Online video advertising is the fastest growing sector of adtech. In addition to various analyst reports supporting this claim, our extensive adtech portfolio that includes companies like Brightroll (online video advertising), Turn (demand side platform), Jiwire (mobile advertising platform) and Exelate (data management platform) provide us with additional confirmatory data. Today online video advertising represents a $4B market that is growing at over 30% annually. It is expected to reach $8B by 2015 (and greater than $10B by 2016) in the US alone, representing a three-year CAGR of 38% (’12-’15) vs. 20% (’12-’15) for overall online advertising and display advertising that is growing at 10-12% annually. Last year mobile advertising grew faster than video advertising it hasn’t yet cracked the $1B per year level. We all know that advertising budgets follow eyeballs, i.e., reach. This is why TV advertising today is a $180B worldwide business with close to $80B of that coming from the US alone.
There are several reasons why video consumption is moving online. First, it is consistent with the general trend of consuming media online, e.g., news, and music, because of changing lifestyles, e.g., time constraints, place shifting, etc. Second, even though there are now multiple routes for online video to find its way to the living room, e.g., connected TV, tablet. However, online video consumption is primarily driven by the accelerating adoption of mobile devices, particularly by the Millennials, and the expanding availability of broadband speeds that enable bandwidth hogs, such as video, to be consumed through such devices, e.g., 4G LTE. Third, because the online consumption of video enables “unbundling,” i.e., the idea of paying only for the content a consumer wants to watch, rather than the pre-packaged channel collections offered today by the distributors of linear TV.
While online video advertising budgets are growing and the CPMs of video ads are the highest among those of other online advertising formats, the price of online video ads remains very low compared to the corresponding linear TV ads. Until now three reasons were presented for this discrepancy. First, TV’s large reach, i.e., the audiences for TV content, even low quality content, tends to be much larger than the audience for online video content. Second, agreements that have been in place for decades dictate the allocation of video ad revenues between linear TV video content producers and distributors. This is why, for example, Comcast, a video content distributor, decided to acquire NBC, a video content producer. Online video advertising contracts have been handled separately from linear TV advertising contracts.
This price discrepancy is about to change for four reasons. First, big advertisers want access to Millennials. Second, more original video content developed particularly for online consumption and through mobile devices is becoming available. Third, advertisers and their agencies are packaging online video ads together with linear TV ads. Fourth, accelerating rollout of broadband with speeds that accommodate the consumption of online video.
Millennials are developing completely different habits than any of their preceding generations. The sharing economy is one such characteristic. Their wide use of online resources is another. Advertisers realize that the analytics and segments they had used over the years for TV advertising do not apply to Millennials. In order to create new analytics they need the appropriate audience data. And in order to get the audience data they need to start interacting with Millennials through their preferred channel, i.e., online, and across multiple devices, from smartphones to large screen connected TVs. As a result, advertisers are not only increasing their online spending, but they are also increasing the budgets for the acquisition of online data and associated analytics. Whereas with linear TV the price of a video ad is driven by the overall size of the audience the content can attract, with online video ads the price will be determined by our ability to precisely understand an audience and associating the appropriate content that is surrounded by the right video ads to that audience.
Over the past few years we started seeing the formation of studios targeting exclusively the creation of online video content, including mobile video content. More recently we saw the formation of Multi Channel Networks (MCNs), such as Maker Studios. In the last few days Disney acquired Maker Studios and Dreamworks acquired AwsomenessTV. Other such studios, e.g., Alloy Entertainment and Machinima are also attracting significant investor and acquirer interest. The reason for this activity is because these studios have developed original online video content that is starting to get strong following, particularly in the demographic segments advertisers are interested in.
Our adtech portfolio companies that work on video campaigns, e.g., Brightroll, which until recently were used to dealing with online-only advertising RFPs, are now seeing integrated campaigns that package online and linear TV ads around specific goals and themes. We had started to see that approach initially around the Super Bowl but we are not seeing it around other premium content or events. Advertisers and their agencies realize that because of the duration and format of mobile content there may be very few advertising slots around each piece of content. Determining how to take advantage of these slots in a way that is well integrated with linear TV campaigns becomes an advantage.
Video distributors such as Comcast, Verizon (see Verizon’s acquisitions of Edgecast and Intel’s TV assets), AT&T, DirectTV, and others are accelerating their investments in IPTV and in broadband Internet, rolling out networks that will enable them to offer online video to a larger portion of their subscriber bases. The continued increase in the prices of online video ads will depend greatly on the ability of the IP infrastructure to handle the demand for online video content.
I’m also watching for the adoption of programmatic approaches, currently being used by online advertising including online video advertising, by linear TV advertising. While the public markets have shown that they are disinterested in first generation video advertising networks (see the market performance of recently public companies Tremor Video and YuMe), they have also shown great support for companies with platforms that support programmatic approaches and Real Time Bidding (see acquisition of Adap.tv by AOL). Programmatic approaches enable not only streamline the video advertising process and make it more efficient, but they will also make it more transparent as they will enable better attribution, and measurement. Attribution and measurement, along with verification, have been identified by IAB as three important problems that need to be addressed effectively before online video advertising can be adopted even more broadly.
I expect that programmatic techniques will start being adopted first in conjunction with local TV advertising and particularly around not premium content, instead of premium content, e.g., Super Bowl. The adoption of such technologies will enable media planners to fill out their advertising plans faster and more efficiently. I expect that by 2020 we may see 5% of local TV advertising budgets being addressed through programmatic approaches.
Online video advertising has a great future by itself. However, as it starts to be combined with linear TV advertising to address the realities of today’s video market it represents a very large opportunity that we just started uncovering.
