• by Erick Hachenburg , January 5, 2011

In this season of reflection and predictions, the online video industry continues to be a trending topic. Among the top digital media stories in recent weeks have been news of multiple mergers between leading video ad networks -- and speculation of additional tie-ups to come. Part of the driving force here, of course, is the simple fact that YouTube already reigns as the top video ad network and in 2011 will expand its ad products, targeting capabilities and ad exchange, forcing continuing consolidation among the other video ad networks.

YouTube delivers more reach than any of the ad networks, offers the same quality of video content, and is investing the resources to develop tools to support advertisers looking for mass audiences and commodity content. Ad networks will have no alternative than to consolidate to compete with YouTube.

But consolidation among video ad networks is only the first step; the next phase will center on the increasing importance of content verticalization. In 2011, expect to see consolidation among video content companies, especially among destination sites that attract meaningful audiences by focusing on a specific content category. The focus on building out vertical content offerings in online video will mirror what we've seen in the cable TV industry over the past several years.

The consolidation will happen in two ways: 1) the aggregation of properties within a content category; and 2) the aggregation of properties across content categories. Viacom is a model for both forms of aggregation: Within the music vertical, Viacom has aggregated multiple properties including MTV, VH1 and CMT. Beyond the music vertical, Viacom has expanded its audience and influence by growing across content categories: Comedy Central, Nickelodeon, Spike TV, TV Land and more.

A similar evolution is taking hold as the online video industry continues its rapid growth. In the same way that cable properties outmaneuvered the broadcast TV networks, online video properties are poised to take on YouTube and Hulu. YouTube and Hulu are known for their programming-for-the-masses approaches: serving all audiences and all types of content without a focus on any one of them in particular. The up-and-coming online video properties are focused on content or audience verticals and will deliver more value by being more nimble companies that super-serve particular audiences through a dedicated focus on one particular content category.

Consumers demand quality and authenticity in entertainment content. And cable networks -- or online video sites -- that focus on a particular type of content simply do it better. This focus results in an engaged audience, which in turn helps those more focused properties deliver more value to marketers seeking to leverage meaningful relationships with consumers and closer association with differentiated premium content. Scaling this audience and revenue by teaming up with other top properties focused on the same content category is the natural next step, followed by expanding into complementary content categories that grow the existing audience even more and bring in new demographic groups - and new advertisers.

We're already seeing early signs of success among online video sites that are taking a more cable-like approach to defining new entertainment experiences for consumers and marketing opportunities for brand advertisers. And this trend will be one of the top digital media stories of 2011 -- with headlines of consolidation among video content companies at the forefront.