on desktops, to the tune of $3.15 billion in revenue, with another $1.25 billion on mobile. The IAB estimates roughly $169 million is spent each year fighting invalid traffic.

Infringed Content

The IAB figures another $2.4 billion in losses come from infringed content—stolen video programming, music, and other editorial content that is illegally distributed on the web. The industry--mostly content creators--currently spends $33 million each year fighting piracy.

The IAB estimates that eliminating piracy would add $2 billion to TV, movie and music businesses (password sharing on streaming sites like Netflix and Hulu account for $48 million in lost revenue), with an additional $456 million in ad dollars.

"To help the industry reclaim some of the $8.2 billion in costs, EY believes that improving some fundamental business practices is critical," said Nick Terlizzi, Partner, Ernst & Young LLP and a member of its EY Media & Entertainment Advisory Services. "Some basics include knowing your supply chain partners and investigating new potential relationships using address information, tax IDs, and background checks."

The IAB's study comes as online advertising continues to drive the overall U.S. ad growth.

Online advertising posted a 25 percent increase during the third quarter, accounting for more than 100 percent of the overall domestic ad growth, according to MoffettNathanson. MoffettNathanson said traditional media advertising (which excludes online) saw an increase of less than 1 percent. By the end of 2015, online advertising will comprise roughly 33 percent of all domestic marketing budgets and is predicted to experience double digit growth through 2020.

By that time, MoffettNathanson predicts online ad spending will surpass TV and make up roughly half of the overall U.S. ad spend.

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