There was an interesting piece in Sunday’s edition of the International Herald Tribune that discusses the rise of Web video and what it might mean to advertising dollars (or Euros) that may have been tagged soley for TV-based advertising just a few years ago.
We’ve been watching how both traditional and upstart media outlets have been addressing digital distribution for some time now, culminating in the report Internet Video: Direct-to-Consumer Services, released in late 2006 (we’ve since updated our findings in a free white paper titled Broadband Video: A Market Update. This paper can be downloaded free from the Parks Associates Website.
In our 2006 report, we found that while big media of all types are actively engaged in some form of digital distribution, pure user-paid, movies-on-demand services will constitute a much smaller piece of total U.S. revenue than will ad-supported models, including the work of the major TV networks to put delayed primetime programming on the Internet via outlets such as ABC.com, CBS’s Innertube, NBC’s Rewind, and Fox Corp.’s MySpace. So far, this assumption has held true, as the major broadcasters are still reporting good returns on their Web properties (an active viewership, no signs of cannibalization, and the ability to charge higher rates for ad inventory). Outside of the iTunes TV show and movie download service (which at last report had generated 53 million downloads), user-paid services — and particularly those specific to movies — are facing many hurdles. In the report, we wrote:
“Internet video for movie content faces stronger challenges in terms of technological challenges, resistance from major retailers, lack of easy connectivity between broadband services and the television, and the continued consumer reliance on tangible media.”
Our own consumer data back the notion that the early successes for broadband video are the efforts focused on shorter (“snackable”) videos as opposed to movie downloads. The good news is that the number of broadband users paying at least monthly to download or stream video has grown significantly since we began tracking the space in 2005. The percentage of U.S. households with broadband that report paying for broadband video content now stands at 19%. The average amount of money being spent on broadband video content is also on the rise, an indication that some key success variables have been met. Certainly, the broader availability of content through a number of channels has increased, and as broadband speeds continue to improve and content-to-device linkages have simplified the process of getting content to viewing platforms, services have improved and demand has followed. So, that’s the good news.
However, the broadband video space is still in a strong degree of flux. Major players still have not figured out the formula to make the provisioning of online video a complete success. The hybrid approaches of Netflix and Blockbuster are intriguing. Both companies are betting on the DVD’s relevance for the next few years, and this is a prudent choice to make. We have not yet reached the point when all of the content that consumers want can be found on the Internet. We are also intrigued by the ad-supported content model, as early returns from the major networks (ABC, NBC, Fox, and CBS) have shown that consumers are willing to watch a few ads in return for free content. Certainly, most of the amateur video on YouTube will not have an ad value, but Google is addressing premium content for now. Also, several direct-to-TV solutions have emerged recently, which warrant attention as they could solve some of the critical challenges in providing a quality viewing experience in the living room. They could set the stage for a real shift in consumer video consumption and provide us with new models to study.
Business models for broadband video remain widely experimental at this point. Consumers continue to have different preferences for how they obtain and watch content. Some want to own their content, some prefer renting, and others wait for broadcast networks’ premiers. For content owners, retail or electronic sell-through yields the highest profit margins and will remain the preferred model. Cable TV service providers want to offer a mix of all business models. Currently, monthly subscription is the biggest revenue stream, but they are interested in growing their a la carte revenue through PPV, digital rental, and potentially electronic sell-through. Broadcast TV networks rely heavily on advertising revenue, and they are likely to position broadband video as a complementary platform in order to offer a 360-degree solution for advertising. Nevertheless, the TV networks are also interested in testing out electronic sell-through models since they are generating good returns on DVD sales for hit TV shows.
Advertising will become an increasingly important component of the broadband video space. With a substantial user base of online video viewers, advertisers will be drawn over the short term to volume and “eyeballs” rather than measurable advertising. Our own forecasts indicate that U.S. revenues for broadband video will grow to $9.7 billion by year-end 2011. Revenues driven from ad-supported video content will about 60% of that revenue, while user-paid services will grow from a relatively small base of 21% of total revenues in 2007 to about 40% by year-end 2011.
So, how big a bite will broadband video take from television advertising? Bear in mind that traditional television advertising is a huge business today (our report The Changing Face of Advertising in the Digital Age predicts that TV advertising will grow to a $72 billion market by year-end 2010), whereas our broadband video forecasts – although indicating very good growth – will tally perhaps $6 billion by year-end 2011 – that’s still a pretty small percentage. Furthermore, as our soon-to-be-released report New Advertising Platforms and Technologies will argue, TV advertising isn’t a static market. With a growing emphasis on attaching advertising to on-demand content and further work in promoting targeted and even personalized advertising, the “dumb box” is gaining IQ almost on a daily basis. So, although money may be flowing away from traditional media to the Internet, there’s no reason to think that as the television takes on such Internet-like attributes as targetability, measurement, and metrics that the ad dollars will continue to support advertising on the television screen.
Finally, the dichotomy of broadband video is that its biggest opportunity and simultaneous challenge is making the video truly accessible in the living room. As we enter 2008, we’re much closer to seeing a larger market emerge for ‘Net-connected devices (TVs, media adapters, media servers, DVD players, game consoles, set-tops, etc.) that will deliver the TV experience. Growth for these devices will be robust over the next five years, as unit sales will be in the tens of millions. However, there will still be a gap between what the products are capable of doing (offering access to CinemaNow, YouTube, or other broadband video content) and what consumers will actually do. Our own forecasts indicate that broadband video revenues at the TV will tally around $1.7 billion by year-end 2011 – that’s 17% of the total broadband video market.
Kurt Scherf is Vice President, Principal Analyst with Parks Associates a market research and consulting firm focused on all product and service segments that are “digital” or provide connectivity within the home. For questions or further information email scherf@parksassociates.com
