• by Scott Meyer , February 22, 2007

Can online video live up to the hype?

In many ways, 2006 was the year when online video finally hit fast-forward. The tremendous use of popular sites, such as YouTube and iTunes, made the industry take notice of video's potential to help advertisers reach audiences and possibly provide publishers with a meaningful new revenue stream.

While the forecasted growth is large on a percentage basis, the total spend is still comparatively small. According to eMarketer, by 2010, online video advertising will be roughly $3 billion, less than 10 percent of total online ad spending. It's a lot of money, but small compared to the $25.2 billion that will be spent on online advertising overall by 2010 - and just a fraction of today's TV/cable advertising spend, which Marketer estimates at $77.9 billion.

While there's little doubt that the outlook for online video is optimistic, it's time to think realistically about whether it can live up to the hype. The short answer is yes, but only if two things happen. First, the gap between the time consumers spend online and the share of media spent on each of these users needs to close. Second, publishers and marketers need to create the right content, advertising formats, and measurements. If this happens, the opportunity for monetizing online video could be bigger than we think.

The adoption of online video by consumers is real. Almost 40 percent of the U.S. online population viewed Web video at least once a month during 2006, eMarketer reports. However, total advertising spend per user is not keeping pace, with just 2.6 percent of total Internet advertising last year going to online video.

User-generated video is growing exponentially. As recently as last spring, according to the OPA, consumers downloaded news and current event videos more often, this lead is likely temporary.

However, for user-generated video to become a real business, the industry needs to overcome copyright infringement issues. Until then, shortage of quality, copyrighted video for the pre-roll business will continue.

It also won't be long until the leader in this part of the space - Google and YouTube - figures out how to monetize the longest parts of the video content tail. In the meantime, consumers will want Web video to provide them with a different experience from what they already get from TV.

Commensurate with the lack of clarity for what type of content works best, the exact methods for capturing user engagement still aren't clear. But, advertisers need to accelerate looking beyond pre-roll and testing different types of ad placements in order to maximize revenue from videos. The experts that I speak with emphasize that ultimately all online video advertising spend will have to tie back to a CPM to make for some type of common denominator among television and regular Internet display advertising. But, simply translating broadcast CPMs for 15- and 30-second TV spots to a cost-per-download, isn't the solution. Publishers, agencies, and marketers need to keep experimenting with various models.

My personal belief is that some form of a session-based concept will work best, an idea I first heard from Adam Gerber of Brightcove (disclosure: The NYTCo. is a minority investor in Brightcove). As in-page video players become the norm, combining the pre-roll, display, CPC, and other placements into a single session, CPM probably holds the most promise. Some form of pre- or post-roll may also do the trick. Or, as will most likely happen, some totally new type of placement and measurement will win the day.

So, how far away is this next stage in the maturation of online video? My bet is closer than you think. Unlike the start of the Internet advertising business in the late '90s, today's growth in online video advertising is driven by blue-chip advertisers, working with established publishers and distributors. Once these same experienced folks are able to put the right content together with the right ad formats, the forecasts of $3 billion by 2010 will seem small.