The Future of Video Advertising: Three-Screens, #hashtags, and Streams

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Paul Sagawa / Artur Pylak

203.901.1633 / 203.901.1634

sagawa@ / apylak@sector-sovereign.com

February 13, 2012

The Future of Video Advertising: Three-Screens, #hashtags, and Streams

  • The 2012 Super Bowl may have been a turning point for leading edge advertisers in embracing hybrid campaigns across multiple screens and media. However, the balance of the market still tilts toward traditional TV ads, partly because the analytical metrics used to evaluate advertising alternatives do not yet adequately address the realities of modern media consumption. The Nielsen Company and others are pursuing audience measurement solutions that more accurately assess the value of viewer impressions across devices and media. We believe that these solutions will serve to highlight the value of the on-line impressions, likely at the expense of traditional TV. Over time, this could mean a meaningful shift in advertising, weakening the value of channel brands and amplifying the opportunity for streaming video and social media.
  • The Super Bowl offered a glimpse of the future – streaming video, event driven social media, hybrid ad campaigns, multi-screen viewing, etc.. 111 million people watched the Super Bowl broadcast live on NBC, while a little over 2 million watched on-line. Twitter saw its record for tweets per minute broken twice during the game, and Facebook usage was up 600% vs. the previous year’s game. Many of the big ads were launched ahead of the game on-line, and many of the big advertisers report big hits on their web sites in response to their spots. Mobile device use surged, rising from 25% to 41% of searches during the game.
  • However, in general, ad spending remains dominated by traditional media. While on-line video advertising is growing nearly 50% YoY, it remains just 1.3% of U.S. ad spending. Taking all forms of on-line ads into account, the Internet accounts for just 16.7% of total US advertising, vs. TV (38.2%) and print (29.3%). Total US channelized TV advertising is split between broadcast nets ($15B), local stations ($19B), cable nets ($25B) and multichannel system operators ($5B). The total of ~$65B is nearly two-thirds the size of annual fees paid by multichannel TV service subscribers, and 40% of total multichannel industry revenues. For broadcast nets and their affiliates, advertising revenues outweigh multichannel retransmission fees by more than 20 to 1.
  • A big reason for this is that the analytical metrics used by advertisers are built on outmoded assumptions about media consumption. TV ratings in particular have had to cope with a raft of innovation – multiple TV households, DVRs, streaming video and multi-screen viewing. Nielsen has set-top box data, but relies on user surveys to confirm the viewers in the room. The basic ratings do not assess whether so-called viewers are multi-tasking with mobile devices and assumes that all are attentive. We believe that this overrates television audiences and thus, inflates the pricing of TV advertising.
  • New analytical solutions to assess advertising effectiveness across media are emerging, revealing 18-34yo demographic shift to on-line. Nielsen has tracked on-line usage for just one year, but has been cautious in applying its findings to negotiations over advertising sales. On-line video advertisements already command higher prices than ads for channelized TV, due to the superior targeting, interactivity and tracking, as well as barriers to avoidance. Nonetheless, the data seems to show the key 18-34 year old demographic shifting its media consumption from TV to the Internet at an accelerated pace, confirming anecdotal reports. If the trajectory continues, it would have profound implications for advertising spending.
  • Video advertising spending will shift from channelized video to on-line, in an accelerating, irreversible, self-reinforcing cycle. This dynamic feeds the cycle – growing advertising is attracting more and better content, improving content attracts a larger audience and the audience attracts additional advertising. Internet video advertising is nearing the critical mass where its growth will be material to the multichannel TV industry and beyond which economics along the value chain from content creation, through aggregation into networks, and into multichannel service offerings could be severely disrupted.
  • Display and search advertising tied to secondary screen usage during video events may also siphon value from TV as part of increasingly hybrid ad campaigns. The boom in traffic on social networks and the spike in Super Bowl specific searches highlights the phenomenon of media multitasking. With the first iPad introduced just 21 months ago, “multiscreen” viewing is a new thing, but one that appears to be changing the fundamental nature of media consumption. Leading edge advertisers have already begun devising hybrid campaigns that co-ordinate messages across media, a trend that could further disrupt the economics of traditional video advertising.
  • The leading Internet aggregators and aggressive content brands, agencies and advertisers will benefit. Those tied to traditional multichannel TV will lose. We believe that on-line advertising is a big part of the concentration of the future value of the Internet into the hands of Google, Amazon, Apple, Facebook and Microsoft. Content creators, entertainment network brands, advertising agencies and advertisers that establish leadership in the emerging medium will also benefit, but those that remain committed to the traditional multichannel model will likely lose ground. Long term, we remain convinced that multichannel television distribution will wane, a serious concern for investors in cable MSOs and satellite TV operators.

Go Big or Go Home

The Super Bowl is advertising’s most important night of the year. Football fans and non-football fans attentively watched the 2012 Super Bowl as advertisers spent an average $3.5M to air a 30-second spot for an estimated 110M+ pairs of eyeballs. A Super Bowl media buy offers the broadest reach possible and with a 2012 CPM (cost per thousand impressions) of $31 was lower compared to the $37 CPM charged during last year’s Oscars and an average $35 CPM charged for a hit TV show (Exhibit 1). Only the largest markers can afford media buys of this scale and typically justify the spend when a marketing plan includes the launch of a new product or campaign. Of the 144 brands advertising during the past five Super Bowls, only seven have bought ads in every one.

Exh 1: Advertisement CPM Ranges by Media, 2011-2012

This year’s event was notable from years past because of multi-screen engagement: it was the first Super Bowl to be streamed live legally and the most widely measured on social networks. NBC sold different ad inventory on the stream than on the broadcast to the chagrin of some online viewers expecting to see adland’s newest and most ambitious creative efforts. Not everyone was able to stream as the public was limited to watching the stream on a Verizon mobile device or through a computer with Microsoft Silverlight installed. NBC, which hosted the broadcast feed reports that 2.1M unique visitors watched 4.59M streams shattering all previous records for live streaming of sporting events. Sandvine, an Internet traffic research firm, reported that while web traffic was down 20% from a typical Sunday evening, the NBC feed accounted for 6.2% of downstream traffic – a significant figure given this is measured among millions of websites rather than hundreds of TV channels.

This year marketers also attempted to use the Super Bowl to study the impact of advertising on 3-screens (TV, Internet, and Mobile). 75% of the ads shown were leaked or made available online before the game. Ads ended with Twitter hashtags and Facebook fan page information to measure ad effectiveness on those social networks. USA Today and YouTube engaged fans to rank their favorite ads, while measurement stalwart Nielsen offered its own take on brand buzz across social networks. The result? Companies that advertised and engaged consumers across platforms were most successful.

The Super Bowl remains a unique phenomenon in televised entertainment consistently beating its own ratings and audience estimates as well as maintaining a captive audience willing to watch advertising. The other 364 days of the year don’t feature a single night of programming with even half the audience. This year’s event illustrated that businesses have to become proficient in cross channel marketing across media and increasingly in Internet/Mobile or risk failure.

I Said I Loved You, But I Lied

Internet advertising topped $30B in the U.S. for 2011, the large majority of that being paid search, with display ads served to web pages making much of the rest (Exhibit 2). The rise of internet advertising has come largely at the expense of newspapers and Yellow Pages, both of which have seen drastic reductions in both rates and volume. Meanwhile, the big category – television advertising – has been largely unaffected, at least so far. U.S. spending on on-line video ads for 2011 is estimated to have jumped nearly 50% to just over $2B – huge growth, but still small potatoes compared with the $65B+ market for television advertising.

That $65B is spread across the multichannel TV value chain. The traditional broadcast networks take $15B of it, and their affiliated local stations take another $19B. Cable-only networks take a $25B bite, to add to the fees paid by system operators, who add another $5B or so in their own ad sales (Exhibit 3). In contrast, U.S. cable, satellite and telco TV system operators take in roughly $100M in fees from video subscribers, with roughly 35% traveling upstream as fees for content Exhibit 4). In this context, advertising is still the most important revenue stream funding the creation and acquisition of video programming.

Exh 2: US Online Advertising Revenues Forecast

Exh 3: Multi-Channel Advertising Revenues, 2010-2012

The importance of advertising revenue to the network owners that aggregate programming is the potential wedge to break the ties between them and the multichannel system operators. Cable bulls typically point to the alignment of interest between networks and systems to argue that the status quo is not threatened, but a shift in advertising could render that status quo asunder. For the broadcast networks (ABC, CBS, FOX and NBC) and their affiliates, advertising revenue outweighs the retransmission fees cable operators pay for the rights to the broadcast signal by more than 20 to 1. Indeed, CBS revenues from on-line alone, which include fees for programming licensed to others for streaming, are more than two-thirds the size of the retransmission fees for the entire industry.

Exh 4: Multichannel Revenues versus Programming Costs

If You Watch It, Ads Will Come … Eventually

While still prodigious, the growth in Internet video advertising has lagged the growth in the on-line audience, although the 20%+ price premium for internet video impressions suggests that the advantages of the medium are clear to a leading edge of early adopters. The biggest impediment to the rise of on-line video advertising has been the physical impediments to consuming internet video. Until recently, on-line video consumption was largely the province of desktop and laptop PCs, a considerable sacrifice in the comfort and convenience for viewers relative to the TV and the living room couch. The meteoric rise of tablets, led by the iPad has changed the circumstances, almost overnight. Since the April 2010 introduction of the Apple iPad, some 35 million tablets have been sold in the US offering convenient access almost anywhere and almost anytime (Exhibit 5). Furthermore, TV makers have embraced the smart TV concept, adding internet access to most larger screen models, piggybacking on the access already available on many of the nation’s 47.6 million video game consoles. In very short order, the universe of consumers able to conveniently access on-line video has expanded many fold, as the consumption of on-line video content continues to expand at a near triple digit rate.

Exh 5: Global Media Tablet Shipment Forecast, Worldwide, 2010-2015

Of course, the lag in on-line ad spending persists. Assuming the barriers to internet video consumption are falling, the biggest remaining impediment to a meaningful shift of ad dollars has been the inability of the entrenched ratings metrics to offer apples-to-apples comparisons. Traditional television ratings are based in a world in which there is little competition for the viewer’s attention. Nielsen counts the number of set-top-boxes from within its scientifically chosen sample households tuned to a particular channel, then supplements that with survey data that confirms which household members were in the room at the time.

In this day and age, that is not good enough. With the rise in the number of TVs per household, the audience may be more passive than in times past. Moreover, the advent of DVRs has enabled consumers to fast forward past advertising, damping the effectiveness in ways that can be assumed but not measured. Finally, many users are now multitasking, accessing their mobile devices while they are ostensibly watching TV. This effect was evident during the Super Bowl, when social networking activity spiked during the game and advertiser web sites were swamped. Nielsen only began tracking on-line video audiences at the beginning of 2011 and openly admits to the inadequacy of such a short sample in assessing a longer term trend. As a result, advertisers may have been more cautious in shifting resources to the new medium, caution that will almost certainly drop with time.

And It Would Have Worked, If It Weren’t For Those Crazy Kids!

Despite the short time series, the Nielsen data on internet video usage is intriguing. After decades of nearly uninterrupted growth in television usage, the advertiser coveted 18-34 year-old demographic appears to be scaling back their TV time, just as they scale up their time spent on-line and specifically, watching web-based video (Exhibit 6). ComScore, which primarily tracks the on-line side of the equasion, goes back further, albeit without detailed demographic breakdowns, but shows a broader and longer trend toward Internet video consumption (Exhibit 7). Nielsen has not introduced its new research into negotiations over network upfront ad buys yet, but management commentary suggests that the day is not far out.

Exh 6: New Media to TV Consumption Ratio by Demo

It is also interesting to note that the ratio of time on-line to TV time peaks in the younger demographics, which is an intuitive result but also foreboding for future media consumption. Even the ratio of time-shifted/DVR viewing vs. traditional channel viewing within TV time peaks for those demographics, suggesting a significantly more elastic perspective on program schedules than in the older age groups. It would seem that users that are not particularly attached to watching a particular show at a particular time would be far more likely consumers of on-line programming in the future, and these users are growing in number and in economic clout.

Exh 7: Total Monthly Minutes Spent Watching Online Video in the US

All of this speaks well to the opportunity for on-line video to take an increasing share of the available advertising dollar. We expect the trend to be strong and long lasting as a self-reinforcing cycle of content availability, viewership and advertising has already begun to accelerate and is likely irreversible. Essentially, the rising appetite for on-line video ad campaigns will attract new video programming from creators, producers and networks eager to tap into the flow of ad dollars (Exhibit 8). In turn, new content will prompt more consumers to spend more time, more often watching internet-based video. Larger audiences will draw more ad money, and so on, and so on. In this way, the transition from multichannel TV domination of advertising spending can change more quickly and more completely than many industry observers anticipate.

We note that television advertising was overwhelmingly dominated by the broadcast networks and their station affiliates just 20 years ago (Exhibit 9). By 2000, cable networks were capturing about a quarter of the pie and today, they are taking almost half of it, in addition to most of the $35B generated by multichannel operator license fees. We suspect that the transition to on-line will be faster than that, given the significant advantages that internet-based advertising gives to advertisers.

Exh 8: Peak Aggregate Traffic Composition – North America

Exh 9: Historical Gross Advertising, Cable versus Broadcast 1990-2010

Hybrid – It’s Not Just a Car, It’s an Advertising Campaign

The move on-line starts with a hybrid approach, as exemplified by the Super Bowl. Buzz-worthy ads are released first on-line, then promoted during broadcast with .url, #hashtag and fb.facebook links. A step further creates interactive elements that tie to broadcast advertising content, essentially making the television advertisement an enticement to come on-line, the implication being that the valuable piece is the engagement in the Internet segment of the hybrid approach. Eventually, the importance of the broadcast enticement fades relative to the on-line engagement, as direct on-line engagement gains effectiveness with the self-reinforcing cycle described in the previous section.

The rise of hybrid ads is particularly interesting, given the relatively recent explosion in multiscreen viewing. While it seems to have been with us forever, the first iPads were sold in April of 2010, a mere 22 months ago, and the population of tablets has risen threefold in the past year. Smartphones have also expanded their penetration dramatically in the past two years, rising from 15% of American adults to 35% (Exhibit 10). It results in a rapidly growing population of couch potatoes with a remote in one hand and their Internet connected device in the other. These people are likely NOT engaged by most televised advertising as they multitask, shifting the focus of broadcast spots toward enticing them to engagement on-line.

Exh 10: Smartphone Penetration by Age Demo, 2009 vs. 2011

What Does it Mean!

A shift in advertising dollars from multichannel television to on-line would be an enormous impetus to programming networks, and in particular the broadcast nets which still constitute the biggest draws on cable, to rethink their Internet position. The networks that respond the most quickly and boldly would likely benefit at the expense of those that cling to the status quo. Content creators and producers also benefit, as the rise of internet video advertising raises the attractiveness of an alternative distribution channel with potentially superior economics, and their bargaining power with the existing networks along with it. The internet based content aggregators – Google’s YouTube, Netflix, Hulu, Vevo, and potentially Facebook – may be the biggest beneficiaries, as they have no downside from the deterioration of the status quo. Advertisers and their agencies, that get this transition right will also be beneficiaries.

Exh 11: Winners and Losers

On the flip side, this is unequivocally bad for the providers of multichannel TV service – cable MSOs, DBS, and telcos. It is also probably yet another bad thing for local television affiliates, as their network partners stand to bypass them on-line. As noted above, there will both winners and losers from amongst the networks themselves, as some will execute the transition well and others will not. The same is likely true for big advertising brands and the agencies that advise them.

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