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Online Video Advertising: What's Wrong With This Picture?
Online video is hotter than ever. So how come online video advertising success stories are so hard to find?

Over the past 12 months, I have produced two articles as part of my regular Hitchhiker’s Guide to Streaming Media series that looked at advertising and streaming. The first of these was closely focused on the technical options for the integration of various ad systems, campaign managers, and so on. The second article commented on the two fundamental ad models, sponsorship (or patronage) and “agency”, and how their respective successes compared.

The articles conflicted with each other—quite badly. The first, penned in early 2008, noted reports that claimed 2008 would be the year online advertising spending would surpass traditional TV spending. It went on to finish, “It’s hardly surprising that it is rapidly emerging as a multi-billion dollar industry.” In stark contrast, the second article, penned in late 2008, painted a different picture. These new technologies were not yielding any real revenues at that time, and old sponsorship models were actually the only effective ad-based revenue generators in the streaming sector.

This is concerning. Not least of all because there has been no clear, widespread acceptance of any viable pay-per-view or subscriber model (although many isolated models are working). Without some working revenue models based on these traditional schemes and in the absence of any clear new commerce model to finance the end user’s insatiable thirst for high-quality rich media, checks and balances must be regularly undertaken to ensure that the streaming ecosphere is sustainable and that investments will see returns.

The Situation

Let’s get some more pieces on the board:

• We know the ad sector is in a slump.

• We know internet video usage is up.

• We know the total market for streaming infrastructure and
services is probably worth about $800 million.

• We know competition in the distribution sector is fierce, and that keeps prices trending toward commoditisation.

• We see big successes in the sector, but most are fads such as
MP3.com, Napster, YouTube, and so on; their life cycles seem
short. YouTube may have the largest market share today, but it’s all sunk-cost for its wealthy parent, Google, which is still battling to convert the cost to revenue.

• The only companies posting profits are providing tools and
infrastructure to the content providers.

So if we want to invest some money into an interesting content project and we expect to see some returns, what are the options?
The logical options seem to be those included in the following list:
Preroll or In-Stream Advertising: Sell 1,000 prerolls for a CPM (cost per thousand) of about $10.

• On-Page Advertising: Banners—the last resort of the spammer:
The CPM is about $1, but hey, it’s cash.

Pay per View: This may work for scheduled or live events, but thanks to everyone’s disbelief in digital rights management, it is not assumed to be viable for on-demand content because once
someone hacks it, bang goes the revenue.

Subscription: This seems to be gaining some ground. Essentially, it has the advantages of pay per view when it comes to
scheduled or live events because it’s difficult to pirate
something before it happens, and there is a great premium
placed on the “moment”. However, subscriptions have to repeat
this value for a long enough period of time for the end user to have to pay and pay again; users might even set up some direct
debiting from their accounts to make the whole process
seamless. If you have the volume of content and a “participant” audience, then subscriptions are the best way forward.

These four basic income opportunities fall into two groups. There are those opportunities where the content is free to end users, provided they sacrifice some of their time for an advertiser’s latest attempt at neuro-linguistic programming. Advertisers buy this time from the content provider. Then there are those opportunities that are paid for by the end users. For a content provider, collecting revenue from end users is expensive—the more folks you have to bill and chase for the money, the more expensive it becomes. Collecting from an ad agency is more effective, and the agency, in turn, must collect revenue from the advertisers, which is still a smaller, higher-value group than the end users. Thus, potentially, profits will be higher.

Figure 1
Figure 1. Lisbon's Central Musical provides sponsored concert webcasts to multiple platforms and has a contract with an ad agency for a 50/50 split. According to CTO Raul Martin, last year the agency failed to turn up any campaigns at all.

Easier still, in revenue collection terms, is getting everything paid for by one benefactor: a sponsor. There is only one bill issued, usually for the entire cost of the production and distribution. In return, the sponsor’s brand is intrinsically tied to the production at whatever level the sponsor and producer agree on. This provides more to the audience with less time intrusion on the content itself and, in general terms, ensures that the event becomes viable. This model used to be called “patronage” and was the most common way that artisans were sustained before the record industry came up with its short-lived, unit-based royalty model. (That only works as long as you can count the vinyl being sold.)

What Would You Do?

So let’s suppose you, as the content provider, discount subscriptions and pay per view because you want your content to be viewed as widely as possible at no cost to the end users, but you still need to find a way to recoup the cost of the distribution and production. Your friends at the sponsors have not come through with the $100,000 you need, and you’re going to have to resort to advertising. Although it’s a shame to cover your content with branding, the advertising revenues are attractive, and at least you’re going to get your stuff out there.

You get the content filmed and the videos compressed into Windows Media and Flash. You sign a deal with a hosting/distribution company. Now you’re ready to go. You need to recoup 50 cents per gigabyte, plus the $250,000 you spent on filming and producing your content.

Figure 2
Figure 2. Robert Manoff, CEO of Jambo Media, is enthusiastic about his model, in whihch publishers share in the ad revenue generated.

All the ad agencies you spoke to said, “Come back when the content is ready”—and you have done just that. Now that they have seen the content, they insist that you integrate their campaign manager on your website exactly as they want it. Although it makes your site look and feel completely different, you agree. Site visits drop away significantly, but at least you have a revenue share on the advertising revenues to count on. Things are looking up.

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