Venture capital is flowing into video ad networks: Brightroll recently raised $30 million, Yume raised $12 million. Tremor Video’s raised over $100 million.
But not everyone’s buying the hype: “it’s just not a big enough market for all the money invested, there can’t be six or seven category leaders”, argues Will Margiloff, chief executive officer of Ignition One, a unit of Japan’s Dentsu. Some have raised more money than their revenue potential.
Not all of the top 100 marketers even buy video advertising, but those that do frequently repurpose a 30-second TV ad spot and run it as a pre-roll, seeking massive scale. Investors are betting that ad networks can provide that scale. Meanwhile, while marketers continue to shun user-generated content and traditional media companies (TMCs) scale back free, ad-supported distribution, VCs don’t seem willing to start investing content plays. I asked a panel of VCs at Vator TV’s VentureShift if they planned on backing content startups; I might as well have asked the question in Swahili.
This would be fine if VCs were returning abnormally high returns to their limited partners, but they’re not.
Difference Between Text Publishers and Video Producers
Unlike content producers who publish articles, get indexed by search engines and generate millions of pages with as many ad impressions, video producers fail to properly index on search engines and tend to rely on a distribution-over-destination strategy. From 2007 to 2010 the number of producers that maintained their own-and-operated site fell from 57% to 18%. Assuming they have the right to sell ads against their content, producers have to weave through a byzantine workflow where they distribute their videos.
Meanwhile, YouTube has marched to a dominant position with 47% of views and 80% of users in the U.S. Barclays reported that YouTube could generate as much as $1.6 billion in revenue this year. This, despite the fact that much of YouTube’s content is UGC or lacks full rights to maximize monetization. U.S. video advertising is expected to hit $2 billion this year with global revenues weighing in at $3 billion according to the same Barclays report.
The Online Video Ecosystem is Broken at Worst and Inefficient at Best…
YouTube generates 3 billion daily video views; while there is an endless amount of video ad inventory, very little is being monetized even though advertisers are demanding more inventory than ever.
Exacerbating matters is that the majority of video advertising has actually been delivered in-banner (where a video ad is delivered in a banner ad unit) according to Accustream.
… and Ad Networks are Killing It as a Result
Brightroll is on pace to gross $50 million in 2011. If you tally the revenues earned by all video ad network, you’re looking at $300 million in aggregate global revenues.
Display ad networks like Undertone and Specific Media have entered the space via acquisitions (Jambo Media and BBE respectively). Others, like Collective, have simply started to sell video ads, too, realizing that while less than 40% of video campaigns come at the expense of TV, 43% comes from display ads.
Adding another $100 million in video ads from display networks and you’re now looking at $400 million globally and $300 million in the U.S. (or 15% of the $2 billion U.S. video pie)
Giving more credit where it’s due, most ad networks have paved the way by embracing VAST, or Video Advertising Serving Template, which allow preroll and companion ads to dynamically rotate without having to traffic the underlying assets, saving time and money.
Capping preroll ads to one per 7 minutes, YouTube has hitherto shunned both ad networks and VAST tags (not a bad strategy). So while Barclays pegs YouTube’s 2011 potential revenues at $1.6 billion, that is global and includes text links, display banners, overlays and prerolls.
How Much Video Advertising Do Non-Content Owners Generate?
If you extrapolate YouTube’s video revenues to about $750 million (of the $1.6 billion) and add:
– $400 million from video and display ad networks,
– Hulu’s $500 million in revenues,
– and round up other aggregators’s (DailyMotion, Metacafe, Break Media) revenues,
Then about $1.7 billion of the total $3 billion pie is booked by aggregators and ad networks while $1.3 billion is spent with publishers. However, with the aggregators and ad networks paying out 50% (or $850 million) of their revenues to content owners, then about $2.15 billion (or 72%) is spent with content owners, albeit mainly the TMCs. Nonetheless, the vast majority of VC dollars keep flowing to ad networks and aggregators even though new media content creators have a legitimate shot of disrupting TMCs and eating away ad dollars.
Difference Between Video and Display Ad Networks
Display ad networks grew as a result of there being too much unsold inventory supply on web properties; video ad networks have grown by capitalizing on there being too little quality inventory supply on each site, thereby selling across thousands of websites, where each individual publisher lacks the scale marketers seek.
The Specter Haunting Ad Networks and Publishers
Adding to the intrigue is the rise of demand or supply-side ad exchanges like Rubicon, Adap.tv, Appnexus, Invite, Turn, Pubmatic, LiveRail; complicating matters is how some ad networks like Brightroll have dove into the space by launching their own exchange.
The quantitative approach is striking a chord with marketers: Razorfish has doubled spending on the exchanges while reducing the number of publishers it works with directly, from 1,832 in 2007 to 598 in 2010. Investors should be wary, though.
History repeats itself in many ways. Same way that video networks have emulated the growth of display networks, we have seen a rise and fall in valuations of display networks, with the zenith coming in the period covering the exits of Advertising.com, BlueLithium, Right Media, aQuantive and Doubleclick (though all of these firms were more than mere ad networks, granted).
Yahoo! and Google paid 10 and 20 times revenues when they bought RightMedia and Doubleclick respectively. Essentially, the buyers agreed to pay 10 and 20 dollars for each dollar of revenue. But they also implicitly argued that they would – ceterus parabus – be willing to wait 10-20 years before recouping their investment, an eternity in tech. Meanwhile, with content having a longer shelf life and being a less risky investment, you have to wonder when VCs will be forced to pivot into taking content more seriously as a lucrative segment to back.
They say insanity is doing the same thing and expecting a different outcome, the only question is who’s more insane, the VCs or me.
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