Web Video: Bigger and Less Profitable

March 14, 2013, 10:14 p.m. ET

Web Video: Bigger and Less Profitable



People in the media business say that the future is online video. Just how many companies will be able to profit is the big question.

Online video-advertising rates continue to fall. Prices for ads on top-tier sites last year were down by 10% to 15% from 2011, estimates BrightRoll, a video-ad company.

That reflects two developments: the number of companies offering online video continues to rise. All kinds of traditional media companies, including those with roots in newspapers, magazines or broadcast television, want a piece of the fast-growing online video advertising market.

Consequently, the amount of online space available for ads—the inventory—is exploding. Of the 39 billion content videos viewed on the Web in December, about 23% carried video ads, up from just 14% a year earlier, according to comScore.

Those trends will be on display next month when online video outlets such asGoogleGOOG -0.46% YahooYHOO +0.40% and AOL AOL -0.87%host their second annual ad-sale event for marketers in New York. This year they will be joined by a host of media companies such as Condé Nast and Weather.com, which will pitch their new online programming plans.

Condé Nast, for instance, launched digital video channels for its GQ and Glamour brands on Tuesday and will promote them during the upfront. Meanwhile, Weather.com, the website for the Weather Channel, is ramping up its entertainment programming online, which it will highlight at this year’s video “upfront.”

Spending on online-video advertising is expected to top $4.1 billion this year, according to eMarketer, up 41% from 2012.


Competition is fierce for a share of that: more than 217 different companies, including video ad networks and publishers, sold at least one million video ads in 2012, according to comScore.

In comparison, about 21 media companies shared ad spending of $54 billion on national TV ads last year, according to Kantar Media, an ad-tracking firm owned by WPP PLC. WPPGY +0.49%

There is “not enough to feed everybody,” said Michael Bologna, director of emerging communications at WPP’s GroupM.

Others battling over online ad dollars include newspapers such as The Wall Street Journal, also presenting at next month’s online video “upfront” pitches, the New York Times and Time Warner Inc’s TWX +1.22% Time Inc. magazine unit. For print media outlets, in particular, online video offers a way to offset declines in their traditional advertising business.

Ad buyers and some publishers blame the influx of inventory, combined with the rise of so called “programmatic ad buying”—automated buying of ads through digital platforms—for pricing declines.

Last year, the average cost for a video ad on top-tier sites was about $15 to $20 per CPM, or the cost per thousand views. That’s down from the 2011 when average CPMs were roughly $17 to $25, according to BrightRoll.

“There is too much supply and this is good for the buyers,” said one publishing executive.

Todd Haskell, group vice president of advertising for the New York Times, said that ad prices for online-video ads are flat with last year but the company has more demand than supply.

“Publishers that are offering a differentiated reader experience and high quality content can avoid the downward commoditized price positioning, ” he added.

Some marketers think online-ad prices are still too steep. The prices do “not reflect the reality of a fragmented and unwieldy marketplace with a surplus of inventory,” said Gail Tifford, UnileverPLC’s senior director of media for North America.

There is one bright side to the price decline. Measured in cost per thousand views, the price for online-video ads on at least some sites is now in the same ballpark as some traditional television programming.

And that could help fuel a shift of ad dollars to online video from television, industry executives say—the only way the online-video ad market will get big enough to sustain all the new entrants.

“Ultimately, the dollars will have to come from television. Will it come from television tomorrow, I don’t know,” said Dawn Ostroff, president of Condé Nast’s entertainment division. Ms. Ostroff said she believes Condé Nast has a good chance of standing out among the surge, thanks in part to the popularity of the company’s brands.

Michael Rooney, The Wall Street Journal’s chief revenue officer, said he is “bullish” about online video. “We are getting positive response from the ad community,” he added.

So far, the lion’s share of money moving to online video has come out of print media and online display, said ad buyers. American Express Co., AXP +0.12% for example, expects to more than double the amount of ad dollars it spends on online video this year. Most of that increase will come from its online display budget, the company says.

“We have the need to change people’s perceptions and that is where video plays an important role because it gives you a higher level of engagement” than static display ads, said John Hayes, chief marketing officer of American Express.

Reckitt BenckiserRB.LN +0.13% the maker of brands such as Lysol, Mucinex and Clearasil, said it has shifted roughly 30% of its TV ad spending over the past three years to online video. Although the company declined to give exact spending figures, ad tracker Kantar Media said Reckitt spent about $270 million on TV ads in the U.S. last year, down about 25% from 2009.

Reckitt said it increased its online-video spending, in part, because it found that in some cases online-video campaigns can provide a bigger boost to sales than TV advertising, thanks in part to the relatively small amount if ad clutter that exists in online video.

“In some online video campaigns, we saw sales lifts that were double what we got from the TV ads,” said Laurent Faracci, Reckitt’s general manager for U.S. marketing.

Some analysts say it will be tough for the big dollars to shift because TV still offers the most reach. Moreover, the big “brands that advertise on TV” want professionally created content and “that isn’t shifting,” said David Hallerman, principal analyst at eMarketer.

“Advertisers are still not entirely enamored by all content choices or audience reach” that are widely available on the Web, he added.

Indeed, South Korean car maker Hyundai Motor Co. 005380.SE +2.83% shifted about 5% of its TV-ad spending in the U.S. to online video ads this year. However, a big portion of those dollars has been spent buying up online-video ads that run on the websites of TV networks such as Walt Disney Co.’s DIS +0.72% ESPN and ViacomInc.’s VIAB +2.44% MTV.

“You have to be online because that is where people are watching TV,” said Steve Shannon, vice president of marketing for Hyundai Motor America.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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