Thursday 13 November 2008

Online video - there is jam tomorrow

Erick Schonfeld on TechCrunch has just painted a stark picture of the future of online video. Looking at the recent announcement from YouTube about running Google AdWord style ads, as well as stories of layoffs at start-ups, he throws out the projections by emarketer that online video advertising will be worth $5bn in 5 years.

The main thrust of the argument is that there is already tons of online video that isn't succeeding in attracting ads and compares a $0.05 CPM for online video with $0.50 for broadcast TV. So the only way is down.

Not at all.

At the Web 2.0 Summit, just a week ago, Morgan Stanley's internet analyst, Mary Meeker, presented her future of the world, also covered by Schonfeld.

Focussing on the US (not, after all, the world), she says: the economic outlook is bad; online ad impressions are growing very fast; the two things combined mean online ad spend growth is slowing down hard; but there's still plenty of upside since so much is still spent on, for example, newspaper ads.

Lets be clear about the upside. In the UK, online ad spend is already almost as much as for TV. According to the Internet Advertising Bureau, the former accounts for 18.7% of the total £9bn spent on ads, compared with 21.7% for TV and 19.3% for print.

The forecast for next year from research firm Research and Markets is for growth of 31.4%, while the consensus for TV advertising is of a decline of around 10%. In short, online ad spend will overtake TV ad spend.

While online ad spend covers everything from paid search to online video, it's clear that, in some ways, the US ad market has not innovated in the way that the UK has. Surprising as that is to me, the US online ad market is likely to grow enormously in proportion to other categories over the coming years.

Indeed, in a downturn, this can only accelerate, as companies look for measurable returns, hard to get from broadcast TV.

The other part of the equation, which Schonfeld finesses, is the relative value of professional versus user-generated content. The proportion of the former is very small and growing fast and with it comes an increase in CPMs.

Schonfeld's pie charts indicate, on the contrary, that the value of online advertising is set to increase dramatically. The tiny proportion of TV that is accounted for by online video is tiny. That will change.

Indeed, if the projections are accurate for the growth of online video and VOD, and CPMs get to only half of what TV broadcasting achieves, then the $5bn mark will be achieved.