Understanding the digital video economy

The internet has blurred distinctions between print and video-based organizations and undermined the geographical divides that once structured the print news landscape. It has created the conditions that allow a startup like BuzzFeed to amass a digital audience rivaling a legacy operation like The New York Times.

Along the way it has disrupted the traditional relationship between publishers and advertisers.

[pulldata align=right context=”There is great opportunity in video for those who understand the economics”]

Most online content is accessible to nearly everyone everywhere. Yet only a few companies hold the deep knowledge of consumer behavior that large advertisers covet. In other words, local organizations are essentially competing in a global, digital marketplace without access to the same global advertising dollars.

Other challenges abound as well: Video advertising commands higher prices than print advertising but video is more expensive to produce and requires scale to be monetized effectively. Despite video’s promise, video advertising prices continue to drop.

This suggests video should be considered as part of a broader strategy rather than a standalone solution.

This section explores:

• The new competitive landscape
• Three forces contributing to the downward pressure on video ad prices: scope, technology, and programmatic
• How large publishers are attempting to protect video advertising revenues and what smaller publishers can do

The new competitive landscape

As everyone knows by now, a Google search is more than a search. It’s an evolving collection of information about your interests that is sold to advertisers looking to target potential customers with pinpoint precision.

The breadth and depth of this consumer information has become so valuable that five companies, led by Google and Facebook, control more than 50 percent of the online advertising marketplace. Publishers are competing for the remaining 50 percent, without the depth of customer information Google and Facebook offer advertisers or equivalent investments in technology and platforms.

The competitive disadvantage for traditional publishers is clear, according to Allen Klosowski, mobile vice president at online video advertising platform SpotXchange. “It’s like they brought a tricycle to a Nascar race.”

[pulldata align=center stat=”2-3 million” context=”Washington Post video shows were viewed each month, but they still weren’t profitable.”]

The financial goal of digital video advertising is to create a one-to-one connection with an audience member. The more content that’s available, the greater the likelihood of making a mass of one-to-one connections. These connections are sold in bundles of one thousand. Using the Latin “mille” meaning “thousand,” this advertising unit is referred measured by a CPM or cost-per-thousand.

The Washington Post learned first-hand the demand for scale.

The Post launched a series of TV-like shows in June of 2013 on their website, at the time its biggest investment in more than a decade. The shows were received favorably. Three months later they were gone. While the shows averaged a respectable 2 to 3 million views a month, the Post needed many times that viewership to generate consistent CPM revenue and cover the cost of production.

The need for scale has created new revenue models too, as new aggregators and distributors enter the space once occupied solely by distributors like AP and Reuters.

NDN is a 6-year-old Atlanta-based distribution platform that offers 4,000 videos to clients each day across categories as diverse as “Animals” or “Sports” or “Parenting” or “World News.” NDN supplies the technology for free. At the core of its model is a revenue sharing agreement. If a publisher shares content with NDN or distributes the content of other NDN clients, the ensuing revenue is shared.

This model has turned former competitors into allies.

“We’ve helped advance the mindset that your neighbor isn’t your competitor — [your neighbor] could be a source of revenue,” said Stephen Bach of NDN.

As the market for digital video advertising becomes more efficient, it will lead to price compression. SpotXchange is a platform for video advertising, a marketplace for publishers and advertisers. It markets billions of video opportunities each day. The vastness of this market means advertisers can scan billions of “impressions” to select the million they want to buy, forcing prices down.

“We’re not creating it — it’s the fact that there is that much. The internet is that big,” Klosowski said. And the technology is that good.”If you look at these ad tech companies they’re saying stuff like … ‘We’ve got 50,000 algorithms making decisions within microseconds’ — and that’s true. It’s robots hunting humans.”

Another factor leading to price compression: the increasing use of programmatic advertising. Simply stated, programmatic is an automated auction that sells residual inventory at discounted prices. (In this case, “inventory” refers to views or impressions.)

Programmatic helps publishers monetize every last impression. Many fear however, that the discounted rates that advertisers pay for programmatic will exert downward pressure on other, more valuable “tiers” of advertising.

The best way for publishers to protect premium prices for their own video ads is to gather first-party data about their audience, Klosowski said, and use that data to communicate the special value of that audience, particularly on programmatic exchanges where data is the key factor in ad purchases.

Protecting ad revenues across platforms and through partnerships

CNN.com’s former General Manager KC Estenson talked in terms of “protecting CPMs.” CNN.com has more than 200 million video views a month.

“We believe we can cordon off and protect video CPMs. So 18 months ago we re-prioritized video in our infrastructure and began mirroring and mapping that to mobile and social.”

Meaning that CNN advertising sells at a uniform CPM across all platforms.

The Wall Street Journal has taken a similar approach, according to News Corp senior vice president of strategy Raju Narisetti.

“We are very agnostic about where you watch WSJ Live because wherever you watch it, the ad model is still in our hand,” he said.

For smaller publishers, revenue strategies include:

• Build partnerships to maximize video content, viewership and CPMs
• Focus advertising strategies on small to medium-sized businesses
• Protect advertising inventories

Building a mass of scalable video is critical for smaller publishers. Two years ago Gannett created a video center in Atlanta, accumulating material from 46 TV stations and sharing it among various Gannett properties, including USA Today.

Dave Callaway, the editor of USA Today, said the paper publishes 50-60 pieces of video per day and “we haven’t even begun to approach the saturation point.”

McClatchy is in the process of creating a similar video sharing service among its newspapers. Newspaper chains can increase their video inventories and attract more viewers by aggregating assets and partnering with other distributors.

Allen Klosowski of SpotXchange believes that when it comes to advertising strategies, local publishers should focus on small to medium-sized businesses, where they still retain an advantage.

“They have the existing relationships with the advertiser in their marketplace — that’s something that Google is not focused on right now, really solving those problems for your small to medium-size businesses. They’re worried about solving problems for people who have giant budgets.”

Mike Donoghue, vice president of Advance Digital, warns against “commoditizing” inventories. In other words, publishers need to make sure that premium ad inventory retains its integrity and value for clients in relation to other types of advertising.

“You need to distinguish very carefully what inventories clients receive, what levels of audience targeting, what ad types. Transparency, reporting and optimization are key,” Donoghue says.

Advance Digital is a sister company to Reddit and Conde Nast and owns 13 digital properties across the country. According to Donoghue, offering well differentiated advertising solutions has helped Advance Digital monetize video.

[pulldata align=right stat=”50%” context=”of News Corp revenue should come from video in 5 years”]

Although success stories exist, most executives seemed more enthusiastic about the future of digital video than the present day reality.

Rahul Chopra, the global head of video for News Corp, said that in his opinion “50 percent of our revenues should be coming from video in the next 5 years.”

Video may offer financial promise but it’s not easy, said Bruce Headlam, the managing editor of video for The New York Times.

“If people jump into video thinking this is a way to quickly grab a lot of ad dollars they’re going to be disabused of this notion very, very quickly. It’s hard to do and it’s expensive to do and there’s a lot of competition,” Headlam said.

That is why The Atlantic’s general manager Kim Lau believed that ultimately video advertising is only one part of the answer. The full financial picture might include a combination of paywalls and partnerships.

“There’s no way you can make video content production succeed without having multiple monetization strategies,” Lau said.