It’s a Booming $1.8B Sector, But Half of That Ad Revenue Goes to Just Two Publishers
At AOL’s digital upfront in New York recently, CEO Tim Armstrong instructed audience members to check under their seats for a car key. He called the three people who found one to the stage and, Oprah-style, awarded one of them a shiny new Mustang convertible.
Such is the hype that marks the two weeks of online-video presentations from the likes of Hulu, YouTube, Yahoo, AOL and others. But many publishers are finding that building audiences large enough to capture real ad growth is harder than it seems.
There is cause for excitement. Online video “represents the most explosive growth area in the digital space in the next three years,” said David Cohen, chief media officer at Universal McCann. EMarketer predicts that the space will grow more than 40% annually for the next three years, before leveling off to a still-robust 20%.
But booms are never evenly distributed. The online-video market was about $1.8 billion last year, with half of that going to just two players: Hulu (about $300 million) and YouTube (about $600 million), according to Brian Wieser, an analyst at Pivotal Research Group. Mr. Wieser’s estimate does not include video that plays within banner ads.
“While our figure remains ahead of the television industry, growth outside Hulu and YouTube seems to be far from exploding,” Mr. Wieser said in a recent research note.
Note: eMarketer benchmarks its U.S. online ad spending projections against the IAB/PwC data, for which the last full year measured was 2010; includes in-banner, in-stream (such as pre-roll and overlays) and in-text (ads delivered when users mouse-over relevant words); mobile included.
Most of the advertising growth in online video will happen because it steals chunks of the $70 billion spent on TV in the U.S. But simply producing high-quality video doesn’t automatically attract vast sums of TV dollars. Those dollars also want TV-like scale, and not many players have both: mainly YouTube and Hulu.
“I have seen almost no evidence of anyone being able to build a sizable audience for these shows,” said Tod Sacerdoti, CEO of BrightRoll, which operates a video advertising network and an exchange for video ads.
“In the last six years, which is how long we’ve been at this, we have always invested in video, but we’ve struggled to really grow streams on our own platforms,” said Kimberly Lau, VP-business development and partnership relations at Hearst Magazines Digital Media, which just introduced its second YouTube channel under the video giant’s premium-content initiative.
YouTube is where younger people watch video, and its financing for premium content means Hearst gets to experiment and learn relatively risk-free, Ms. Lau said.
But publishers would rather see their own sites accumulate big audiences, which would let them keep complete control as well as all the ad revenue.
“Ultimately, I believe we will be able to do more video streams on our own owned-and-operated sites,” Ms. Lau said. “But the fact is that YouTube has an audience.”
Where YouTube has scale that individual publishers do not, Hulu has a large supply of TV content—making it a comfort zone for marketers and media buyers accustomed to TV advertising.
“Hulu has become a sort of portal to the online-video marketplace for TV buyers,” said John McCarus, senior VP at Digitas.
In March, Hulu had 1.75 billion video-ad impressions, a 39% year-over-year increase, according to ComScore data. Some players saw even more dramatic growth rates, though from much smaller bases. For example, impressions on ESPN sites totaled 563 million an eightfold leap from March 2011, ComScore said.
But video ads on Discovery Communications’ digital sites grew a more modest 9% in March vs. a year before and totaled fewer than 20,000, according to ComScore. (On May 3, Discovery said that it had reached a deal to buy digital-video company Revision3, part of an effort to pump up scale.) And video ads fell year-over-year for a variety of publishers, including Gannett, Turner and Demand Media.
Many publishers have a chicken-and-egg problem as they vie with these challenges: They’re unable or reluctant to sink big investments into video series until they know they can recoup their costs, but brands will be reluctant to move dollars out of TV until digital video has quality content and significant audiences.
“The big win is turning TV dollars into online video, but that’s only going to happen if you can provide the benefits that TV does — and that is scale and quality,” said Ben Winkler, chief digital officer at OMD.
The Wall Street Journal has expanded its reach by distributing beyond its own sites, but it plans to give video more prominence on its properties soon.
“About 60% of our total streams come off our own platform,” said Alisa Bowen, general manager of The Wall Street Journal Digital Network. “All the growth in the last four months has come off other platforms, including YouTube, Roku, Apple TV, and we’re soon to launch on Xbox — those kinds of environments that are video-centric.”
“We still see tremendous opportunity through our owned and operated properties,” Ms. Bowen said. “There’s been modest growth, but we haven’t seen the kind of gains that we expect to in the next phase.”
Ms. Lau said that advertisers love Hearst’s video content. “So the only thing that keeps us from having a robust sales strategy today is figuring out the scale issue,” she said. “But I would say that we’re going to figure that out in the next year, year and a half.”
It remains to be seen how many publishers can pull that off and how many will largely rely on ad networks or other partners for their video ads — a less profitable future than the splashy digital-upfront pitches suggest.
“Scale plays a huge role in the video space, and it’s hard for publishers to develop it directly,” said Ran Harnevo, senior VP-video at AOL. “Eventually I think we’ll see five to seven publishers that make it independently, much like TV.”