Google, Inc.'s Worst Nightmare Is Coming True

By Markets Fool.com

Google 's worst nightmare is coming true: a mobile browser that blocks the ads it generates revenue from.

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Eyeo GmbH, the German company that developed the popular Adblock Plus extension for major web browsers, recently released the beta version of Adblock Browser, a Firefox-based Android web browser that removes mobile ads. That's bad news for Google, since a recent survey by PageFair found that 28% of online Americans already use Eyeo's Adblock Plus extension on PCs.

Source: Pixabay.

Does Eyeo's new browser present a serious threat to Google, or will it fail to dent the company's massive advertising network?

What mobile ads mean to Google
To understand how Eyeo could hurt Google, we should first discuss Google's mobile strategies. Google monetizes Android, a free and open-source OS, through search revenue, mobile ads, and purchases on Google Play. Google also tracks users if they browse the web with Chrome or use ecosystem apps like YouTube, Gmail, or Drive.

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However, mobile users often use companies' native apps instead of visiting their mobile sites with Chrome. This causes Google to lose potential revenue from mobile ads. In response, Google is discouraging the development of native apps by allowing mobile sites to deliver app-like push notifications through Chrome. Google could also soon launch "Buy" buttons on mobile ads to encourage shoppers to use its mobile search engine for product searches.

The business of holding ads hostage
The use of Adblock Plus on PCs cost Google $887 million in potential ad revenue in 2012, according to research firm PageFair. That was equivalent to just 2% of Google's total ad revenue that year, but it was enough to convince Google to pay Eyeo to "whitelist" less intrusive ads.

The terms of that deal were never disclosed, but The Financial Times claims that Google, Microsoft , Amazon, and others agreed to pay Eyeo 30% of the ad revenue that they would have made if the ads were unblocked. Therefore, Google might have paid Eyeo about $226 million in 2012.

Eyeo's Adblock Plus for Chrome. Source: Google.

It's not Eyeo's first attempt to conquer Android
This isn't Eyeo's first attempt to block ads on Android devices. The company previously launched an Adblock Plus app for Android, but it works best on "jailbroken" devices with root access. If the device isn't rooted, the app needs to be manually configured as a proxy server for all web traffic. Google also booted the app from the Google Play Store in 2013, so the app must be downloaded and installed manually.

The new Adblock Plus browser will reportedly work on both rooted and non-rooted devices, which could help it reach a wider range of mainstream customers. However, it's still unlikely that Google will let Eyeo offer the browser on Google Play.

In its press release, Eyeo highlights several of its new browser's key strengths. The company notes that loading mobile ads can consume up to 23% of a device's battery, increase data costs, and cause pages to load more slowly. It also states that malware often "hides behind ads, even on trusted networks," and blocking ads keeps mobile devices safe.

Should Google start worrying?
If Eyeo's browser gains ground against Chrome, which accounts for nearly a third of the mobile web browsing market, Google's mobile ads could start losing value and it will lose the ability to consistently track user behavior with ads across mobile devices. Google wouldn't be the only casualty -- advertising rivals like Yahoo! and Microsoft would also be adversely affected.

If Eyeo gains the support of companies that want to boot Google's ecosystem from Android -- like Samsung, Cyanogen, and members of the Android Open Source Project -- that problem could get a lot worse.

Meanwhile, Facebook would be well-protected from Eyeo's browser for a simple reason: its ad network is mainly contained within its own app and third-party ones via the Audience Network. Adblock Plus blocks Facebook ads on desktops, but a whopping 73% of Facebook's ad revenue came from mobile devices last quarter.

The key takeaway
If Eyeo's new web browser becomes as popular as its browser extensions, Google might have to pay even more money to keep some of its ads whitelisted.

But that doesn't solve the fundamental problem with Google's business model -- people are getting sick and tired of traditional ads, and they're getting smart enough to block them. If this trend continues, Google's mobile ads will lose value as marketers look for new ways -- like business pages on Facebook or Promoted Tweets on Twitter-- to promote their businesses.

The article Google, Inc.'s Worst Nightmare Is Coming True originally appeared on Fool.com.

Leo Sun owns shares of Apple and Facebook. The Motley Fool recommends Amazon.com, Apple, Facebook, Google (A shares), Google (C shares), and Twitter. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Google (A shares), Google (C shares), and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.