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Into the Mainstream: Advertising Year in Review

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Online video advertising has gone mainstream. The issues that have inhibited agencies and advertisers from adopting digital video, i.e., a dearth of standards and widely accepted metrics, are being addressed. Advertisers and agencies are responding accordingly, with dedicated working groups and seven-figure budgets now focused exclusively on online video advertising. As a result, major publishers such as Hulu and Google have begun to generate serious revenue from video advertising. "I don’t think of [digital video advertising] as a test medium anymore," says Tod Sacerdoti, CEO of BrightRoll, one of the largest online video ad networks. "Last year, there was a lot of dipping the toe in the water. That is no longer the case." Analyst estimates of online video advertising spending in 2008 range from $500 million to more than $1 billion, and they show a growth rate of more than 50% over the previous year.

The Interactive Advertising Bureau’s (IAB) Digital Video Committee issued reports in 2008 that specified definitions for online video advertising metrics and established ad-serving standards. Most major publishers have made significant progress toward compliance with the IAB’s specifications and now offer an array of IAB-defined metrics. "The criticality of the metrics issue has declined over the last several years," says Ari Paparo, group product manager for advertiser products at Google. "It’s by no means as good as it could be … but it’s less of a critical blocking factor."

Within the advertising industry, there is still a lack of consensus regarding how to measure online video advertising success. The internet as a whole is unique in its ability to target every imaginable microniche, and regardless of online video advertising’s sophisticated targeting capabilities, most audience targeting is still done by site demographics. Ads for Chevy trucks are more likely to run on ESPN.com than on Disney.com. Ad execs migrating to the digital world from TV are often comfortable with third-party, panel-based metrics from comScore, Inc. or Nielsen Online’s NetRatings. Interactive agencies accustomed to internet-level visibility into their campaigns are more focused on server-based metrics, and for them the current situation is still suboptimal. A lack of scale in online video advertising also contributes to minimizing the value of metrics to advertisers. "If online video is only 1% of your total budget, the metrics matter but you’re not that focused on it," says Sacerdoti. "When online video is 20% of your budget, you’re going to spend a lot more time digging into the data."

Pricing for online video advertising has yet to reach equilibrium. While advertisers and publishers are loath to reveal the true price of ad inventory, CPMs (cost per thousand impressions) for similar DVA formats are known to range from $10 to $100, depending on where they are placed. Prestigious publishers that sell out their inventories keep CPMs high because they can. As a result, many advertisers and agencies are convinced the online video category is overpriced. (A recent report commissioned by the IAB showed an average online video CPM of $43 compared to a $25 average for prime-time TV and a $15 average for online display.) Ad networks want prices to come down across the board so they can sell more volume. "I believe that total dollars will go up dramatically when the price of online video reduces to one that is comparable to the price of television," says Sacerdoti.

The laws of supply and demand would dictate that as high-quality content and ad inventory proliferate online, CPMs for online video would decline. But ironically, the biggest driver of price reduction may be an increase in demand. "When [advertisers and agencies] start committing meaningful amounts of money," says Sacerdoti, "they’ll start to really care and they’ll push the price to a more appropriate level." And while higher quality content might be expected to attract more ad dollars, advertisers are finding that the highest click-through rates are often on the worst sites. It’s evidently less painful for users to click away from less compelling content. "If we’re measuring on clicks, we’re almost penalized for being in good places," says Sacerdoti. "That’s the irony of being able to measure down to the interaction."

The cost of online video advertising to advertisers and agencies has also been inflated by high transaction costs. Compared to either television or online display, video ads tend to be small-reach buys that involve extra costs for production work and operational implementation. Fragmentation between ad servers, ad networks, rich media technology companies, etc., increases the operational costs of buying online display advertising. In the video space, in addition to fragmentation, immature video ad-serving technologies and interoperability issues add to costs. "There is no effective way for an advertiser to traffic a video ad across five different publisher sites," says Paparo. "Compared to the rest of the Internet, it’s incredibly inefficient."

The IAB’s Digital Video Committee addressed the interoperability issue with the October 2008 release of its "Digital Video Ad Serving Template (VAST)." VAST’s aim is to facilitate interoperability between ad servers so that DoubleClick, Microsoft, Tremor Media, and the rest can call up a video ad from the same XML document, whether it be a linear preroll ad or a nonlinear overlay ad. The major players in the industry are now at various stages in the process of implementing VAST. "In 2009, you can expect to start seeing a great deal of interoperability," says Paparo, principal author of the VAST document. "That will reduce transaction costs, not just for agencies, but also for publishers."

The market for ad time in network television is relatively efficient and straightforward. A media buyer typically negotiates terms with one network contact. Buying and selling inventory in the online video advertising world is more complicated. Take Hulu, the sixth most popular purveyor of streaming video in the U.S. Content contributors to Hulu (FOX, NBC, etc.) can sell a certain percentage—let’s say 70%, for example—of the ad inventory that runs against their content. The remaining percentage, in this case 30%, is Hulu’s to sell. If FOX sells half of its allotted inventory, then the remaining half of that inventory, 35% of the original total, reverts to Hulu. Hulu then has 65% of the inventory, but it might only sell half of that, leaving 32.5% of the original total unsold. Hulu then works with ad networks to sell the remaining unsold inventory. To complicate matters further, if FOX doesn’t unload its original 70% allotment, it may sell what’s left to an ad network before Hulu gets a crack at it. In this scenario, the ad network may have multiple chances to buy inventory, at varying prices and at different points in the process. (Note: The above is cited only as an example, and it does not necessarily reflect the true portion of inventory that is allotted to content owners, publishers, or ad networks.)

Figure 1
Figure 1. While Hulu won’t say, some analysts estimate that its distribution partners receive 10% of ad revenue.

Just as in broadcast television, online video content enjoys an extended life through syndication. For example, Hulu’s expanded distribution network includes AOL, MSN, Yahoo!, MySpace, and more than 100 others. While Hulu won’t say, some analysts estimate that Hulu’s distribution partners receive 10% of ad revenue. Beyond its formal partnerships, Hulu allows users to embed widgets in blogs and websites, turning the site's own audience into its most powerful marketing vehicle and extending advertisers’ reach even farther. While Hulu’s content is being disseminated through widgets into the nether reaches of cyberspace, PC extenders and high-bitrate IPTV enable the same content to be streamed back to its original intended venue, the living room TV. The TV networks will have to make the necessary calculations to determine where and how to most effectively monetize their original content, given the warning of Jeff Zucker, NBC Universal’s CEO, not to exchange "analog dollars for digital pennies."

Widely second-guessed at its launch in March 2008 (inside Google, Hulu was originally referred to as "Clown Co."), Hulu is already an unmitigated success, serving more than 140 million streams to 6 million unique viewers in September 2008 according to Nielsen Online’s VideoCensus. Those are impressive numbers until they are compared to YouTube’s 5.3 billion videos streamed to more than 80 million unique viewers in the same month. But while Hulu can monetize almost all of its professionally produced content, YouTube has been able to sell ads against only 3% of its content. Domestic revenue projections for YouTube vary widely, ranging from $100 million to $250 million for 2009. But at least one analyst estimates that in spite of the vast differential in audience size, domestic ad revenues for Hulu and YouTube will be about even—around $180 million—in 2009. (Unlike YouTube, Hulu has yet to go global.)

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