With television advertising being a $70 billion market and total online advertising weighing in at $22.7 billion for 2009, you can’t help but wonder why online video advertising only represents a $1 billion market.

In fact, according to the IAB, video advertising grew from $734 million to $1.017 billion from 2008 to 2009 — or 38%.  That’s not bad, but when you consider that total video consumption per month has soared from 10 billion videos in July 2008 to over 33 billion in December 2009 (or 230%), you wonder why the revenue growth hasn’t mimicked the viewership.

For sure, economics tend to trail consumer patterns.  Moreover, the recession and advertising slump didn’t help either.  And yes, the so-called experts might not be all-knowing either, after all.

I personally think there’s more to it than that.

The Genie is Out of the Bottle

In 2000, I worked at a search engine company.  We gave away our search engines for free and sought to generate revenue via advertising.  The Nasdaq crashed and took down the ad market, after which point we sought to collect licensing revenues for our technology.  With the cat out of the bag, it was impossible to get people to pay for the product afterwards.  Lesson learned: If you give something away for free, you can’t charge for it subsequently.  Of course, by then, other search engines — namely Google — began to give away their technology for free as well, so there was no way that strategy would have prevailed, especially in the zero-sum game of search.  More on Google later.

No Risk, No Reward, But Also… No Effort?

When someone pays for something, they tend to associate a value to it.  When a company pays for something, they want to recoup their investment.  It’s psychological, even though in accounting we’re told not to make decisions based on sunk costs.  Today, I work in online video content and after four years in operation it’s clear that when a distribution partner of ours pays for content, they always push the content more.  Lesson learned: Without any risk, people don’t work as hard to make something successful.  More on distribution partners later.

Consumers Won’t Pay for S&*t!

Online, consumers expect a free lunch.  But I also think that media companies — the very same folks who want to get paid for their content or eyeballs — don’t seem to want to put their money where their mouth is.

Let’s take a step back for one second.  To this day, the real money remains in television.  No one doubts that television will shrink over time and digital will continue to grow, but online video needs a lot more than nosebleed growth projections to compete with television ad dollars: it needs to grow up!

One reason why television is so huge relative to radio is that radio is by its nature a “barter” medium.  While I was working at my last job (running sales for an online publisher), I produced and hosted a series of talk radio shows and quickly realized that so much of the value in radio was in barter, trade and promotional exchanges.  As a result, I could see how that mindset and those practices weighed down the top line of the businesses involved.

You Get What You Pay For

If you extend this parallel, one could argue that television is so much larger relative to online video because decisionmakers in television seem to realize that things cost money and you get what you pay for, so they tend to understand that there is a cost to producing or obtaining rights to content.

For purposes of clarification, in this article: licensing implies some kind of financial commitment or minimum guarantees (MGs), be it upfront or over a period of time.  Conversely, syndication is pure revenue sharing.  These are not mutually exclusive, a deal can have MGs in place that become syndication deals over time.

On the Internet, so many aggregators and distributors want to enter purely speculative deals.  In our experience, very few of the aggregators and distributors have the kind of audience scale and sales teams in place to actually generate revenue.  A few do, but many don’t.  This is why we have always favored business deals with minimum guarantees in place.

Even less want to explicitly give us the right to sell ads against our content.  Over time, if they fail to deliver results, we tend to earn that right and generate more revenue than we did previously, but by then, it’s almost moot.  So while I agree that content owners should also risk something — that only applies if and when the content owner also has the right to sell ads against the content.  If they don’t have that right, it’s really moot.

Premium Content Will Drive Video Advertising Growth

Exacerbating matters is the role that premium content owners will have to play if online video is to grow.  Let’s refer to our content pyramid where made-for-web premium content owners sit in between super premium content owners in traditional media (on top) and UGC (at the bottom).

At the bottom end of the content scale: UGC will continue to fail to win over marketers; at the top end, super premium content owners will lack the economic incentive to publish and distribute aggressively online.  Since advertisers tend to run ads next to content (and not applications) and most of the content online will be made for Web, then premium content owners need to realize that always giving away their content will only hurt them over time, especially considering the cyclical nature of the advertising market.  This is not to say that revenue share deals are bad business practices, au contraire, all content owners need to be positioned to share in the upside.  My recommendation is that content owners should generally try to protect themselves against downside protection too.

History Repeats Itself:  Who Should Pay?

For the record, I am not saying that all advertisers should prepay all content owners all the time.  Nor am I saying that all distributors should prepay all content owners all the time.  Heck, I don’t even think we should always get prepaid from a distributor.  Clearly, it’s case by case and leverage comes into play.

But if we want more than re-packaged television programming or marketer-financed content (which tend to be too promotional in nature) then we need to understand that that will require more win-win business terms than what we’re passing off as standard.

Not All Content is Worth Paying For

I am also not saying that all content is worth paying for.  After all, print executives are trying to get consumers to pay for their content.  That won’t happen with enough scale to make a dent into the reality that consumers generally shun paying for commoditized content such as news, weather, stock information etc.

However, we have seen that consumers might pay for some forms of content (sports, super premium content, etc.)   We have also seen media companies pay content owners for rights to content, be it on an exclusive or non-exclusive basis.  That is the way premium and super premium rights holder should think before they give away their content for free.

Spiraling Down Towards a Vicious Downward Spiral

When you look at AOL or Demand Media’s strategy, they are clearly out to drive down the price of production.  At some price point, low enough is good enough (when it comes to cost); video content has to boil down to quality, but quality content requires money.

The Role of Ad Networks

Ad Networks have a unique role they ought to play.  For one, ad networks historically lack any defensibility.  Publishers tend to ignore them all or work with all of them.

Revisiting our content pyramid:

–      Super premium rights holder won’t need ad networks.

–      Ad networks won’t touch pirated or UGC,

–      So they should back premium content owners.

This will give them higher quality video programming, which will present a premium relative to most of the inventory they represent.

What About Google?

Some will argue that Google gave away its product and built a $200 billion company via revenue share.  That worked for Google and in the zero-sum search engine industry where by giving away the technology Google undercut competitors and created a monopoly.  Content is not a zero sum game.  When our competitor gives away their content to an aggregator, it doesn’t fully meet the aggregator’s demand and it surely doesn’t stop the aggregator from paying us the MGs.  All it does is make the competitor’s offering seem worth less.  That actually plays to our advantage in the short term but in the long term makes online video become the equivalent of radio.  Not that there’s anything wrong with that, but as we said, the real money is in television and that is the market whose best practices we should be emulating.