Don't expect the online video ad market to explode anytime soon

Mike Dano

SANTA CLARA, Calif.--It's no secret that prices are softening for online video ads. However, despite all the momentum in the market, I don't think the situation will improve in the near future.

First, let's start with the current situation for advertisements in online video. As the Wall Street Journal recently reported (sub. req.), online video ad rates continue to fall; according to ad vendor BrightRoll, prices for some ads declined 10 to 15 percent last year compared with 2011.

"We've seen some softening in prices, particularly as supply has cycled up," confirmed Michael Hudes, EVP of online video ad network YuMe. YuMe generates 1 to 2 billion ad impressions per month across its network of 2,500 content publishers.

The reason behind the pricing troubles in advertising is not necessarily a bad thing: The market is being flooded by new video content. Existing online video content suppliers are expanding their content offerings, and at the same time the number of new content suppliers continues to expand. For example, publishing giant Conde Nast earlier this month launched a digital video network that it said will showcase original video series based on content from its Glamour and GQ magazine titles. The result is more locations for advertisements to be displayed, and a lowering of prices for those ads as a result.

Further, marketers are expected to increase their spending in online video ads. According to eMarketer, spending for video advertising, both desktop and mobile, will rise from $2.93 billion in 2012 to $8.04 billion in 2016.

And which companies are reaping the rewards of this activity? According to comScore, Americans viewed 9.9 billion video ads in February, with Google Sites ranking first with its all-time high of 2.2 billion ads. BrightRoll Video Network came in second with 1.6 billion, followed by Hulu with 1.4 billion, with 1.4 billion and with 1 billion.

Thus, although the market is softening right now, spending on online video is expected to increase, as is the number of people watching video online.

So what's the problem?

"It's still very early days," Alex Rowland, president of advertising company Alphabird, said here at the OTTCON conference. "Everyone gets the potential, but it's very, very early."

Some in the online video market expect the segment to overtake the traditional TV space quickly--eMarketer predicted that by next year nearly three-quarters of all U.S. Internet users will watch video online at least once per month. But Rowland warned that advertisers won't necessarily invade the space at the same rate.

And I would agree. Although it's clear that Americans are quickly moving to online video, the online video market itself is evolving at an almost alarming rate. For example, two years ago most marketers wouldn't have put much thought into targeting tablets and mobile devices. Now, according to Brightcove's Albert Lai, video traffic to tablets is in some cases exceeding traffic to desktop sources among Brightcove customers. "The explosion of the tablet caught many publishers by surprise," Lai said.

It's that kind of surprise that will likely slow the progress of the online ad market. Marketers want to know exactly what their ad dollars are buying. As BrightRoll noted in a recent report, "marketers are being pressured to validate the effectiveness of online video, but difficulty measuring ROI and the lack of standardized metrics are significant obstacles to the growth of digital video advertising." BrightRoll cited a 2012 Break Media report that found 42 percent of the marketers it surveyed found it difficult to measure the return on investment of an online video ad.

"There's a battle in the living room going on," concluded Brightcove's Lai, explaining that all kinds of companies, from Apple (Nasdaq: AAPL) to Verizon (NYSE: VZ) to Comcast (Nasdaq: CMCSA) to ABC, are working to engage online video viewers in the living room and elsewhere.

Advertisers are well aware of the opportunity created by online video. But I doubt they want to enter a war zone. --Mike | +Mike Dano | @mikeddano

P.S. Don't forget to check out this detailed feature on the future of Aereo and Boxee.