Online video: the hype and the reality
Despite the hype, the outlook for online video revenue does not suggest it will be leapfrogging free-to-air TV as the media entertainment platform of choice any time soon.
Reports are over 10.8 million Australian's watch online video each month –10.8 million. It's a big number, right? Well sure … but how come at current growth levels the revenue of the online video market by 2016 will be no larger than the online display market was in 2005?
For all the hype of online video, the numbers right now simply aren't there. In this market alone there are 15 to 20 operators working in the online video space, offering pre-roll video, overlays and in banner. It's a keenly explored area for investors who are looking to capitalise on the reducing TV audiences who are moving online both internationally and locally. Telstra dropped $US35 million into US video technology platform Ooyala.
The problem is, in reality, the TV audience isn't reducing. According to PricewaterhouseCoopers, the average time spent viewing TV broadcast in the home each month via traditional sets increased by 6.1 per cent between the fourth quarter of 2011 and the same period in 2010. Households now watch almost 114 hours of broadcast TV per month. Free-to-air audiences have grown 5 per cent, with the commercial FTA networks reaching 14.2 million people per day. Not bad and certainly not a reduction.
Now, this doesn't mean the online video space isn't a growing one. Online video and TV can co-exist and both can flourish. However, if online video is currently reaching more than 10.8 million people a month, then why is the revenue online video is generating only equate to 2 per cent of what the FTA channels are generating? And why in 2016 is it forecast to only account for 5 per cent
What's the issue here? With 15-plus operators all selling online video solutions the problem can't be market coverage? The sales machine around online video is well and truly developed. Is it agency hesitation? Doubtful. Agencies have been vocally supportive of online video for the better part of the past five years – showcasing it as a great way to extend TV reach and place advertisers in a so-called ‘lean forward' medium. Is it price? Unlikely. Whilst some online video is vastly more expensive than broadcast TV on an audience basis, most of the inventory now has decreased in price as supply has opened up and competition has increased.
If you look back at the history of the online advertising market in Australia, or were lucky enough to be involved in the early 2000's, you will be aware of the growth the market experienced during this time. Back in 2005 the online display market reached the milestone of reaching $194 million in revenues for the 12 months ending December 2005. Since December 2003 it had grown 2.5 times in size and enjoyed for 2005 year-on-year growth above 60 per cent. In 2006 it enjoyed a similar growth trajectory and powered past $300 million and as a total industry (including search and display) past the magic $1 billion mark.
Looking at PWC's Australian Entertainment and Media 2012-2016 outlook, the growth forecasts around the next online boom don't seem so boom-like. Online video is projected to bring in $72 million of revenue in 2012. In 2013 this will move to $100 million and by 2016 the total online video market will be worth $192 million – that's $92 million of revenue growth in three years.
Compare this to the growth that online display achieved a decade before. Even without adjusting for inflation, the display market grew from $80 million to $303 million in the three-year period from 2003 to 2006. And this was a time before digital marketing managers, digital departments in ad agencies, behavioural targeting, automated trading, digital strategists, consultants and all the other things which have fuelled the industry over the past five years.
PWC 2016 growth projections of $192 million for online video in isolation appear positive, especially when you compare this with forecast revenue for pay TV advertising for the same period of $483 million, however pay TV has the luxury of end user revenue for the same period being in excess of $4 billion. This is $4 billion they can use to secure content, develop content, develop technology and improve their offering – $4 billion they can use to keep producing the professional content audiences, regardless of channel, demand from the moving picture. Content creation costs should not change depending on whether a video is broadcast on TV or online – the user doesn't differentiate. This means cheap content won't work online.
For online video, this $192 million will need to cover a broad range of overheads. It needs to cover licensing of content (which is very expensive), the creation of content (even more expensive, generally), infrastructure, sales teams, commission payments and other business expenses. For a ‘network' selling others inventory, the challenge is generating enough scale; for a company seeking to monetise their owned and operated inventory the challenge is keeping costs contained and generating viewer volume. Video content is expensive and high risk, just ask the TV networks. Winning formats require a large chunk of experience, a larger chunk of cash and an even larger chunk of luck and good timing.
With that in mind, the best positioned platforms in Australia are YouTube, who have both significant volume and low content costs; and VEVO which enjoys the same volume and is partially owned by the major content owners – record labels. Fifty to 70 per cent or more of the entire market being distributed across these two players is not an unlikely scenario. For the rest, it's a scrap fight over the rest of the pie and an operational challenge to keep operational costs low, network/partner payments even lower and hold CPM yield to make a buck.
For a next big thing, the numbers around online video still seem underwhelming. The hype unfortunately isn't matching the reality, nor the forecast future reality. Online video is undoubtedly a vitally important piece of the digital advertising pie, but in its current guise will remain a very niche end business for the foreseeable future. Assuming no audience growth and the above-mentioned PWC figures being accurate, in 2016 FTA TV will be extracting $19.86 per viewer per month, whilst at the same time online video will be extracting just $1.48 per viewer per month.
Considering these economics, TV is the dying business?
Ben Shepherd is group commercial director at Dainty Consolidated Entertainment and blogs at Talking Digital.
He owns Telstra shares.
For all the hype of online video, the numbers right now simply aren't there. In this market alone there are 15 to 20 operators working in the online video space, offering pre-roll video, overlays and in banner. It's a keenly explored area for investors who are looking to capitalise on the reducing TV audiences who are moving online both internationally and locally. Telstra dropped $US35 million into US video technology platform Ooyala.
The problem is, in reality, the TV audience isn't reducing. According to PricewaterhouseCoopers, the average time spent viewing TV broadcast in the home each month via traditional sets increased by 6.1 per cent between the fourth quarter of 2011 and the same period in 2010. Households now watch almost 114 hours of broadcast TV per month. Free-to-air audiences have grown 5 per cent, with the commercial FTA networks reaching 14.2 million people per day. Not bad and certainly not a reduction.
Now, this doesn't mean the online video space isn't a growing one. Online video and TV can co-exist and both can flourish. However, if online video is currently reaching more than 10.8 million people a month, then why is the revenue online video is generating only equate to 2 per cent of what the FTA channels are generating? And why in 2016 is it forecast to only account for 5 per cent
What's the issue here? With 15-plus operators all selling online video solutions the problem can't be market coverage? The sales machine around online video is well and truly developed. Is it agency hesitation? Doubtful. Agencies have been vocally supportive of online video for the better part of the past five years – showcasing it as a great way to extend TV reach and place advertisers in a so-called ‘lean forward' medium. Is it price? Unlikely. Whilst some online video is vastly more expensive than broadcast TV on an audience basis, most of the inventory now has decreased in price as supply has opened up and competition has increased.
If you look back at the history of the online advertising market in Australia, or were lucky enough to be involved in the early 2000's, you will be aware of the growth the market experienced during this time. Back in 2005 the online display market reached the milestone of reaching $194 million in revenues for the 12 months ending December 2005. Since December 2003 it had grown 2.5 times in size and enjoyed for 2005 year-on-year growth above 60 per cent. In 2006 it enjoyed a similar growth trajectory and powered past $300 million and as a total industry (including search and display) past the magic $1 billion mark.
Looking at PWC's Australian Entertainment and Media 2012-2016 outlook, the growth forecasts around the next online boom don't seem so boom-like. Online video is projected to bring in $72 million of revenue in 2012. In 2013 this will move to $100 million and by 2016 the total online video market will be worth $192 million – that's $92 million of revenue growth in three years.
Compare this to the growth that online display achieved a decade before. Even without adjusting for inflation, the display market grew from $80 million to $303 million in the three-year period from 2003 to 2006. And this was a time before digital marketing managers, digital departments in ad agencies, behavioural targeting, automated trading, digital strategists, consultants and all the other things which have fuelled the industry over the past five years.
PWC 2016 growth projections of $192 million for online video in isolation appear positive, especially when you compare this with forecast revenue for pay TV advertising for the same period of $483 million, however pay TV has the luxury of end user revenue for the same period being in excess of $4 billion. This is $4 billion they can use to secure content, develop content, develop technology and improve their offering – $4 billion they can use to keep producing the professional content audiences, regardless of channel, demand from the moving picture. Content creation costs should not change depending on whether a video is broadcast on TV or online – the user doesn't differentiate. This means cheap content won't work online.
For online video, this $192 million will need to cover a broad range of overheads. It needs to cover licensing of content (which is very expensive), the creation of content (even more expensive, generally), infrastructure, sales teams, commission payments and other business expenses. For a ‘network' selling others inventory, the challenge is generating enough scale; for a company seeking to monetise their owned and operated inventory the challenge is keeping costs contained and generating viewer volume. Video content is expensive and high risk, just ask the TV networks. Winning formats require a large chunk of experience, a larger chunk of cash and an even larger chunk of luck and good timing.
With that in mind, the best positioned platforms in Australia are YouTube, who have both significant volume and low content costs; and VEVO which enjoys the same volume and is partially owned by the major content owners – record labels. Fifty to 70 per cent or more of the entire market being distributed across these two players is not an unlikely scenario. For the rest, it's a scrap fight over the rest of the pie and an operational challenge to keep operational costs low, network/partner payments even lower and hold CPM yield to make a buck.
For a next big thing, the numbers around online video still seem underwhelming. The hype unfortunately isn't matching the reality, nor the forecast future reality. Online video is undoubtedly a vitally important piece of the digital advertising pie, but in its current guise will remain a very niche end business for the foreseeable future. Assuming no audience growth and the above-mentioned PWC figures being accurate, in 2016 FTA TV will be extracting $19.86 per viewer per month, whilst at the same time online video will be extracting just $1.48 per viewer per month.
Considering these economics, TV is the dying business?
Ben Shepherd is group commercial director at Dainty Consolidated Entertainment and blogs at Talking Digital.
He owns Telstra shares.
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