• by Ashkan Karbasfrooshan , Op-Ed Contributor, August 13, 2012

The oil industry is profitable for producers when the costs of exploitation are low and/or the prices at the gas tank are high.  That is pretty much the case for any producer, but oil and online video are different in one key way, which serves as a good indicator of what will drive 2013.

Last week we took a trip down memory lane and looked at some of the trends (and fads) that shaped online video.  Today we ask, “What does next year have in store?” 

A Victim of Its Own Success

Online video has always been a victim of misaligned cost and revenue equations, which explain why so many online video firms have lost their lives because of the inherent dangers of the business. 

For example, before 2000, Steven Spielberg’s Pop.com, Pseudo and others perished after the dot-com bubble because (among other reasons) few consumers had bandwidth to watch video content, and few marketers were spending money on online video.  Mind you, those that did were spending very high CPMs (more on that later). 

Then after the 2003-04 Internet renaissance, a whole slew of startups burned through tens of millions of dollars, eventually hitting a wall or downright failing because of misaligned cost and revenue – and, in particular, huge marketing expenses. 

YouTube burst onto the scene and overnight provided an audience only interested in video, thereby reducing marketing costs and simultaneously absorbing the otherwise high costs of bandwidth and hosting.  As such, it didn’t matter early on that revenues remained a mirage. 

Without a doubt, online video advertising is growing rapidly, but as bullish as we all are about digital video (online, mobile, tablets), the reality remains that online video remains much smaller than anticipated, weighing in last year at $2 billion in the U.S. (forecasts back in 2007 pegged 2012 online video ad figures at $7.1 billion). Meanwhile, television remains a juggernaut at $60 billion in annual U.S. advertising spend. We’re not seeing much television content online, and realistically, we will continue to see small amounts of it in the future.  When we do, it shall be on the rightsholders’ terms (hmm… Olympics, anyone?). 

Where the oil and online video industries are very different

That’s at the high end of the market.  At the low end, we’re seeing a combination of soaring inventory of user-generated content and a proliferation of “good enough” content, which is keeping CPM rates down.  Ultimately, there’s little incentive for the average producer to create original content. 

This is where online video is fundamentally different from oil: Oil prices are being driven by so much demand that prices at the tank have remained high for the past decade.  Supply can’t move fast enough.  That’s not the case in online video, where supply is outgrowing demand. 

Whereas some select publishers can maintain abnormally high CPMs, they are doing it artificially due to low supply.  The true eCPM of online video is alarmingly low.  This is also why YouTube was compelled to subsidize video content; YouTube, son of Google, who lived and died on revenue share via its AdSense and AdWords platforms.

2013 Story #1a: Impact of Mobile

You have to be in a coma (the “living in a cave” analogy doesn’t apply, since you’d rely more on mobile in that case) not to realize that mobile (wireless phones and tablets) will be a key driver for years to come. 

But whereas mobile once bragged of high CPMs, I believe that you will see a convergence between ad rates regardless of whether you watch content on a computer, phone or tablet (television will retain a premium for years to come).

Exacerbating this trend, total ad spend on mobile will remain small. 

2013 Story #1b: The Importance of Keeping Costs Down

As a result, content production costs need to be contained (while increasing quality, somehow), which was the rationale provided by Discovery Communications when it acquired Revision3. 

Indeed, as a recent article on NBC’s decision to delay the Olympics stressed, “Content is king, and creating and buying video content is really expensive.”

While I don’t see TV dollars shifting massively to online video for another few years (though it will eventually happen, if you look at what is now occurring in the print industry), advertising will continue to trickle away from display to video.  Online video will continue to grow by 25%-50% per year for the foreseeable future.  Where it gets tricky is that dollars will continue to gravitate toward:

-      broadcast companies’ online offerings (including Hulu)

-      YouTube

-      Ad networks and exchanges

As a result, publishers will have to fight for a very small piece of the pie, which, while growing, won’t be large enough to allow for high production costs.