Video 2.0’s Blossoming Impact on Advertising

If the 2006 online video market was still in the traffic-building stage, 2007 marked the beginning of the monetization stage.

This new media platform engages a prime audience group for marketers. Online publishers and their technology partners large and small were pressed hard in the last few years by these marketers for quality ad inventory, flexible and accurate ad serving technologies, and efficient ad campaign management tools. These demands were gradually being fulfilled in 2007. Most online video destinations revamped their Web sites and recategorized video in a more coherent way that makes it convenient for viewers to discover content (e.g. click ranking) and for advertisers to target ads for specific audience groups (e.g. grouping content by channel).

Most have also added search functions or text tags, tools benefiting users as well as advertisers. YouTube began to offer embedded ads in the second half of 2007; Facebook announced its own ad model in November.

Another prominent trend is that many broadcasters, even broadband service providers, have revisited their online portal strategies and decided to follow the trend by adding premium video content to their Web sites. Those who produce original shows become more active in content syndication deals, with various distribution outlets either as streaming online or PC download. These premium online destinations, along with other top-rated Web portals like Yahoo, MSN and AOL, provide high-quality ad inventory as demanded by advertisers.

Improved Liquidity

Online video gives brand advertisers a better venue in which to engage consumers than do display or search. As a result, more advertising budget that was allocated to brand advertising has started to flow to the Web as online video inventory increases. Although Web portals like Yahoo, MSN and AOL provide the breadth of content and diversity of audience, brand advertisers also need the audience depth to target consumer cohorts of certain product categories.

Many endemic sites are therefore gaining popularity among brand advertisers. In practice, advertisers buy both types of inventories to balance breadth and depth of audience reach. To reduce potential ad dollar loss to these emerging endemic sites, Web portals have sharpened their focus by boosting content offerings to their flagship categories while making opportunistic acquisitions of endemic sites that complement their under-performing categories.

Finally, thanks to the industry’s efforts to standardize ad formats, ad buying and selling has become more efficient. While many premium ads are sold long before they are due, online publishers and ad networks also own less-sellable ad inventories that are undervalued due to poor liquidity.

In recent years, ad exchanges emerged to address this issue. Acting like a trading floor in which brokers match buyers and sellers to earn commissions, these ad exchanges aggregate ad inventories from numerous online properties and auction them out to the highest bidder or broker large-volume purchases on behalf of buyers. By injecting liquidity into these normally penny-worth inventories, these ad exchanges can boost their value by finding them the willing buyers.

This eBay-like model has proven so effective that between 2005 and 2007, more than a dozen large ad exchanges emerged. The online video ad market — especially the long-tail end of the market — will benefit greatly from the improved liquidity through ad exchanges. The exchange model is so complementary to large ad networks that some exchanges eventually ended up in the hands of companies like Yahoo, AOL and Google.

Challenges Remain

Impressive growth aside, several challenges are holding the industry back, including the shortage of creative online video ads, lack of standard measurement metrics and viewer tracking methodology, lack of ad agencies with experience in broadband video ads, and the relatively small broadband video audience compared to the audience for TV.

From consumers’ perspective, online video services have been gaining traction over the past year. From 2006 to 2007, the percentage of broadband households that watch online video at least once per month increased from 31 percent to 48 percent. Individual viewer habits vary by age. Of online video watchers, those age 45 and older are most likely to watch short video clips such as news, sports highlights, etc. Younger audiences in the age range of 25 to 34 are most likely to view full-length programs, such as a TV show.

As consumers are shifting media consumption platforms from traditional linear ones to more interactive ones, advertisers must follow. Developing these new entertainment platforms with an ad-supported business model requires not only delivering compelling content but also sending the right message to the right person at the right moment and reporting back to advertisers with convincing and reliable engagement metrics.

Harry Wang is a research analyst at Parks Associates.

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