A Suit With a View: Web Video's Lower Ad Load Is Unsustainable - Jonathan Bokor - MediaBizBloggers

One of the most pleasant things about watching TV shows online has been the relatively light ad load compared to watching the same shows on television. The 2-3 minutes of ads I typically encounter in an online episode represent about one fifth of the amount I experience when watching an hour of traditional TV. Advertisers seem to like it too, as the reduced clutter has made the Hulu environment an attractive place for experimentation.

Unfortunately, it's unsustainable. Unless CPMs are much higher for online video, or some other form of revenue can be obtained from online, the ad load gap between online TV and traditional TV results in a significantly lower amount of revenue per online view. This revenue gap will have to be significantly reduced, if not eliminated, and at least some of the equalization will have to be achieved by upping the number of ads online. Otherwise, online video in its current form simply isn't a business worth being in for owners of TV content.

But let's step back for a moment and get some perspective. Broadcasters, desperate to find a second revenue stream to supplement their traditional ad revenue, have embraced online distribution of their hit content and placed a lot of their shows on Hulu and their own sites. Cable channels on the other hand, which can count on subscriber fees from cable operators to supplement their advertising revenues, have wisely been far more circumspect. Given that the broadcast networks were struggling to maintain single digit ad revenue growth before the current downturn, and that they now cumulatively represent less than 50% of overall viewing, they should be applauded for taking risks and embracing new technology.

And in many ways their efforts have succeeded. Hulu's spectacular rise confounded many pundits, and it has quickly become the number two video site on the Web. But the question remains whether enough new revenue can be generated from repurposing TV shows online. As long as the online sites carry a much lower commercial load, they have to charge much higher CPM rates to make up for it. Some of the advantages of the online platform, including targeting, less clutter, interactivity, and better measurement, seem to have yielded increased CPMs, but nowhere near enough to overcome the smaller number of ads. This is what Jeff Zucker of NBCU was talking about when he referred to "digital pennies vs. analog dollars." From a business standpoint it makes sense to begin narrowing the ad load gap in order to help narrow the resulting gap in revenue per view.

But some network executives (and many others) argue that Web users will not tolerate more commercials, and that they'll flee if forced to watch more commercials online. Ad sales teams argue that the reduced clutter of the online video environment is part of what attracts advertisers, and reducing that benefit will hurt ad sales.

Maybe so, but that lower ad load will eventually convert traditional TV viewers to online TV viewers, threatening the much larger revenue stream from traditional TV ads. If viewers can watch the same content online with fewer commercials, many of them will find ways to pipe that online stream to their televisions. Although a hassle today, broadband-enabled TVs and separate devices like Roku and XBox are making it easier every day. And as the newspaper and music industries have already learned, if your customers can get your content for free or with fewer ads, they will do so, and it will significantly hurt your business.

In order to avoid undermining their entire business, broadcast networks must begin to equalize the differential in revenue per view between online and TV, and by necessity that means they must increase the number of ads online. Luckily for the networks, nobody knows how to do that better than them, since they've been at it since the early days of television. If done gradually, most viewers will grumble and complain, but continue to watch.

Ah, but if you increase the number of ads online, won't you just cause CPMs to fall and cause viewers to watch fewer episodes online? Yes, CPMs will likely fall as the amount of ad inventory is increased, but the effect should be moderate if it is done gradually. If CPMs drop dramatically, then the market is signaling that full episode online video simply isn't a very good business, and that's a reality that should be faced sooner rather than later. Similarly, if viewers truly are turned off by more commercials and drastically reduce the amount of online episodes they consume, then once again the market will be providing a valuable signal.

In either case, network executives would need to accelerate their efforts to find another way to save the broadcasting business. Creating a premium model for online video, as Hulu has recently indicated it is interested in doing, would be one possibility. The other obvious method, and the one that looms as the most realistic way to ensure the long term viability of broadcast, is to do what it takes to get cable, satellite and telco operators to pay carriage fees for broadcast networks, as they do now for cable channels. CBS is wisely pushing this issue now, rather than waiting. Granted, it will be an extremely contentious and ugly battle, but unless online video can demonstrate that it is a powerful generator of incremental cash (and thus save broadcast's bacon on its own), it's a battle that will have to be fought. Perhaps offering to include the content that's now on Hulu within the nascent TV Everywhere initiative might get the process moving.

Sooner rather than later, broadcasters should begin the process of raising the ad load in online video so that revenue per view moves towards rough equivalence with traditional TV. Ad rates will fluctuate accordingly, but hopefully the advantages of online (targeting, better measurement, etc.) will keep CPMs higher than traditional TV. If this succeeds, then broadcasters have the makings of a long term business on the online side. If not, it's time to face reality and begin looking hard at other alternatives.

Jonathan Bokor is a consultant specializing in monetization strategies and business development for both digital media and traditional media companies. Jonathan can be reached at jbokor@yahoo.com.

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