YouTube's $&@%'n Biden Moment

Way back in March, 2010 when the Affordable Care Act was set to become law (and not just the beginning of an unsuccessful IT project), Vice President Joe Biden uttered specific words to President Obama regarding just how big a deal it was. Epochal changes warrant amplified language to appropriately characterize the scale of those changes, and Biden's words, profane as they may have been, were in some ways appropriate. We can only imagine if the Vice President were employed by YouTube or Nielsen he may have said the same thing when news broke regarding YouTube allowing tags from Nielsen's Online Campaign Ratings (OCR) service.

OCR is important to this sector because it provides nationally-oriented or global advertisers with metrics that are generally comparable (if not perfectly matched) with those used to buy traditional national TV advertising from broadcast networks, cable networks and syndicators. Nielsen remains the unquestioned standard for audience measurement in this field with its National TV Ratings (NTR) panel, used for measuring TV ratings and commercial viewing. OCR provides GRPs, reach and frequency for consumers' online media consumption against demographic target groups which are categorized in a manner which is generally comparable to those used in the television sphere. Until last week, one of the key factors limiting the acceptance (or at least commercial scale) of OCR has been that one of the largest sources of online video inventory - Google's YouTube - refused to accept OCR tags with ads, significantly limiting the efforts of advertisers who wanted to work towards holistic measurement of video across the web using Nielsen's products.

Whether because Google did not wish to empower a third party as big as Nielsen via its platform, or because they did not want to risk providing data around its video properties to Nielsen's partner and underlying source of OCR data, Facebook, or because Google wanted time to develop its own measurement service, there were clear consequences for a broad range of industry participants that followed from their position.

For starters, comScore held an advantage over Nielsen as tags associated with their competing measurement service vCE (Validated Campaign Essentials) were allowed on YouTube. Beyond pricing or other deal terms, many large agencies and advertisers chose to use vCE because it worked on YouTube and also because vCE could better capture viewing activity across a broader array of video-based digital media as a result. We believe that at the individual media agency level Google left as much as tens of millions of dollars in annual media budgets were "on the table" with their previous position. This collectively might mean hundreds of millions of dollars that could have gone to Google's YouTube haven't been making their way to date. Advertisers who embraced OCR were effectively indicating they only wanted to buy properties which could eventually support consistent measurement across screens (meaning a service that would be consistent with Nielsen's NTR television ratings panel) and those advertisers may have been selective in spending money with YouTube over the past few years.

So the news that Google will in fact allow OCR beginning in the first quarter of next year will probably accelerate YouTube's growth. We estimate YouTube generated perhaps 40% of the $3bn in online video ad revenue we think the industry will account for this year, not including the display revenue it generates. It will also help Nielsen improve the value of OCR and weaken one of comScore's primary advantages. It might also cause a shift of budgets away from video ad networks including Tremor Video, YuMe and properties owned by AOL, as these sources of online video inventory were likely among the beneficiaries of money that Google essentially turned away. Of course, there are still many reasons for advertisers who are customers of Tremor, YuMe and AOL to continue buying the products these companies offer, whether because of good prices, good sales efforts or unique product attributes. By evolving their products, they may also be able to expand the total market faster than might otherwise be the case. And other measurement services and approaches will also likely live on. For example, comScore's more robust mobile measurement capabilities and integrated digital measurement will continue to be an advantage for them in their sales efforts for many advertisers; many publishers will also find advantage in providing supplementary metrics from other third parties which run parallel to Nielsen's, but which allow for more depth in a particular field of measurement. However, the competitive intensity each of these companies now face is likely amplified as the potential of Nielsen and Google is more fully realized.

OCR on YouTube is a big deal for online video at a strategic level because it removes a pretty significant barrier (albeit not the only one) preventing the flow of most traditional TV budgets onto different platforms where inventory is not associated with a traditional TV network. It is notable that while a "gate" has been opened, it's unlikely to be a floodgate for some time. OCR is unlikely to mean that budgets will flow directly from television onto the web at this time in any meaningful way, except if those budgets were already moving, as is the case when they are assigned to traditional TV inventory with online extensions. Thus, for now our expectation remains that YouTube will in the near-term benefit primarily from budgets which most directly flow from other suppliers of online video inventory and indirectly from other digital media budgets.

It's worth reviewing why we think this will be the case.

First, traditional TV budgets are generally allocated in order to optimize against cost and reach and frequency-based metrics for a given volume of desired gross ratings points (GRPs), with an intention of driving awareness of a brand's attributes, distinctions from another brand or some other characteristic, if there is even an intended marketing goal to begin with. Further, a brand will generally place a higher value on reaching an individual at least once rather than reaching the same people multiple times and leaving some individuals un-exposed. Thus reach is generally the more important (or at least scarcer, and thus more valuable) attribute of TV buying. Perhaps it goes without saying, but the self-selecting group of advertisers who dominate TV advertising (perhaps less than 200 account for around 60% of all TV and 90% of network TV) are particularly focused on these types of goals vs. other advertisers whose media goals will differ substantially.

With this starting point, these reach/frequency-centric advertisers start their budgeting process by finding the media which most efficiently (or which "least inefficiently") satisfies their objectives.

Because advertisers cannot cherry-pick individual impressions from traditional TV inventory, and neither can they choose to buy only individual programs (they must buy packages of programs from individual TV networks which include collectively guaranteed levels of GRPs over the life of a campaign), the most efficient budget allocation process will usually involve network TV inventory, as their packages of inventory will generally have the broadest reach vs. alternatives. This is because even in an era with lower aggregated viewing levels of network TV, virtually everyone still watches some network TV over a multi-week period. Given this relatively unique value, networks are well-positioned to insist that advertisers accept identical inventory that is delivered on different platforms, such as is delivered through online video players including Hulu (although happily for the networks, most advertisers and agencies willingly accept this convention).

Large advertisers then typically consider cable networks and nationally syndicated properties, where the primary objective is to round out reach and frequency goals while reducing a campaign's average cost per thousand (CPM) impressions. As with network TV, advertisers are generally willing to accept comparable online video inventory in their packages. It is worth noting that cable networks often receive press indicating that their agreements have been made ahead of network TV. Our view is that even under circumstances where agreements have been made with cable ahead of network, the buyers and sellers generally know where they will come out with their network volumes and pricing, and made their deals with cable networks accordingly.

As it stands now, we think that YouTube might be considered among third-tier cable networks for a TV buyer. Using the broader definition of the share of the population who consumes some Google-related video, as YouTube stands now it could rank somewhere among the top dozen-or-so networks. Our best estimate (we generally believe that comScore data overstates online video consumption while Nielsen data likely understates it) is that in terms of tonnage, YouTube consumption probably equates to the equivalent of 2% of total TV consumption. Despite these advantages, YouTube falls apart because the reach of its ad-supported properties is somewhat lacking today (per data from comScore for September 2013, that Google's video ad properties reached 36.4% of the population, it would rank as the 33rd widest reaching cable network (using reach data from Rentrak) just after National Geographic and before Bravo). Reach would certainly be higher among younger audiences, but then if we considered this metric against the share of "acceptable" inventory for an advertiser to juxtapose their brand with, the reach figure would likely be much lower. This is becausemost advertisers who buy traditional TV wish to avoid the proverbial cat-on-skateboard content that accounts for so much of YouTube's "programming" at present.

YouTube does have some properties that satisfies large brands' content interests, and so there will certainly be some advertisers willing to place modest "TV" budgets on YouTube because of their use of OCR. But for the most part, Google will need to invest substantially more on content than it does presently in order to be competitive. With programming spending in the low hundreds of millions of dollars at best, YouTube would need to multiply its budgets many times over in order to more fully compete with what is available to advertisers on traditional TV programming.

For now, the bulk of ad budgets that go to YouTube will continue to originate as budgets managed by digital buyers with media goals that are often different than the goals of traditional TV buying. Digital buyers tasked with a goal of brand "engagement" against a narrow audience looking at different digital media vehicles to satisfy this engagement-based goal will undoubtedly buy YouTube more now than they would have without OCR in the mix, as metrics will be somewhat comparable (if not fully integrated) with traditional TV-based video buying metrics. Presuming that buyer wants a "one-stop shop" for their online video buying needs will be positioned well to go to one media owner - Google - and potentially start the process of managing a campaign by buying YouTube before layering on additional sources of supply from stand-alone online video ad networks or other publishers. Of course, that same advertiser may also choose to buy video from an exchange or another source which can reach the bulk of the online population, but many advertisers will continue to prefer to work with media owners via direct sales channels, and for those advertisers YouTube will likely be a very efficient starting point.

But at some point it would seem likely that Google will be able to address many of the aforementioned issues which will still constrain TV budgets for the near future. Significant content investment would not seem much of a stretch for Google given Netflix' success with the first-run "TV" programs it has licensed. They may also find that they need to ensure that YouTube's separates more of its "quality" content and increases the reach of that quality content to greater number of consumers within individual countries.

All of these tactics will take several years to execute against and to make work well given the industry conventions which are likely to stay in place. Any new system needs participants who can evolve their offering in order for the new order to thrive, perhaps not unlike healthcare reform. But years from now, if YouTube is producing original content that is capturing real TV budgets and competing for at least a small share of a traditional TV network's ad revenues, last week was the one where an observer could point to, saying YouTube enabling Nielsen's OCR was a big $&@%'n deal.

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