BUSINESS

WHERE’S THE WEB VIDEO GOLD RUSH?

Millions are watching but advertisers are wary. Here’s why.

COLIN CAMPBELL July 9 2007
BUSINESS

WHERE’S THE WEB VIDEO GOLD RUSH?

Millions are watching but advertisers are wary. Here’s why.

COLIN CAMPBELL July 9 2007

WHERE’S THE WEB VIDEO GOLD RUSH?

BUSINESS

Millions are watching but advertisers are wary. Here’s why.

COLIN CAMPBELL

As the advertising world gathered in Cannes this month for its annual awards fest, the spotlight shone squarely on some relative newcomers to the party—companies like Yahoo!, Google and Microsoft. The Internet giants were hard to ignore, not simply because of the large number of their executives swarming the French Riviera, but because of their none-too-subtle recent investments, a bold bid to join the ranks of the titans of the advertising business. Microsoft recently purchased online ad firm aQuantive for US$6 billion (the largest acquisition in the company’s history), while Google bought Doubleclick for US$ 3.1 billion. Their mission in Cannes: to convince the world’s biggest advertisers to funnel more of the many billions of dollars they spend on television each year, online.

It might seem like a simple task. TV networks, after all, have been equally excited about the future of the Internet in recent months. NBC Universal and rival News Corp. (which owns the FOX network) teamed up to create an online video network rumoured to cost about US$100 million. MSN, AOL, MySpace and Yahoo! have quickly lined up to carry the network’s content. Viacom, which owns stations like MTV and Comedy Central, announced it was joining a new online venture called Joost to put its content online. CBS and Canada’s CHUM have also signed on. Kick-starting this whole frenzy was Internet giant Google with its purchase last year of the online video site YouTube (a then not quite two-year-old company) for a muchdebated US$1.65 billion.

But despite all the champagne sipping at Cannes, advertisers themselves have been surprisingly reluctant to go digital, especially in the important realm of online video, limiting their spending to relatively small pilot projects and careful experiments. While any

dedicated Web geek will say the future of television is on the Internet, scratch below the surface of the online video business models, and what you find are endless questions, gambles, and a black hole where one would expect to see profits. Even a cursory glance at the numbers shows that online video has so far proven to be a cash-burning exercise in hype, and an experiment in which companies can only guess at the outcome.

There are a lot of statistics that help to explain the hysteria over online video. In March, 126 million people in the U.S. alone watched over seven billion videos online, according to Internet surveyor comScore Inc. Spending on online video advertising has been rising fast and is expected to jump 89 per cent this year alone, according to a report by eMarketer. But often overlooked is the fact that even with such increases, online video advertising represents a tiny fraction of the advertising universe. Last year, US$410 million was spent on advertising attached to online video, or just 0.6 per cent of the over US$70 billion spent on television ad budgets each year. Online video is only estimated to be a US$3billion business by 2010—impressive growth, sure, but a little short of a revolution. “It’s a drop in the bucket,” says Nate Elliot, a senior analyst in Berlin with Jupiter Research. “This is still play money for advertisers.”

These cautious investments stem from the fact that online video remains a horribly ineffective place for advertisers to do business in, analysts say. People may want to watch the kind of goofy video clips that popularize online video, but it’s not yet clear they’re prepared to sit through an ad to see them. “No one has figured out how to make it profitable,” says James McQuivey, a principle analyst with Forrester Research, in Cambridge, Mass. Nor are advertisers seeking out the kind of viewer who watches these clips. “The value of an eyeball transfixed by The Daily Show is so much more interesting to an advertiser than the value of an eyeball skimming over images of skateboarders or people’s cats sliding into glass windows,” says McQuivey.

The Internet, with its billions ofWeb pages, is made for browsing—an unfriendly atmosphere for advertisers who love nothing more than a captive audience. It’s also a place, noted a report last year from the research firm IDC, where people are accustomed to getting videos for free. Introducing ads might only serve to alienate Internet freeloaders, the report said. “It’s still so new,” says David Hallerman, a senior analyst with eMarketer in New York. “Advertisers who have put billions of dollars each year into television are still looking at how to best use it,” he says of online videos.

No case exemplifies the problem better than that of the reigning king of online video,

YouTube, and a Quebec boy named Ghyslain Raza, who was featured on the site acting out a private light-sabre battle with a golf ball retriever. The video (which is at once painfully embarrassing and hilarious) has been watched an astounding 900 million times, making “Star Wars Kid” the most-watched online video according to estimates by the London-based marketing firm Viral Factory. If only Raza had figured out how to collect a cent each time someone was entertained by his public humiliation, he’d be rich. That hasn’t been his fate. Nor has it been the fate of companies like YouTube, with its pay-nothing strategy (a model that continues to confound those who question the massive price Google paid for YouTube). Even if these kinds of clips could be monetized, the question remains: would 900 million people have tuned in had they been forced to watch a 30second ad before the video, or would they have gone off in search of something more instantly gratifying?

TV remains the advertiser’s land of milk and honey—a place where they’re comfortable operating and have a “deeper knowledge” of the medium, says Hallerman. They know how much they should pay to reach viewers on TV and how to do it—a system perfected over several decades. So wary are advertisers of the Internet that money they spend on online video is not yet being taken from TV ad budgets, but comes H instead from overall online spending, notes Elliot. For the first time in years, TV ad sales for the upcoming season have reportedly been on the rise. And networks have been enticing advertisers by packaging online ads with prime-time TV ones. Far from killing TV advertising, online video is simply piggybacking on it.

Internet video types hope this will soon change, envisioning a world in which everybody watches TV on the Web. Television advertising, they say, risks being undermined by the fast-growing popularity of digital video recorders, which let viewers skim past commercials. “TV is considered the most effective place to advertise, but advertisers are frustrated with it at the same time,” says David Clark, the general manager in North America for Joost. TV executives, however, aren’t crossing their fingers. “Not everything out of the gate is about the money,” says Maria Hale, VP of business development at CHUM, which has joined Joost. “This is

something that needs to be developed in the early days that you can learn from and see where it’s going.”

For the time being, television companies want to be online not because there’s money to be made, but because they don’t want to be the last ones to the ball. Nobody wants to follow the disastrous path of the music industry, which threw lawyers at Internet start-ups like Napster, that were using copyrighted content, in an attempt to litigate them into oblivion. That strategy failed to stop the migration of content and customers to the Internet. TV networks have learned from those mistakes. “What you have here is an industry that doesn’t want to be Napsterized,” says McQuivey.

In many instances, the real benefit of the Internet to television companies has been its value as a marketing tool helping drive viewers back to TV or promote ailing shows. In late 2005, NBC’s Saturday Night Live tried to stop the spread of its popular “Lazy Sunday” video online, only to realize later how much buzz it was generating as it spread to millions of viewers on sites like YouTube. A year later, with its next hit, a video called “D-k in a Box,” Saturday Night reversed course and promoted a special online version of the video. Most companies are now willing to tolerate some degree of copyright infringement in the name of marketing.

That may be a reasonable

approach for short clips, but the biggest roadblock to online video may be the fact that the Internet is a lousy place to watch TV. It wasn’t designed to handle the kind of bandwidth required to broadcast high-quality video. Even with expensive broadband connections, online video is patchy at best, with mediocre picture quality. Moreover, made-for-Internet videos are a poor substitute for the kind of high-quality entertainment available on TV. Even online offerings by TV pros, like Steven Bochco’s online video series Café Confidential, have an amateurish, low-budget feel. Next to slick TV shows like House or Grey’s Anatomy, there’s little doubt which programs advertisers will want to be associated with. Television companies have focused mostly on shuffling their own content online, rather than trying to make money on amateur work. “There is very little ability to monetize video advertising on user-generated video,” News Corp. president Peter Chemin told reporters earlier this year.

The Internet is not going to kill TV, at least no more than TV killed the radio, say analysts. It will no doubt have an impact on the way we watch television, but the extent to which that will happen tends to be vastly overstated. “If we look back five years from now, we’ll probably find some of the estimates were a bit wild,” says Elliot. While television companies are deathly afraid of missing something online, for the time being, there just isn’t all that much to miss. M

LAST YEAR, $410 MILLION WAS SPENT ON ADVERTISING ATTACHED TO ONLINE VIDEO—0.6 PER CENT OF THE OVER $70 BILLION SPENT ON TELEVISION AD BUDGETS