The business model of commercial (free-to-air) television relies on advertisers to pay for programming. Viewers \u2018inadvertently\u2019 watch advertisements that are bundled with programming. Advertisers have no reason to pay to have their ads embedded if the viewers succeed in unbundling the advertisements from the entertainment content (advertising bypass). TiVo (Digital Video Recorder) machines, remote controls, and pop-up ad blockers are all examples of ad-avoidance technologies whose deployment detracts from the willingness to pay of advertisers for audience since a smaller audience is actually exposed to the ads. However, viewer purchases of devices to avoid ads may cause a disproportionate share of the ad nuisance to fall on the remaining audience. As these are views less adverse to ads, this causes broadcasters to increase advertising levels. This result is in line with observed facts. The bypass option may cause total welfare to fall. We demonstrate that higher penetration of such technologies may cause program content to be of lower quality as well as to appeal to a broader range of viewers (rather than niches). In addition, we cast doubt on the profitability of using subscriptions to counter the impact of ad- avoidance.

Wilbur, Helen Weeds, and participants at the 4th Workshop on Media Economics (Washington, 2006) and seminars at New York University and Cornell University for comments. We thank the Australian Research Council and IPRIA for financial assistance. All correspondence tojoshua. gans@gmail.com. The latest version of this paper will be available atwww.mbs.edu/jg ans.

Commercial (or free-to-air) television is a two-sided market. The broadcaster provides programming which bundles entertainment content with advertising messages. The programming simultaneously serves two groups of consumers; the viewers who want to enjoy the content, and the advertisers who want to reach prospective customers with their messages. This business model may be undermined by ad-avoidance technologies (AATs), such as Digital Video Recorders (the most famous of which is TiVo), which enable the viewers to unbundle the content from the messages.1 Since the advertisers no longer reach viewers who strip the messages from the programming, they are willing to pay less for placing their advertisements. This may impact the programming choices. In extremis, the business model will no longer work if no messages are viewed because the advertisers will no longer pay anything for the programming. Even when only some of the viewers watch in the old style, programming will be affected through changes in the amount of advertising because only those viewers less averse to advertising will remain. The incentives to provide quality programming will be diminished because the returns from quality will fall, and the type of programming may be altered too.

The aim of this paper is to analyze the effects on equilibrium advertising levels, programming, and welfare in the face of such unbundling (or \u201csiphoning\u201d). The ability to bypass the advertising will make better off those who are most annoyed by it. But it will also harm the broadcaster\u2019s profit. The broadcaster will be faced with a lower audience, but one that is less sensitive to advertising clutter. This may cause the broadcaster to put on more advertisements \u2013 not to recoup lost revenues per se, but because the marginal advertisement is less likely to cause viewers to switch off (or switch over to a rival channel). The welfare economics of the two-sided market with a bypass factor weighs the benefits to viewers who screen out the ads with the costs to those who are subjected to more ads. The advertisers lose from a reduction in the effective viewer base, but gain from the lower price per ad per viewer as the broadcaster raises ad levels.