Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? case study is a Harvard Business School (HBR) case study written by Zsolt Katona, Miklos Sarvary. The Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? (referred as “Ad Users” from here on) case study provides evaluation & decision scenario in field of Strategy & Execution. It also touches upon business topics such as - Value proposition, Disruptive innovation, Entrepreneurship, Marketing, Technology.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? Case Study

The case centers on Eyeo GmbH, a German software development company, whose main product is Adblock Plus, the world's leading ad blocking browser extension that blocks ads from appearing on the screens of individual users, both on desktops and mobile devices. Initially started as a hobby by Wladimir Palant in 2006, Adblock Plus has since been downloaded over one billion times and has helped drive, along with its competitors, the exponential use of ad block software, which numbered 380 million desktop users and 235 million mobile users, worldwide, by the start of 2017. Over its first 11 years, Eyeo -- as one of the five alliance members behind the 2014 Acceptable Ad Coalition Manifesto -- has seen itself as making the web a better experience for individual users by eliminating annoying and unwanted online ads, while its publishing industry critics -- to whom digital advertising revenue is a critical portion of their business model -- have denounced the ad blockers as "self-appointed hall monitors" of Internet advertising, setting the standards for acceptable ads and then requiring the mostly larger publishers to pay them a "whitelisting" fee, a form of "extortion". In response to ad blockers, publishers have prevented individual users of ad blocking software from visiting their site, sought to charge these users a subscription fee for access, or, in a few cases with several German media companies, even taking Eyeo to court, albeit unsuccessfully so far. Set in January 2018, the case asks which path Eyeo's three principal officers -- CTO Wladimir Palant, chairman Tim Schumacher, and CEO Till Faida -- should take the company in the future. Despite the past growth in Adblocker Plus usage and revenue, storm clouds are brewing. In recent years, as the number of global mobile phone users surpassed that of desktop users, it has become more challenging to install ad blocking software on mobile phones, compared to desktop browsers, since the individual operating systems and ecosystems of mobile phones are more tightly controlled by its overseers -- mainly Apple iPhone or Google Android. Then in December 2017, Google had announced that its popular desktop Chrome browser would now automatically block out various types of annoying ads as determined by its own Coalition for Better Ads.

Case Authors : Zsolt Katona, Miklos Sarvary

Topic : Strategy & Execution

Related Areas : Disruptive innovation, Entrepreneurship, Marketing, Technology

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Calculating Net Present Value (NPV) at 6% for Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10026621)	-10026621	-	-
Year 1	3445882	-6580739	3445882	0.9434	3250832
Year 2	3962984	-2617755	7408866	0.89	3527042
Year 3	3945124	1327369	11353990	0.8396	3312402
Year 4	3234275	4561644	14588265	0.7921	2561849
TOTAL			14588265		12652125

The Net Present Value at 6% discount rate is 2625504

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Profitability Index
2. Internal Rate of Return
3. Payback Period
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Ad Users have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Ad Users shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth?

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Strategy & Execution Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Ad Users often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Ad Users needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10026621)	-10026621	-	-
Year 1	3445882	-6580739	3445882	0.8696	2996419
Year 2	3962984	-2617755	7408866	0.7561	2996585
Year 3	3945124	1327369	11353990	0.6575	2593983
Year 4	3234275	4561644	14588265	0.5718	1849207
TOTAL					10436195

The Net NPV after 4 years is 409574

(10436195 - 10026621 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10026621)	-10026621	-	-
Year 1	3445882	-6580739	3445882	0.8333	2871568
Year 2	3962984	-2617755	7408866	0.6944	2752072
Year 3	3945124	1327369	11353990	0.5787	2283058
Year 4	3234275	4561644	14588265	0.4823	1559739
TOTAL					9466438

The Net NPV after 4 years is -560183

At 20% discount rate the NPV is negative (9466438 - 10026621 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Ad Users to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Ad Users has a NPV value higher than Zero then finance managers at Ad Users can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Ad Users, then the stock price of the Ad Users should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Ad Users should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What can impact the cash flow of the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth?

References & Further Readings

Zsolt Katona, Miklos Sarvary (2018), "Eyeo's Adblock Plus: Consumer Movement or Advertising Toll Booth? Harvard Business Review Case Study. Published by HBR Publications.