We all know the Internet is big - some 3.5 trillion web pages big, by the latest comScore estimates. But you wouldn't know it by looking at the current state of the online video market.
Nearly a decade after advertisers started batting around the idea of the Internet's "long tail," highly branded video publishers have yet to grasp the meaning of the phrase. The online video market is now pulling in over $6 billion. That's not bad. But with an injection of democracy, the market could grow to three times that size in very short order.
Video, still a bit player
Display advertisers have long made good use of the Internet's long tail for their banner ads, and programmatic buying has exploded as a result. And yet at that $6 billion figure, video makes up only a sliver of the nearly $50 billion digital ad market.
It's not for lack of interest. Some 188.6 million Americans watched online video via desktop computer in February 2015, including 55 million watching premium video. The average American Internet user consumes almost eight hours of online video a week. Online video CPMs are the highest in the industry, with demand seemingly unstoppable. So what's holding video back?
Party of five (four)
For the past decade, the top 35 display ad sellers accounted for roughly 85% of total digital advertising revenues. Not the most egalitarian trade, sure. But compare that to video: by our estimates, the top five online video destinations (YouTube, Facebook, AOL, Yahoo, and, again, Google) net 87% of all video views online and 82% of the video ad revenues. The next ten biggest publishers - not surprisingly, powerhouses from grand old media brands like ESPN, CNN, and Fox - account for 12% of views and 16% of revenues. You do the math.
The entire rest of the Internet produces a dumbfounding 1% of all video watched. ComScore 15-400 sites, where Internet consumers spend 40-50% of their total time online, are quite literally negligible when it comes to video views and video revenues.
Premium's leadership vacuum
So again, the question: why isn't the video market growing faster? For starters, a handful of prominent big publishers are to blame. Vanguard media companies like CNN, CBS, and Fox have brand names and the resources to produce and distribute enough premium video to satiate a fair chunk of the Internet's appetite. Yet today they are limited to serving their video only to the audience at their own websites. All the while the comScore 15-400 "1% club" goes untouched.
Among publishers with traditional TV programming operations, just 4% of their video ad views came from non-MVPD, non-portal third-party syndication in Q3 2014, according to FreeWheel. Yet their digital pure play competitors fared much better, with third-party syndication accounting for 45% to 55% of ad views over the first half of last year.
The appetite for ad space on top of premium video is clear - for most of the top media brands mentioned above, video inventory has been sold out on their sites for years. They clearly can't meet the demand only on their own sites. Without looking beyond their own noses, the YouTubes and Facebooks of the world will happily keep eating their shortsighted lunch.
So you're saying there's a chance?
That's where forward-thinking media brands have a shot. Clearly the biggest opportunity for the companies that already control the display market now is to "video-enable" the rest of the web. By inking syndication deals between traditional media companies ("video-rich") and mid-tail web publishers ("video-poor"), they could boost revenues by serving video ads for a fraction of the gross CPMs and splitting the returns with publishers. At the same time, advertisers can target a much larger and diverse number of consumers - and TV ad budgets can begin to flow to online more freely.
As more publishers (and audiences) get access to premium video inventory, there will either be new incremental ad spending or online video will finally start eating into TV's ad spend kingdom in a meaningful way. If that shifts the online video market to anything even remotely resembling the more mature display market, this could turn it from a $6 billion business into a $20 billion market, fast.
Still, Google (through YouTube) and Facebook have the biggest content libraries in the world to take advantage of this opportunity. Google will leverage YouTube to create the largest content exchange anywhere, potentially edging out the traditional TV players, and the search giant is already plugged in to most mid-tail publishers through its existing DFP ad platform. At the end of the day, that makes Google the most likely victor here, with Facebook as a likely number two.
As such, traditional media companies who are creating loads of video would be wise to start bringing in the incremental revenues delivered by syndication now while they still can. If video advertising is going to be dominated by a few parties like display, it will be dominated by those solving the supply issue. Google is the obvious pick. After all, it's an inventory problem.
Programmatic technology beyond advertising
Google and Facebook aren't the only companies working on this issue. A new round of video platform startups are also looking to get advertisers and publishers there. These companies are leveraging programmatic technology to match relevant video to text-based article pages, creating new video inventory where none existed previously. The result is new incremental revenues for publishers of all sizes. Technology that in an automated fashion brings relevant video into largely text-based websites is the key. The question is whether it's too late.
Start-up platforms like Tout and Vidible (recently acquired by AOL) are two of the up-and-coming technology companies who have created unique technology to tap into this opportunity.
The future lies with the facilitators, be it a startup or Google. They could end the growth-constrained, elitist age of online video and usher in a new, democratized era of growth. The technology is already here. But until it's put to more widespread use, the top-heavy elitism of the online video market will keep it playing second fiddle to online display advertising’s long tail - and the flow of TV ad dollars online will be slowed indefinitely.
Jeff Segal is a Director of Magid Associates’ Strategy Consulting practice, and Mike Vorhaus is the President of Magid Advisors.