Online video is one of the fastest growing categories in online advertising. But how does the industry work? How big will it get? This special report will seek to address the following points:
- Why online video is hitting a tipping point and is poised to become a large market.
- How the value chain in the industry breaks down; who the big players are, what they do, what the ad formats are.
- Our forecast for online video advertising, to hit almost $9 billion by 2016.
Online Video: A Primer
Online video has been prophesied to be a huge market since the 1990s. Is this time different? We think so.
One metric, viewer engagement, reached a tipping point last year. According to comScore, average daily uniques rose 43 per cent, videos viewed were up 45 per cent, and videos per viewer jumped 37 per cent (see chart to the right). According to the latest comScore stats, last month 181 million Americans watched 37 billion online videos and 8 billion video ads.
The reasons behind the growth are pretty straightforward. High speed broadband, necessary to support streaming video, is pretty much pervasive in the U.S. now. Tablets and, to a lesser extent, smartphones have also increased the reach of online video; you no longer have to be chained to a computer to access YouTube or Hulu. Video plays on non-desktop devices almost doubled in the fourth quarter of 2011, according to Ooyala’s Video Index Report.
There are three types of ads associated with online video:
- Pre-roll: Video ads shown before a video, widely considered ineffective because consumers typically view them as a nuisance
- Mid-roll: Video ads shown in the middle of a video, more effective because you have an engaged audience
- Overlay (Banner Display): Can accompany a video ad or stand alone, usually occupy the bottom third of the video
Importantly, these standards have mostly solidified, after years of experimentation. Once more or less standard ad units are in place, it means the business can scale because advertisers can buy a known commodity.
But how does the world of online video actually operate? There are two key types of players:
- Infrastructure, and
- what we call “Internet TV networks”, i.e. companies who want to be destinations for consumers thanks to their content.
Everyone knows YouTube and Hulu, but there is a huge ecosystem beyond the streaming giants that help power online videos and the ads that support them. Crucial to this broader infrastructure are video publishing platforms, like Brightcove and Ooyala.
These platforms manage, upload, and deliver videos for large corporate and media clients, such as ESPN, the New York Times, or GM. If you have ever watched a highlight of your favourite team at ESPN.com, you have unwittingly used Ooyala’s technology.
They provide holistic video hosting and publishing solutions for their clients, from uploading the video to monetization. The platforms help brands monetise by integrating their technology with video ad networks. In other words, it requires minimal heavy lifting on behalf of the publisher to sell their ad inventory. While most brands monetise videos through ads, some also use paywalls.
Publishing platforms also provide their customers with deep analytics to improve viewer engagement and, subsequently, ad revenue. For example, Ooyala’s technology personalizes recommendations for what to watch next after a video has ended, which they say can improve viewer engagement four-fold.
The online video ad ecosystem is fairly similar to the online ad market. Ad networks connect publishers and advertisers and ad exchanges facilitate the purchase of ad inventory. It is important to recognise, however, that despite the proliferation of online video, much of the infrastructure is outsourced and not as simple as uploading a YouTube video.
Internet Television Networks
The three major players in online video—YouTube, Hulu, and Netflix—have different backgrounds and business models, but share a common goal: to become the next-generation web-based television network.Recently, companies like Yahoo and Google held online video ad-sales presentations similar to the upfront events television networks hold for advertisers before the fall season.
While YouTube is popularly derided as the place for cat videos, it is attempting to transform itself into something more television-like. The website underwent a major redesign in December that emphasised channels with professionally produced content while de-emphasising trending viral videos. Users are encouraged to subscribe to channels, not unlike cable, which then create a steam of videos for you to watch on the landing page, not unlike Twitter or Facebook’s News Feed.
The reason, of course, is money. Viral videos are unpredictable, fleeting, and, like lot of user-generated content, not necessarily ad-friendly. Professionally produced content, or content curated around a specific theme. is more predictable and an easier sell for advertisers. It’s too early to tell if its a success, but the percentage of days with tandem masthead or expandable ads, YouTube’s big ticket ad product, ticked up substantially year-over-year in the first quarter (see chart above). Furthermore, user engagement in March was up 60 per cent from a year prior and subscriptions are up 50 per cent, although that is not necessarily indicative of the redesign’s success (some of it is due to natural growth).Hulu and Netflix, on the other hand, are taking a different tack. Both owe their success to licensing other people’s content, but came to recognise that it isn’t a long-term sustainable solution by itself. Content owners can theoretically pull the rug out on them whenever they want. Consequently, both of them are now developing their own original programming. Netflix has released its first series, Lilyhammer, and has several more in the works. Likewise, Hulu launched its first series last year and a second in February, and has a documentary series in the works.
However, there is one key difference. Netflix has a subscription business model; it is trying to become the next HBO (click here to read our note about that effort). Meanwhile Hulu, though it has a premium subscription option, relies on advertising to generate the majority of its revenues like a conventional TV network.
The Future Of The Online Video Ad Market
According to an aggregation of stats from the Interactive Advertising Bureau, comScore, and eMarketer, U.S. online video ad revenues jumped from $324 million in 2006 to just over $2 billion in 2011, a five year CAGR of 44 per cent.We are forecasting that U.S. online video ad revenues will grow to $9.0 billion by 2016, a five year CAGR of 35 per cent.
Our forecast is underpinned by two keep assumptions:
- Video ad technologies keep improving
- There is a continued migration towards longer-form, higher quality content.
Ad technologies are starting to catch up with engagement. According to a report by video ad firm FreeWheel, ad volume growth in now outpacing videos viewed; video viewing grew 47 per cent, but ads viewed was up 49 per cent.
Furthermore, Google recently introduced AdWords for Video, which should accelerate the monetization of YouTube, which has by far the largest inventory in the industry. Companies can now seamlessly integrate video campaigns with the search and digital campaigns they are already running on AdWords.
The industry will also benefit as viewers continue to shift towards consuming longer-form content. Unsurprisingly, viewers watch longer videos (ie movies and TV shows) on tablets and connected TVs, but the length of “time watched per play” is up across all devices, according to Ooyala’s Video Index Report.As a result, mid-roll ads, usually reserved for longer content, grew 146 per cent last year, according to FreeWheel. Pre-roll ads, which are generally used for shorter videos, grew 35 per cent.
Finally, it is important to remember that the fate of video advertising is directly related to content production. Similar to broadcast TV, there is a finite amount of ad inventory, albeit much larger. However, unlike broadcast TV, online video is not constrained by the amount of time in the day or the number of channels available. Ad inventory ultimately hinges on content production. However, Given the momentous shift to online video consumption that has been taking place, and will only accelerate with continued growth of internet connected mobile devices, we believe content producers will adapt and this will not hinder the market’s continued growth.
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