Commentary

Why Online Video Fails To Meet Its Lofty Expectations

With television advertising being a $70 billion market and total online advertising weighing in at $22.7 billion for 2009, you can't help but wonder why online video advertising only represents a $1 billion market. 

In fact, according to the IAB, video advertising grew from $734 million to $1.017 billion from 2008 to 2009 -- or 38%.  That's not bad, but when you consider that total video consumption per month has soared from 10 billion videos in July 2008 to over 33 billion in December 2009 (or 230%), you wonder why the revenue growth hasn't mimicked the viewership.

For sure, economics tend to trail consumer patterns.  Moreover, the recession and advertising slump didn't help either.  And yes, the so-called experts might not be all-knowing either, after all.

I personally think there's more to it than that. 

The Genie is Out of the Bottle

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In 2000, I worked at a search engine company.  We gave away our search engines for free and sought to generate revenue via advertising.  The Nasdaq crashed and took down the ad market, after which point we sought to collect licensing revenues for our technology.  With the cat out of the bag, it was impossible to get people to pay for the product afterwards.  Lesson learned: If you give something away for free, you can't charge for it subsequently.  Of course, by then, other search engines -- namely Google -- began to give away their technology for free as well, so there was no way that strategy would have prevailed, especially in the zero-sum game of search.  More on Google later.

No Risk, No Reward, But Also... No Effort?

When someone pays for something, they tend to associate a value to it.  When a company pays for something, they want to recoup their investment.  It's psychological, even though in accounting we're told not to make decisions based on sunk costs.  Today, I work in online video content and after four years in operation it's clear that when a distribution partner of ours pays for content, they always push the content more.  Lesson learned: Without any risk, people don't work as hard to make something successful.  More on distribution partners later.

Consumers Won't Pay for S&*t!

Online, consumers expect a free lunch.  But I also think that media companies -- the very same folks who want to get paid for their content or eyeballs -- don't seem to want to put their money where their mouth is.

Let's take a step back for one second.  To this day, the real money remains in television.  No one doubts that television will shrink over time and digital will continue to grow, but online video needs a lot more than nosebleed growth projections to compete with television ad dollars: it needs to grow up!

One reason why television is so huge relative to radio is that radio is by its nature a "barter" medium.  While I was working at my last job (running sales for an online publisher), I produced and hosted a series of talk radio shows and quickly realized that so much of the value in radio was in barter, trade and promotional exchanges.  As a result, I could see how that mindset and those practices weighed down the top line of the businesses involved.

You Get What You Pay For

If you extend this parallel, one could argue that television is so much larger relative to online video because decisionmakers in television seem to realize that things cost money and you get what you pay for, so they tend to understand that there is a cost to producing or obtaining rights to content. 

For purposes of clarification, in this article: licensing implies some kind of financial commitment or minimum guarantees (MGs), be it upfront or over a period of time.  Conversely, syndication is pure revenue sharing.  These are not mutually exclusive, a deal can have MGs in place that become syndication deals over time.

On the Internet, so many aggregators and distributors want to enter purely speculative deals.  In our experience, very few of the aggregators and distributors have the kind of audience scale and sales teams in place to actually generate revenue.  A few do, but many don't.  This is why we have always favored business deals with minimum guarantees in place. 

Even less want to explicitly give us the right to sell ads against our content.  Over time, if they fail to deliver results, we tend to earn that right and generate more revenue than we did previously, but by then, it's almost moot.  So while I agree that content owners should also risk something -- that only applies if and when the content owner also has the right to sell ads against the content.  If they don't have that right, it's really moot.

Premium Content Will Drive Video Advertising Growth

Exacerbating matters is the role that premium content owners will have to play if online video is to grow.  Let's refer to our content pyramid where made-for-web premium content owners sit in between super premium content owners in traditional media (on top) and UGC (at the bottom).

At the bottom end of the content scale: UGC will continue to fail to win over marketers; at the top end, super premium content owners will lack the economic incentive to publish and distribute aggressively online.  Since advertisers tend to run ads next to content (and not applications) and most of the content online will be made for Web, then premium content owners need to realize that always giving away their content will only hurt them over time, especially considering the cyclical nature of the advertising market.  This is not to say that revenue share deals are bad business practices, au contraire, all content owners need to be positioned to share in the upside.  My recommendation is that content owners should generally try to protect themselves against downside protection too.

History Repeats Itself:  Who Should Pay?

For the record, I am not saying that all advertisers should prepay all content owners all the time.  Nor am I saying that all distributors should prepay all content owners all the time.  Heck, I don't even think we should always get prepaid from a distributor.  Clearly, it's case by case and leverage comes into play. 

But if we want more than re-packaged television programming or marketer-financed content (which tend to be too promotional in nature) then we need to understand that that will require more win-win business terms than what we're passing off as standard.

Not All Content is Worth Paying For

I am also not saying that all content is worth paying for.  After all, print executives are trying to get consumers to pay for their content.  That won't happen with enough scale to make a dent into the reality that consumers generally shun paying for commoditized content such as news, weather, stock information etc. 

However, we have seen that consumers might pay for some forms of content (sports, super premium content, etc.)   We have also seen media companies pay content owners for rights to content, be it on an exclusive or non-exclusive basis.  That is the way premium and super premium rights holder should think before they give away their content for free.

Spiraling Down Towards a Vicious Downward Spiral

When you look at AOL or Demand Media's strategy, they are clearly out to drive down the price of production.  At some price point, low enough is good enough (when it comes to cost); video content has to boil down to quality, but quality content requires money.

The Role of Ad Networks

Ad Networks have a unique role they ought to play.  For one, ad networks historically lack any defensibility.  Publishers tend to ignore them all or work with all of them.

Revisiting our content pyramid:

-      Super premium rights holder won't need ad networks. 

-      Ad networks won't touch pirated or UGC,

-      So they should back premium content owners.

This will give them higher quality video programming, which will present a premium relative to most of the inventory they represent.

What About Google?

Some will argue that Google gave away its product and built a $200 billion company via revenue share.  That worked for Google and in the zero-sum search engine industry where by giving away the technology Google undercut competitors and created a monopoly.  Content is not a zero sum game.  When our competitor gives away their content to an aggregator, it doesn't fully meet the aggregator's demand and it surely doesn't stop the aggregator from paying us the MGs.  All it does is make the competitor's offering seem worth less.  That actually plays to our advantage in the short term but in the long term makes online video become the equivalent of radio.  Not that there's anything wrong with that, but as we said, the real money is in television and that is the market whose best practices we should be emulating.

6 comments about "Why Online Video Fails To Meet Its Lofty Expectations".
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  1. Jonathan Mirow from BroadbandVideo, Inc., April 21, 2010 at 4:40 p.m.

    Nothing personal, but these are the observations I would expect from a guy who is part of WatchMojo. Now, don't get me wrong, WatchMojo is a class act - the problem is that it looks and smells just like broadcast TV which is why nobody cares. Encoding TV (or TV-like) content is a serious non-event on the web. Why? Because you can watch it on TV - which is a better overall viewing experience / environment (don't start harping on AppleTV or whatever). The thing that internet broadcasting gives us is the ability to a) be niche b) be interactive c) engage the audience in a manner that broadcast cannot AND present content that broadcasters won't touch - until webcasters embrace those concepts we'll just be left trying to monetize "How to Choose a Prom Dress" (seriously?). Cheers.

  2. Richard Monihan, April 21, 2010 at 4:50 p.m.

    Excellent commentary.
    But the REAL reason online video hasn't lived up to its potential has more to do with advertisers and advertising agencies, NOT the poor content quality or nature of how content is distributed.

    Fact is, agencies are still stuck on "REACH" as a valuation tool for online purchasing. The concept that REACH is meaningful online has some validity, but only in a very limited sense.

    Reach is great for TV. Why? Because when you run a :30 commercial, it hits hundreds of thousands, even millions, of eyeballs all at once. You are getting TRUE REACH - lots of people seeing your commercial.

    Online could have reach. If you buy YouTube, you could potentially "reach" all the millions of eyeballs who view various YouTube content. In reality, if you watch the behavior of online video viewers, the likelyhood of this is slim.
    Reach, as means of guiding online purchasing, is a blunt tool and almost irrelevant. Why? Because online users focus on engagement and environment. I can watch a particular video I like on several sites - but only 2 or 3 have the "reach" which agencies crave. Based on the number of video outlet sites, and the nature of online viewing habits, chances are those large sites aren't the right environment the agencies should be seeking. The COULD be - but using reach to determine this is absurd.

    More importantly, agencies should realize that online video viewing is driven by desire and comfort, whereas TV viewing is more passive. Online viewers expect to have 1 or 2 commercials....but these commercials should fit within the environment which is being utilized.
    A sports themed ad may work well on ESPN video, but not on Yahoo! As a result, the money spent on Yahoo! (due to greater reach) may be less effective.

    Sometimes, when it comes to online video, the niche sites may be the ones with value - particularly when it comes to content. It is not uncommon (and I've seen this) for advertisers using reach as their driving motivation to place a video game budget on a huge site geared toward teens. What they didn't account for was that the site was primarily teen girls, while the game was geared toward boys. Sounds odd, but I have seen this more than once. The reason? Reach, pure and simple.

    Advertisers should recognize that the value of online video is environment and engagement - and move away from reach. Seek out sites that MAKE SENSE for the ads in question. Online video ad viewing can be MUCH MORE EFFECTIVE than TV ad viewing if the right decisions are made, and the right amount of money put against those decisions.

    $1,000,000 spent on a Madden video game on ESPN at a $26.00 M18-49 CPM (a made up figure) can be less effective than $500,000 spent on a good sports or gaming activity site reaching roughly the same demographic for $15.00. Why?
    1. 100% SOV with online, versus running against 11 other advertisers per half hour on ESPN
    2. Engagement levels online are much higher - you may get many more pure eyeballs with TV, but they are passive and uncaring
    3. Environment is correct - you've hit the key demographic where they live and breathe, and mainlined the message to them.

    When some of these decision making factors begin being utilized, we'll see video budgets rise significantly.

  3. Ashkan Karbasfrooshan from watchmojo.com, April 21, 2010 at 4:53 p.m.

    hey Jonathan,

    First off thanks for the kind words re: class act and the overall feedback, which is interesting.

    Honestly, I used to think that "nobody cares" about television content but I think that is "us" (online video pros) being a bit delusional and misrepresenting the preferences of the overall population. In fact, "Time Warner, Disney, Viacom-CBS, Comcast-NBC Universal, Fox control 85% of video-viewing hours in America". Is that a coincidence? Nope.

    At WatchMojo, indeed, we don't strive to create scripted entertainment or episodic web series that we pretend/hope will kill television or Hollywood. I personally do not think that anything will match the quality of the best super-premium content coming from traditional media, and part of that is the refusal to really support made-for-web premium content with minimum guarantees or upfronts (that is the core message of the article, btw).

    What WatchMojo strives to do is take a) newspaper or magazine content and adapt it to video form OR b) take television content and present it in a format that works online. We do so NOT by striving for the lowest common denominator, we do that by emulating the best practices of television, so that our travel videos look like something you might see on the Travel Channel, our How to videos look like something you would see on the DYI channel, etc. So to some extent, your description is correct, but your conclusion that no one cares about that is probably not representative of facts. We streamed 3M videos / month last year, we now do 10M. Obviously someone cares. Rather, millions care.

    As per the "How to Choose a Prom Dress" video, that is 1 video out of 5,600 in our catalog, and while it might not be my cup of tea (or yours), there are a lot of people out there who care about that (along with marketers who do too) so yes, WatchMojo is NOT interested in producing self-indulgent content that we care about but no one else does, we produce the best made for web premium content that users have proven interested in, distributors generally value enough to pay for and marketers respect enough to advertise alongside of.

    If that makes us a class act, then I can live that characterization.

  4. Nelson Yuen from Stereotypical Mid Sized Services Corp., April 22, 2010 at 9:42 a.m.

    Completely agree with Jonathan. I question the metrics and valuation of broadcast overall.

    Case in point - Monihan's comment. What exactly is "REACH." Is this elusive metric more valuable than relevancy and engagement? Because those things you can measure online.

  5. Dave Mcilroy from PlayFullScreen, April 22, 2010 at 4:09 p.m.

    I echo the sentiments that measuring online video against TV, Radio and Print misses the mark. For many; the default position is has been “it looks like TV therefore we must measure and model it like TV”. Online video is its own animal and as stated in Jonathan's comment is niche. Narrowcast, might be an applicable term only it again implies a TV-like paradigm. So as not to be myopic, I prefer to think of online video as being a visual version of information dissemination. The information might be entertaining or dry but first and foremost it is just information. For example: one might tweet that a goal was scored in a sporting event; that is information. Seeing the goal scored is the visual equivalent of the same information. It is just packaged differently. Some information being disseminated has a very narrow interest, it is therefore highly targeted. The disconnect occurs when advertising science or more appropriately hubris tries pigeon hole online video and the audience which uses it. It cannot be simply qualified by traditional means or measurement, so it gets dismissed. When compared to traditional ad. revenues, yes it pales in comparison today. But when the ad community begins to realize that the new paradigm is micro and infinitesimally small when compared to the traditional shot gun approach, we will see aggregation models like Google Adwords become the new way of marketing in and around online video. Highly targeted audiences and engagement is what IP based media can deliver like no other. The problem facing the traditional media delivery industry is that they no longer understand or relate to their audience. This is why the success of online video advertising will come from outside TV and Cable networks and will leave Madison Ave asking why they had not thought of it. I predict The Nerds will triumph once again while the traditional TV industry continues to witness the erosion of audience and ad dollars just as the former music industry has. It is no longer possible to tell the market what it wants, the market tells us. Therefore the only solution is to provide the market with everything in all media forms and see what sticks. Only online video can accomplish this visual omnipotence. In my opinion I don’t see the marketplace becoming more voracious readers so video will be *the* way information is conveyed.

  6. Kyle Lake from Done In Sixty Seconds, LLC, April 23, 2010 at 6:14 p.m.

    Good article and good conversation all around. Definitely agree with the viewpoint that placement is key. We produce content for both television and web and each is used differently by the agencies. Web still seems to be more geared toward providing information where as TV is still about "selling something" so whether or not you have good content (which I'd recommend!) if its not in front of the right audience who cares. This also explains the appearance of more demographic specific video sites such as streetfire or howcast.
    http://www.donein60.com "An Online Video Creation Tool"

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