So if masking is used, I assume compressing the audio with any modern compression scheme from mp3 up should defeat that shouldn't it (because they drop masked signals to save bandwidth)?
Depends. The Arbitron system works through the HD Radio codec, which is a wavelet codec. It is basically hybrid mp3 type coupled with high frequency reconstruction on the receiver side.
Interestingly, that literally means fake signals on the receiving end above 8 to 10Khz! Was as low, and may still be as low as 5khz when used for AM. I have not kept up.
I could tell early on. It has improved a lot since then.
The Arbitron system appears robust. Noise, low signal quality, etc... do not generally impact it much. The effective bitrate needed is very low.
Given a larger sample of audio, it is likely to work.
A robust watermarking system will include some sort of error correction, so the answer is that it might, it depends on how much error it introduces.
A purpose built algorithm designed to thwart watermarking however is far more likely to be successful than a compression algorithm that is designed to maintain the integrity of the audio.
The first step is to ID marks successfully.
Only then can means and methods to evade the mark be trusted.
I would look really hard at what the radio industry has done. They faced very significant challenges as internet advertising rose up to dominate.
The incentives to get this right and be super robust are all there and are time tested, production proven today.