SpectatorBytes

Much has been written about the Hulu experience. Since last year, I increasingly have found myself using my laptop on weekends to catch up on my favorite TV shows both on Hulu as well as on the network sites. The experience is particularly enjoyable on Saturday afternoons when College sports dominate TV programming.

So, obviously the on-demand capability which PCs offer makes them a compelling device. However, there was one more interesting aspect of my laptop experience that I noticed: I am ok with the ad spots shown (pre, mid and post roll format). The overall number is bearable. Four per show. They are somewhat targeted and in some cases they are entertaining.

This has led me to believe that many years from now the TV experience may ultimately end up emulating the laptop experience from an advertising perspective. TV networks will offer less spots at probably higher CPMs (given that reach will continue to be important). As is the case today, Hit shows will generate most of the value for the TV industry and non-hit shows will have to be both much more targeted and less expensive.

It will take several years before the industry adjusts to the potential economic implications of this shift. Nevertheless, this may help the TV industry more effectively address the DVR and Broadband challenges.

Note: As you may be, I am surprised that pre-rolls increasingly look like a format that is here to stay. I will discuss this on another post. In the meantime, emarketer has an interesting article on online video advertising (see here).

As I have discussed in previous posts, the Web is dominated by performance-driven rather than brand advertising. To explain my point, I have always cited the lack “Colgate Ads” around the Web. This is because growing up, Colgate was one of the leading brand advertisers on television.

So, you can imagine my surprise when I came across the following ad while watching the Daily Show on Hulu a couple of weeks ago. The ad included a pre-roll spot in addition to the post-roll banners that you see below.

Encountering this ad is important because it signals that leading “brand” advertisers may have found an ad solution which they are comfortable with on the Web. More importantly, this ad solution is scalable, which means that the advertiser can easily replicate this campaign in other video aggregation platforms.

So, why would brand advertisers be comfortable with this ad solution on Hulu? The following seem to be the main reasons:

- Linked to high-quality/professional content (Proven materials; Little/no risk for advertiser)

- Predictable usage levels (There is a history for shows and their clips)

- Format similar to TV (Easy for ad agencies to explain in context of the multi-media campaigns)

Bottom line: I believe we are witnessing the beginning of the much awaited shift in brand advertising from other media to the Web.

I would appreciate your sharing other examples which may be illustrative of this trend.

The Associated Press has been reporting on the box-office success of the Dark Knight (See here). One the most interesting points that the AP made in their coverage is the following:

However, the numbers reflect today’s higher admission prices, and “The Dark Knight” will not approach “Star Wars” or “Titanic” in terms of actual number of tickets sold. Taking inflation into account, “The Dark Knight” would need to pull in about $900 million to match the number of tickets sold for “Titanic” and about $1.2 billion to equal “Star Wars.”

Here is a more detailed analysis I put together to put The Dark Knight’s numbers in perspective.

These data (sourced from the MPAA and the AP) indicates The Dark Night has been seen by 62M people while Titanic attracted 131M and Star Wars attracted 207M.

These numbers suggests that many people are waiting for other windows (DVD, Pay Per View, etc.) to consume film content. Consumers seem to be opting to experience movies at home rather than at theaters. The home theater experience has certainly improved over the past few years with the growth in penetration of large TV sets, digital television and personal devices.

One can also suggest that audience fragmentation due to the proliferation of content and distribution platforms may also have played a role in this lower number. However, one would have to wait until the final sales figures of DVD and PPV come out for the movie to make this a conclusion. I will be paying attention.

A few posts back I wrote about the new dynamics of content businesses in a digital world (See here). In recent months, the mantra of “content is king” has returned to the forefront of these businesses as a way to highlight their value. This is not surprising. As distribution outlets proliferate thanks to the digital revolution, the focus of leading media players is back on content rather than distribution. Tim Arango’s article in the New York Times today certainly makes this case (See here).

So, if content is still king, are the traditional owners of content likely to be the main beneficiaries of the digital revolution? The answer is that they are certainly well positioned to be. However, since the media world is rapidly moving away from royal kingdoms and becoming much more of a democracy, it is important that the leading producers of content embrace change and adjust their businesses to this new reality.

Content production to-date has been built around mass-audiences and mass-marketing. As audiences fragment and brands seek greater reach efficiency, content producers will need to adjust their businesses.

Here is a list of some of capabilities that will be increasingly critical for content producers to have in a post-digital revolution environment:

- Producing content for micro-audiences

- Building micro-brands

- Developing low-cost content production models

- Leveraging Web to develop new “green-light” processes

- Building/Finding audiences on the Web through SEO, SEM, and social media

- Packaging and programming in new distribution outlests (e.g., Video Aggregators, Content Networks, Social Networks, etc.)

- Expand ancillary business infrastructure to take advantage of hits

- Develop innovative and much more tailored advertising solutions for brand/premium advertisers

Leading producers of content are likely first to focus on consolidation as a way to preserve scale and sustain growth. However, as the new digital dynamics take greater hold, developing these new capabilities will be essential for them to keep their throne.

The Online Publishers Associate just released a study which concludes that advertisers can boost the effectiveness of their ads by focusing their campaigns on branded content sites. Below are some of the key findings outline in the report (Full report here):

- Ads Placed on Content Sites Raise Brand Favorability and Purchase Intent Significantly More than Ads Run on Portals

- Ads on Content Sites Provide Double the Brand Favorability and Purchase Intent than Advertising Placed with Ad Networks

- Sponsorships on Branded Content Sites are 36% More Effective than on Portals

- Video ads on content sites have greater impact — For example, brand awareness and favorability are about 40%+ greater on content sites than MarketNormsaverages

- Rich media ads are more effective at engaging content site visitors –making content sites a better platform for newer ad technologies; Rich media ads are 25% more likely to be seen when placed on  content sites than when run on ad networks; Visitors are about 66% more likely to remember advertised messages on content sites than ad networks, and more than twice as likely to develop favorable brand opinions

Since OPA’s members clearly benefit from these findings, one needs to keep this study in context.

Having said that, there is a couple of things I find interesting in the study. First, the additional measures use in the study to determine the value of a particular advertising campaign such as “Message Association”, “Brand Favorability” and “Purchase Intent.” These measures try assess the value that brands can derive from advertising on well-targeted environments. Unfortunately, these measures do not have the same simplicity as CPM, CPA and CPC which makes these metrics “scalable.”

Second, this study measure the effectiveness of online advertising in the same way that TV and print have done so to validate their value proposition. As a result, the study falls short in trying to validate the unique value proposition online media can provide via engagement and interactivity.

Nevertheless, I think this data needs to be factored in the discussion between premium and performance advertising on the Web.

Venture Beat picked an interesting story from Ad Age which outlines the challenges facing the online advertising industry (See Here) which outlines the challenges facing the onlineadvertising industry. Below is one of the most interesting statement’s in the Ad Age piece.

“The inconvenient truth is that for all its new-media spin, display advertising is “old” media — a commercial message to be placed next to editorial or entertainment content. And we know by now that measured-media growth has pretty much ground to a halt as marketers continue to increase their dollars in unmeasured disciplines such as web development, public relations and database marketing at the expense of paid advertising. Ad spending among the top 100 U.S. advertisers last year grew a paltry 1.7%, with measured media only up 0.3%. Measured-media spending is in decline in Japan, and it’s not much better in the U.K.

Sure, dollars are shifting within those media budgets, with some moving out of traditional media into interactive. But most of the top 100 advertisers that wield the big budgets are still primarily TV and print spenders. The question is: Should the fact Procter & Gamble spends only 1.5% of its marketing budget on display ads be viewed as a warning signal by online ad sellers, or as an opportunity? (Even Unilever, Ad Age’s Digital Marketer of the Year, spends little more on display, allotting it 2% of its budget.) Instead of thinking of how much more P&G could be spending on internet advertising, sellers should be asking why it doesn’t spend more.”

As I have outlined in several posts, the online ad industry need to continue to work on creating innovative solutions for brand advertisers. These solutions need to deliver on the unique capabilities of the Web: audience engagement, virality, and measurability. These solutions need to simply deliver a different value proposition than Television and Print. The current model of display advertising does not seem to do that…and thus brand media buyers are still holding back their online spend.

This was a tough week for online advertising given Valueclick’s lower guidance for Q208 (see below), Google’s less than stellar performance and even eBay’s cautious outlook for Q3.

While Valueclick’s performance is in part driven by internal challenges, these numbers have raised questions about the growth prospects for the overall online performance-driven advertising market.

The Web had been expected to be insulated from the economic slowdown since it is a much more efficient channel than other medial. However, it seems that two things are happening:

1. Consumers simply stop responding as they are spending less. In that sense, online is a good reflection of the general economy.

2. Advertisers are putting downward pressure on CPMs given hyper-competition among performance ad solutions.

The question that still remains for me is whether or not there is a consumer fatigue element to this growth slowdown. Like with junk mail, consumers may have gotten tired of direct response advertising (particularly display). Will keep an eye on reports.

So, what are the implications for advertising-supported businesses:

1. Ad Revenues are likely to take longer to scale for sub-scale sites than previously expected given state of the direct response market. 10-30 cent CPMs are here to stay.

2. Publishers must focus on finding ways to make their experiences attractive to brand/premium advertising revenues. Premium-focused/Vertically targeted ad networks (e.g., Glam and Gorilla Nation) will benefit from this trend.

3. Companies which delivered high-quality experiences/content and highly engaged audiences will be big winners as competition for “sponsorable” experiences increases. Companies which are not able to deliver this type of experiences will struggle.

4. We will hopefully see new innovative and scalable ad solutions - including better targeting.

5. We will likely see consolidation among performance display ad solution providers

I have written several posts about the need for offering innovative ad solutions to brand advertisers. I wanted to share a couple of solutions for brand advertisers that two companies in our portfolio have developed (obviously I have a vested interest in the success of these two companies). Nevertheless, I think that they are offering compelling solutions which are designed to allow advertisers to take advantage of the unique value proposition of the Web as a medium, as well as to scale.

The first one comes from Mixercast. Mixercast allows advertisers to create engaging ads using widgets. Below is an example of how Nike leveraged Mixercast’s widget creation tool for its new basketball shoe campaign. The goal is to deliver higher engagement and a richer experience than a simple banner ad.

The second one comes from Next New Networks. Alley Insider uncovered it this morning (See Here). In this example, N3 integrated an ad for Starbust as part of the content. This approach reminds me of Howard Stern’s radio ads. N3 can remove the ad at a later time when sponsorship agreement ends.

Love to hear about any other examples of creative solutions out there for brand advertisers. Please share.

Years ago, I realized that Google’s search product has become the leading distribution platform for content on the Web. As a website owner or content publisher, one has to optimize its site structure to make sure that Google properly showcase your content when your users are looking for it. If Google does not want to showcase you, your site pretty much would not exist for most users. In other words, Google is like Wal-Mart for consumer goods producers. If you don’t get stock in Wal-Mart’s shelves, your chances of having a business at scale are much smaller.

Well, it now seems that Google is on its way to gain the same level of control over video content. TubeMogul has released a study about video distribution platforms.  They looked at 200K videos to determine which video platforms generated the most views for those videos. YouTube’s lead is staggering - with 4X the number of views than the nearest competitor (See Here).

YouTube is a platform just like search is. So, Google is likely to start creating features that will require video producers to start customizing the way they distribute their content specifically for YouTube (for example, how to best get categorized in YouTube channels). Once this starts to happen, other platforms will have to follow suit or fall behind. This will make sure the video ecosystem of online video on the Web is built with YouTube as the main platform. This is no different than search where most publishers optimize for Google’s sitemaps and do much less around Yahoo search, MSFT’s Live and Ask.com.

YouTube positions Google well to win the video monetization battle for performance-based advertising - which is ultimately the reason why Google paid $1.6B for this asset. This may have been obvious for a while but now there is data to back it up.

In January 2007, AOL made a tender offer for Tradedoubler shares at 215 SEK (Sweedish Krona). The total value was $900M. The offer was supported by the board of directors and counted with support from several large shareholders. However, the majority of the shareholder base decided that the offer undervalued the company significantly. AOL pulled its offer a couple of months later. AOL went on to buy Buy.at an affiliate marketing company in the UK.

Today, 18months later, Tradedoubler is trading at 68+ SEK (Sweedish Krona). This is a major drop in value in a very short period of time.

One of the challenges with digital media companies is that they face hyper-competition and rapidly changing market dynamics. This means that companies can drop in value as fast as they rise. Revenues can come and go pretty quickly for a company. Revenue streams do not last forever for digital media companies.

Shareholders and Corporate leaders need to be aware of this “hit-like” dynamic for digital media companies and be more thoughtful when evaluating potential M&A opportunities.

Online Ad optimizer, Pubmatic put out once again their findings about online CPMs (See Here). Pubmatic found that CPMS are stagnant at best on average and dropping across several categories. This research is in line with what most large networks have also reported about their CPMs in the last couple of quarters.

The problem is simple. The Web offers advertisers an abundance of display inventory. Since the majority of the advertisers participating in the market today are direct response/performance-focused advertisers, they are relatively indifferent about the specific inventory they buy. As long as the inventory performs, they will buy it. Publishers are struggling to differentiate their inventory. As I said before, behavioral and increased transparency will help increase performance. However, pricing may still not rise given inventory abundance. If this is the case, exchanges are unlikely to drive an increase in prices.

Search has proven to be a great application to capture intent behavior and offer high response rates to ads. Other applications across the Web (social networks, mail and even content sites) not only offer levels of response rates but also generate too much undifferentiated inventory. This dynamic is not likely to change any time soon and thus prices are likely to remain low.

In addition, the more the large networks focused on performance display rather than brand premium offerings, the quicker and longer online inventory is going to get devalued.

As an industry, we would benefit if we move quickly to rethink how we package non-search inventory for “brand” advertisers rather than “performance” advertisers.

I recently came across an interview given by former head of Ad Sales Wenda Harris Millard (see Here) which outlines some of the issues that I see in the online ad industry today — particularly around the push to shift “brand” advertising spending to the Internet and away from Television and print.

- The online ad infrastructure on the Web is being built around performance advertising - Think paid search, performance display ad networks, marketplaces.

- New products such as behavioral and contextual targeting appear to be used more for enhancing display advertising performance than improving the online’s value proposition for brand advertisers.

- Large online networks seem to be de-emphasizing their efforts to offer integrated brand campaigns given their zealot focus on systems-driven solutions for advertisers.

- Ad innovation is taking place at many startups which is great but is doing little to establish scalable solutions for advertisers

Brand marketers are demanding innovative campaign solutions for their brands which offer two key things:

- A unique value proposition, different from TV or print. Display ads next to “relevant” content is not the answer. TV and print already offer that. The Web can offer truly multi-media campaigns.

- Deliver better engagement than other media. TV is quickly losing points on engagement with marketers as people increasingly skip ads using DVRs or simply their remote controls. Please note that click-throughs does not mean engagement. Web is a great medium to drive customer participation and the solutions offered to campaign marketers should offer ways for customers to “engage” with brand experiences.

If as an industry, we are able to deliver on these two things, we will start to see brand marketers more quickly embrace the medium. Publishers will start to see higher CPMs…at scale.

Millard’s comments suggest we are still not heading in this direction. What do you think?

Today, there was an interesting article on USA Today about the impact of DVRs on TV viewership (See Here). It seems that we have certainly been talking about DVRs and specifically Tivo for quite some time. Yet, as the article indicates, DVRs have yet to reach mainstream; penetration levels are hovering at 23%. This will likely change as cable companies and telcos more aggressively integrate DVRs as a core feature of the TV watching experience over the next couple of years.

DVRs feel a bit like the Blackberry. While business users have lived with blackberry devices for over five years, it is only until now that mainstream audiences are having access to and falling in love with them.

When this happens, it will have a dramatic impact on TV audience viewership. The numbers outlined in the survey are already pretty dramatic. At14% penetration level (when survey was conducted), the percent of audiences for hit TV shows that opted to watch after the show’s airing ranged between 12% and 26%. If we extrapolate this numbers, we could estimate that when DVRs reached 50% penetration, >50% of the audience would likely watch the show after its airing.

Three implications of this trend which come to mind:

- The TV advertising value proposition needs to change. Delivering simultaneous audience reach becomes more difficult. Advertisers will also have to assign more value to relationship to good content rather than simply reaching mass audiences

- Live shows (e.g., sports events, award shows, etc.) will continue to increase in value as they become the only vehicle for advertisers to meaningfully get simultaneous reach

- For long-form programming, TV advertising and online ad solutions will likely start to look more similar than not. DVRs will probably enable overlays and post roll ads.

If you have other implications that come to mind, i would like to hear about them.

Over the past 10 years, there has been much discussion about who will win the battle for the set-top box in the home. Hardware manufacturers, cable operators and telephone companies have invested billions of dollars in becoming the gateway for consumption of digital goods in the home. The market belief has been that whoever controls that set-top box would have an opportunity to capture new business opportunities (Video on demand, interactive advertising, new channels, digital asset sales – music, video, etc.)

This belief was driven by two assumptions: 1) Television would be at the center of home entertainment, and 2) Set-top box owner would have the ability to control the services offered through that box.
Given where Internet consumption and mobile devices are heading, it seems that both of these assumptions were wrong. Internet consumption is growing at levels that are quickly matching television. Online video consumption is a major force behind that.

In addition, the emergence of the iPhone and other similar phones, which truly deliver a mobile Internet experience, have quickly positioned mobile devices (including laptops) as the ultimate personal set-top box. If you have kids, you probably know that new generations preferred personal, mobile experiences than TV-centric ones.

So, mobile devices (including laptops), not the set-top box, will be at the center of digital entertainment ecosystem. Owners of these devices and other players in the ecosystem will capture significant value as consumption patterns continue to rapidly shift.

Who would have thought that it would be Apple the company best positioned to win the battle for the set-top box? Did you?

Recent report by Pubmatic (see here) over the past week indicate that online advertising prices are declining. This trend had already become evident as leading Web players announced their Q1 results.

The forces that have enabled the growth in advertising on the Web now seem to be working against it.

Direct Response advertisers have driven the growth of online advertising. These advertisers, however, put significant pressure on CPMs as they focus primarily on performance. As DR advertisers have grown more comfortable with ad networks, it is becoming harder to sell premium inventory.

Increase in usage has allowed the creation of new inventory. This has led DR advertisers to enjoy an abundance of advertising options. There is no scarcity premium on the Web, and thus DR advertisers are being able to buy inventory at lower prices.

Ultimately, this has led to little to no differentiation between premium and non-premium inventory.

To break from this depression, we need to work to find solutions that attract brand advertisers. I have written about this in the past (see here). These new ad solutions are focused on delivering guaranteed levels of engagement within the right context. Also, these ad solutions need to be custom but scalable.

In addition to ad solutions, advertising networks need to identify how to most effectively serve brand advertisers. Selling premium online advertising is very different from selling ad network solutions. Premium advertisers want customization, unique engagement metrics and transparency. Ad network sales focused primarily on performance and reach.

Lastly, we need to work quickly to create standard metrics around these new solutions for brand advertisers.

The quickly we start working on solutions for brand advertisers, the faster will be able to overcome this depression.