• by Dave Morgan , Featured Contributor, May 26, 2006

Online advertising is hot. So hot in fact, that pundits lately have increased projections for the potential size of the online ad market, some now predicting that U.S. online ad expenditures could hit $35-50 billion by the end of this decade, up from $12.5 billion last year, according to IAB/PWC.

How could that be? Is it even possible? Even if advertisers wanted to spend that much money online, where could they put it? Is there likely to be enough quality inventory for all of those ads? This has been a topic of debate ever since the online ad market began its resurgence two year ago.

While the demand for online advertising is growing fast, the supply of quality online ad inventory has been lagging. The key word here is "quality." Online ad spend is growing at more than 30 percent per year, but most Web sites have audience and page view growth rates that are closer to 10 percent to 20 percent per year. The latter is not keeping pace with the former. Since much of the online ad growth is from traditional brand advertisers, the explosion of new inventory from social networks, where the content is riskier, has not helped much. The shortage of enough high quality and easily accessible inventory is already starting to drive up pricing, which undercuts some of the economic advantages of online versus offline mass media. Tight inventory and higher prices are forcing advertisers to make buys on more sites and on smaller sites, which makes both their buys and their lives much more complex and much less satisfying.

So, while it may be easy to predict that the demand for online advertising could take on television-like scale in a few years, pragmatism tells us that it is just not possible. Pragmatism tells us that it will take many more years for online media to create the maturity and scale and buying simplicity necessary to easily absorb that kind of demand.

Is that our future? Are we destined to live in a supply-constrained marketplace?

While normally quite persuaded by pragmatic arguments, I am not convinced here. As challenging as it may be for the online ad market to absorb tens of billions of dollars in new expenditures each year, I am confident that it can and will. How? It's simple. Video.

The emergence of web-based video advertising, and the "sight, sound and motion" that it brings will give the online ad market the scale that it needs.

Am I drinking too much of the broadband Kool-Aid? Maybe, but consider my reasons.

Built-in Buyers.Video advertising is easier for traditional advertisers to buy. There are lots of them, and they already know and love video advertising. They buy billions of dollars of it on television every year. With Web video, they can finally find something about the Internet that they understand and feel comfortable with. And, given the challenges that the television folks are having in keeping their audiences, online offers just the balance they need.

Self-Evident Value. Ad agencies and their clients already know that sight, sound and motion can drive powerful branding. They don't need a pre- and post-campaign branding study to know that it works. The ability for video advertising to brand is self-evident to them.

More Yield.Video advertising has more impact and commands much higher pricing per unit, per page, and per person than more traditional online banners or simpler rich media. This means more money for less inventory. Imagine a world where most ad-supported Web sites have dumped their three of four banners in favor of one major video unit. This alone could dramatically extend the top-end scalability of the medium. Changing over to better units with higher CPMs means lots of revenue growth on the existing audience, and doesn't require more traffic growth.

IPTV. Internet Protocol Television (IPTV) is coming fast. Cable systems all across the country are upgrading to digital and all of the suppliers are pushing Internet-enabling. Cisco now owns Scientific Atlanta, the country's largest supplier of TV set-top boxes, and Lynksis, the country's largest supplier of WI-Fi devices in the home. The new TiVo is networked, as are Xbox and all of the new video game consoles. With all of that hardware moving into U.S. homes by the tens of millions, we can be certain that IP-enabled television will hit critical mass in the U.S. faster than most people think,

The online ad industry can scale this market, and video will be a big part of it. It can absorb more spend. Sight, sound and motion can engage consumers better than static or basic rich media banners can. This will justify much higher pricing than we see today. It is already a staple on the home page of NYTimes.com. The rest of the next can't be far behind.