• by Ashkan Karbasfrooshan , Op-Ed Contributor, March 18, 2013

According to eMarketer, online-video advertising spending is expected to top $4.1 billion this year, up 41% from 2012.  (This and all the following stats were first cited in a Wall Street Journal piece by Suzanne Vranica.) Any way you look at it, that's a healthy growth rate -- any way, of course, except the following: 

Never Catch a Falling Sword

Ad rates are actually falling, according to ad network/exchange Brightroll, which estimates that prices for ads on top-tier sites fell by 10% to 15%, to $15 to $20 CPM from 2011, when average CPMs were roughly $17 to $25.

Part of the reason for this drop in rates is the massive increase in ad inventory: “Of the 39 billion content videos viewed on the Web in December 2012, about 23% carried video ads, up from just 14% a year earlier, according to comScore,” writes Vranica.

While ad dollars will continue to flow online and to Web video from both television and display advertising spend, the reality is that there’s absolutely no stopping the much-faster growth in inventory.

Too Many Mouths to Feed

Television ad revenue is controlled by a relative few fortunate companies -- Kantar Media calculates that roughly 21 media companies divvied up the $54 billion spent on national TV ads last year. Meanwhile, online there are way too many mouths to feed: more than 217 different companies (including publishers and video ad networks) sold at least one million video ads in 2012, according to comScore.  The actual number is likely much more -- if you could be the 218th company on that list, does it really matter? 

After all, audiences are so fragmented online that listing on comScore is no guarantee to secure the limited number of ad campaigns.  If online video has demonstrated anything, it's that those with the brands and premium content usually don't have the scale. 

Wishful Thinking and Unbridled Optimistic, Meet Strategy and Execution

The big name publishers are holding out and hoping that over time, their brands and programming will tip the scales. For example:

Todd Haskell, group vice president of advertising for the New York Times told The Wall Street Journal’s Vranica:  "Publishers that are offering a differentiated reader experience and high quality content can avoid the downward commoditized price positioning."

Also quoted in the same piece, Dawn Ostroff, president of Condé Nast's entertainment division said,  "Ultimately, the dollars will have to come from television. Will it come from television tomorrow, I don't know."

My guess is that while both Condé Nast and the Times have unparalleled quality content and brand equity, neither will be in a position to generate much online video advertising because they will never generate a meaningful volume of streams.

My company has been profitable for over 18 months largely because we didn't chase online advertising revenue at any cost.  That's not bragging, it's reflecting an industry reality that you have to choose between revenue growth and profitability due to fragmentation, declining rates, fill rate and discrepancies, global audiences not monetizing equally in all regions, etc.

How About We Ask Marketers What They Think

While everyone is hoping that ad rates will somehow defy gravity and tilt upwards, marketers believe that despite the benefits of targeting, online ad prices are still too steep and simply don't "reflect the reality of a fragmented and unwieldy marketplace with a surplus of inventory," according to Gail Tifford, UnileverPLC's senior director of media for North America.

Ultimately, as eMarketer principal analyst David Hallerman points out: "brands that advertise on TV want professionally created content and that isn't shifting."  (Again, quotes come from the WSJ piece.)

Granted, while some companies like Reckitt Benckiser are shifting some 30% of their TV ad spend to online video, (stats according to the WSJ piece), cynics would argue that there's a real ceiling to how much marketers can in aggregate shift to online video.  And no one is a bigger cynic than Web entrepreneur Dave Morgan, who argues that "97% of all video viewing in the U.S. still occurs on TV,” but “only 20% of Americans consume 80% or more of all web video viewed - and, ironically, that 20% are heavy TV viewers too."

Morgan's bearishness naturally spills onto the prospects of online video startups: "Reaching 20% out of 2% - the amount of quality digital video media relative to TV” does not equal “a greater business."

The Silver Lining

The fact is that if you are trying to build a television-style business online, you will fail.  If, however, you leverage the Web's inherent advantages and try to build a profitable business that happens to be a media or publishing business that is supported by advertising, then you can do so successfully.