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Where’s the Money in Online Video?

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This post was originally written for GigaOM‘s syndicated column relationship with BusinessWeek. It’s relevant to NewTeeVee so we’re publishing it here as well.

The sharp growth in online video viewing, increasing availability of TV online, and proliferation of high-quality, web-originated content has made it easy to point the arrow for online video advertising up and to the right. But while video will probably continue to be a bright spot of growth in a dull economy, that’s mostly because it’s just getting started. The reality is revenues will be close to nothing for a long time, and the growing number of tech entrepreneurs and creative types in the space should probably be worried that industry watchers are now cutting their expectations for growth in online video revenues based on factors other than the shaky U.S. economy.

eMarketer, which has been putting out good research on online video recently, back in August chopped its estimate for 2008 U.S. video ad revenue by more than half, to $505 million from $1.3 billion. That’s a pretty significant downgrade more than halfway into the year, though eMarketer warned it was “more a change of methodology than of perspective.” But even with the methodology revision, eMarketer is forecasting growth to start declining after 2012.

In a market in which CPMs (cost per thousand impressions) for very similar ad formats can range from $10 to $100 depending on where they’re shown, it’s worth trying to pin down the factors affecting video advertising pricing. Everybody agrees that prices for video formats such as in-stream ads and overlays will stay at a premium vs. banner ads, but it’s not yet clear where rates will settle.

Jason Glickman, CEO of video ad network Tremor Media, attributes the major fluctuations in CPM prices for in-stream (mostly pre-roll) ads over the last two years to a combination of a few key factors. Initially, he says, there wasn’t much inventory, so CPMs were “north of $20 to $25 on a constant basis.” Then inventory started to increase, causing prices to drop to a range of $12-$20 about a year ago. They’ve managed to stay stable since then as budgets have started to migrate from television. Today, the most pressing factors affecting CPM prices are better accountability measures (a plus) and pullbacks on budgets (not a plus), according to Troy Young, chief marketing officer at competitor VideoEgg.

Video accounts for a tiny part of the $70-$80 billion spent on TV in the U.S. each year, and that’s barely starting to change. TV networks like CBS say they have always been able charge higher CPMs for the same shows online vs. TV, but that their digital revenues are not yet significant enough for that difference to be meaningful. Even by 2013, when eMarketer thinks advertisers will spend $5.8 billion on online video ads in the U.S., that will amount to just 7.6 percent of total TV ad spend and 9.8 percent of total Internet ad spend.

So going forward, what else might depress video advertising CPMs? First, online audiences in a post-TiVo world don’t much like ads, and in the “lean forward” online video-watching environment, they are more likely to reach for the mute button, employ ad-blocking software, or switch to another window. Second, the aforementioned demand for better tracking and accountability drives forward less lucrative performance-based ads. Third, while more intensive kinds of advertising like sponsorship and product integration are becoming increasingly popular, they’re even harder to measure. Fourth, the amount of inventory will only continue to rise, with more and better video being released and syndicated further out across the web.

“We recently brought down the average CPM again, to between $15 and $35, because of the development of video widgets,” said Brett Garfinkel, SVP of the original online content site maniaTV. “We can now reach more eyeballs for the same cost and afford to cut costs to advertisers and remain competitive.”

A big question for further growth is when advertisers will start to be comfortable with user-generated content. At this point brands are still extremely cautious about being associated with new content producers, perhaps unreasonably so, given that many of the big viral hits come out of nowhere. However, advertisers are becoming comfortable with a new kind of inventory — made-for-the-web content with high production values — and also with so-called professional content that is made for a lower budget so as to fit in better online.

But should advertisers accept UGC, it would open the floodgates for online inventory, which would surely come at a lower price. This is especially relevant for YouTube, which dominates the U.S. audience but only sells ads when it has a revenue-sharing relationship with the video’s creator, partly as a safeguard against profiting from unauthorized uploads. That means YouTube only makes money on an estimated 4 percent of its total videos. The site has recently been trying to milk that segment for more money by offering content owners the option to monetize copies of their shows and movies caught in YouTube’s copyright filter, and automatically playing post-roll video ads after partner videos end.

On the whole, video ads are still looking like a good market. But just like everybody else, online content providers would be well-advised to keep an eye on their balance sheets.

16 Responses to “Where’s the Money in Online Video?”

  1. Isaac Hooper

    Until they can be sure they’re putting their brand on highly vetted content, advertisers are gonna be cautious of sites like Youtube (which is why only 4% of the videos make money). Most of the ad money is gonna end up going to sites like Hulu and, where the content is professionally produced. Youtube may continue to be the most popular online video site, but it’s likely to get left behind by advertisers.

  2. If companies advertise on websites like YouTube they risk the reputation of their brand. However, watching videos online is the future for the current 18-25 year old market. Online videos are up and coming, not on their way out. Tech entrepreneurs will make money by creating videos companies can rely on to produce dependable content. It will be difficult for any citizen generated material to meet and gain that trust.

  3. This is really getting ridiculous. It’s pretty clear at this point that online video is not a good market. The costs are extremely high and the revenues are extremely low. All the analysts, like emarketer, are drastically cutting their outlooks for overall revenue. There’s really no reason to believe their numbers after they slash them by 50%. Hulu and the networks will dominate monetized video and there’s very little room for any startups with anything except major media content. And any deal you make to display major media content means you’re kicking back your already thin margins to the content providers. This is a sexy business to be in, but it’s certainly not a good one. All the hype has not panned out. That’s the reality. Hulu and the networks will make money. Nobody else will. So that looks a lot like the boring old version of things, doesn’t it?

  4. Alec, I wonder if you’re right — there definitely is a lot of crap on TV. I think it will be a combo of factors, though.

    Jamison, you are definitely right but that will be even harder to measure, yeah?

  5. Brand integration seems to seems to offer greater audience recall than overlays or pre/post-roll and is an important driver of revenue for online video creators. I wonder if shrinking ad budgets will result in an emphasis on more targeted integration.

  6. FWIW, there are other ways to monetize video other than advertising. Companies are using video for wide ranging applications these days from training to clinical trials. These companies generally use video because it either a) helps increase revenue, or b) reduces costs. Helping companies use video effectively in these contexts may not be as sexy as selling ads against NBC’s latest hit, but it is something companies are happy to pay for when they can directly correlate the expenditure on video to ROI.

    Ben Ruedlinger
    Wistia, Making Video Productive

  7. Great insight. Thanks Liz.

    I wonder how much online video is expected to cannibalize TV ad revenues (and viewers) over the next five years. I bet it has more to do with tech innovation (set-top boxes, acceptance of RSS, mobile device viewing, etc.) than quality of content.

    We’re seeing ‘high-quality’ TV shows tank and low-production-value online shows make a killing (at least, in terms of audience). Seems like there’s a lot of that this fall…