When ad avoidance backfires

Now that there is technology to avoid ads on television, advertisers are willing to pay less to air their announcements. What consequences would such a loss of revenue have on the television landscape?

Torben Stuehmeier and Tobias Wenzel say that the reduced profit opportunities should reduce entry (or favor exit) from the free-to-air television market. Note, however, that those how avoid ads are those who are bothered by them. The remainder are those the advertisers want to reach, so ads may become more numerous. In contrast, pay-TV (either pay-to-subscribe or pay-per-view) should be able to charge more for subscriptions to compensate for the reduced ad income. There is no change in revenue.

Thinking about welfare, the TiVo customers have the same utility as they pay for their subscription what they think ad avoidance is worth. But for everyone, there are now fewer channels to chose from the free-to-air market and consumers are worse off. In a pay-TV market, welfare is also reduced, as non-users pay more for subscriptions. Now extend the model of Stuehmeier and Wenzel to allow both television industries to co-exist and compete against each other. As customers have fewer free options, they will go towards the pay channels. The end result: a similar number of channels, but more you have to pay for. Consumer welfare was reduced by the availability of the TiVo box.

Note that the authors have a different concept of welfare than me. They consider not only the consumer surplus, but also television industry profits. Why would one want to consider the latter? If the argument is that it increases the income and thus the consumption of someone, why not model it explicitly? And given that the only good produced in this model is differentiated television channels (with a bad through ads), that is all what counts. Profits are just a monetary illusion here.