The Coming Online Video Ad Spending Phenomenon

Spending on online video advertising will soar throughout this decade with sales predicted to break the billion dollar barrier in 2008, according to a report released this month by research aggregator eMarketer.

This year's outlay for Net-based video ads grew more than 82 percent over 2005, to some US$410 million. The forecast for next year's growth is even higher: 89 percent, to $775 million, prevised the report, a copy of which was obtained by the E-Commerce Times.

It showed growth peaking in 2007, but sales continuing to climb for the rest of the decade, reaching $2.9 billion by 2010.

Jumping on the Bandwagon

While advertisers are starting to accept the online gospel for video, the market is still in a nascent stage, according to the author of the report, eMarketer Senior Analyst David Hallerman.

Advertisers want to use online video ads "for the same reason they've poured money into TV over the years -- because it engages people far more than any other form of advertising," Hallerman told the E-Commerce Times.

Advertisers have "gotten religion" about online video spots, added Mike Wolf, digital home research director at ABI Research.

"The click-through rates are higher for video advertising than for things like banner ads, which has become a pretty tired medium," he told the E-Commerce Times. "Video is a new form to reach consumers that a lot of advertisers are jumping on."

Experimental Stage

Nevertheless, Hallerman maintained that advertisers are still, in terms of dollars and cents, treading relatively lightly.

He explained that they're experimenting with length of ads, their content and their placement.

"Advertisers love the idea of pre-roll video ads -- ads that run before a user has watched the content -- because they have a captive audience," he noted. "But there's some indication that, for a significant segment of the audience, they dislike that immensely."

'Implied Bargain'

As much as netizens may dislike their video snacks garnished with commercials, they're learning to swallow them, ABI's Wolf contended.

"There's an implied bargain at work here," he said. "The advertisers and the portals are saying this is the deal we're making with the viewer: if you want to watch this content, you're going to have to watch this ad."

A sign that the bargain is being accepted by viewers, he reasoned, is that free or ad-supported content is much more popular than paid content online. "The number of people downloading videos that they pay for through iTunes is much, much smaller than people who watch free or ad-supported video," he observed.

Playing Both Sides of Street

Surveys have shown that as much as 25 percent of Internet users would rather pay for content than be peppered with advertising, Hallerman pointed out.

Mixing paid and ad-based content is becoming fertile cybersoil for experimentation, he added.

"ABC, for example, is playing two sides of the street," he said. "You can watch their shows for free with ad support at ABC.com, or you can go to iTunes and buy the programs."

He predicted that Google's (Nasdaq: GOOG) $1.65 billion purchase of YouTube will have an important impact on online video advertising.

By 2008, Google should increase video ad inventory by cutting deals with content makers to post their ad-supported video at YouTube, Hallerman claimed.

Polluting YouTube?

Will that ad-supported content pollute the YouTube ecosystem? Hallerman thinks not.

The success of that ecosystem, he contended, has been its ability to attract a cross-pollinating audience. Visitors may go to the site to watch professional video, but once there, view some of the amateur stuff, too. By the same token, amateur or viral video seekers will take in a professional video when they're at the site.

"Both need each other to have a robust audience for the site," he continued. "It works best with a mix of consumer and professional content."

Nevertheless, Wolf interjected a word of caution about any potential efforts to monetize YouTube.

"Google has to be careful," Wolf cautioned. "What people like about YouTube is that they can watch clips without being bombarded by a bunch of advertising."