As Video Advertising Options Increase, Commoditization Will Take Its Toll

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Part 4: Myers 2010-2020 Media Trends Report

In 2009, advertisers invested more than $41 billion in six categories of national video advertising. Total national video advertising is projected by Jack Myers Media Business Report to grow at an average annual rate of 6.6% for the next three years and will continue to be strong for the remainder of the decade. The issue for media companies is how marketers are likely to redistribute these expenditures among broadcast network television, cable network television, broadcast syndication, cinema advertising, online video advertising, videogame advertising, mobile video advertising and other emerging platforms. And how will the increases in available inventory from emerging platforms impact on traditional video media ad costs?

With cumulative audiences reached by broadcast networks declining every year since the mid-1980s, their total ad revenues still grew from $15.3 billion to $16.8 billion between 1999 and 2009, significant since cable network television ad revenues grew from $8.0 billion to $18.4 billion during that period. Although the amount of total broadcast plus cable network inventory grew, demand for broadcast network inventory remained strong as advertisers compensated networks for lost audiences with increased prices.

The core question for the industry is when the size of broadcast network audiences will erode below the threshold at which advertisers are willing to increase costs to compensate them. The parallel question is when digital video media options will offer meaningful value and enable advertisers to shift their investments without losing impact or value vs. network TV buys.

Many analysts, including me, believed the 2009 recession would herald a new era of advertiser frugality and that networks would no longer command the premiums they had been generating. That was not the case. The 2010/2011 Upfront market saw average cost-per-thousand increases of 7.0% to 10.0%, more than compensating the networks for their season-to-season audience erosion of an estimated 3.0%. And while online and mobile video options are improving, they are far from being recognized as either broadcast or cable replacement vehicles. But they are gaining traction as extensions of traditional media buys with more and more media sellers extending their video content to digital platforms.

Most traditional media companies are depending on their ability to generate value for this new inventory in online, mobile, iPad and other new platforms. NBCU's Jeff Zucker outlined the challenge of exchanging analog dollars for digital pennies, and the reality of this concern is not lessening, although the cost comparison is more likely dimes and potentially quarters than pennies. Long-term, video media sellers need to be concerned.

Total advertising spending between 1999 and 2009 grew from $150 billion to $181.5 billion, an annual average rate of only 2.1%. During that period, the U.S. economy experienced an annual average rate of inflation of 2.56% (http://www.usinflationcalculator.com/inflation/current-inflation-rates/). In real dollars, viewed in a decade-long context, advertising has been in a deflationary spiral. Although most forecasters, including me, are reasonably bullish on the future of advertising, growth projections remain at or below inflation levels, meaning real growth will be flat to down for the ad business. As evidenced by Google's introduction of its Do-It-Yourself App Creation software, targeted to teens and unsophisticated users, both technology and content will become increasingly commoditized into the foreseeable future. Audiences will be progressively more splintered and difficult to reach. The value of media sellers that can successfully aggregate relevant and engaged audiences will, in this emerging marketplace, become even more valuable, following the broadcast network model since the early 1980s.

But there simply will not be sufficient dollars in the marketplace for today's video media leaders to sustain the mid-single digit growth that most of them require without restructuring their current business models. Technology is enabling too many opportunities for generating audience reach at improved cost efficiencies. Too many video media alternatives and more cost efficient ways to reach audiences effectively will eventually result in disintermediation of the traditional media/agency buyer-seller relationships that are sustaining the businesses of most TV networks, magazines and other established media.

It may be 2015 or 2016 before this reality significantly impacts the business, but by that time traditional content-centric media sellers will need to have in place alternative revenue models that generate revenues above and beyond what is available in the share-of-market and CPM game they play in now.

While advertising budgets were growing only one percent annually over the past decade, total marketing expenditures, of which advertising represented an estimated 27% in 2009, grew an average 3.6% annually. Although consultants, economists and analysts have been recommending for at least three decades that media companies expand their focus beyond marketers' advertising budgets and take a more holistic approach to the marketing ecosystem to attract non-advertising marketing budgets, they have, for the most part, not needed to do this.

The greatest value of new media technologies is not the ability to buy audiences at progressively more cost efficient prices. It's the ability of content producers to identify their audiences, build databases and loyalty programs, communicate directly to them and motivate them to act in measureable ways. Through these capabilities, content-centric media companies can begin attracting those non-advertising marketing dollars that are targeted to retail trade initiatives, consumer sales promotion, event marketing, social and conversational interaction, direct sales and other "below-the-line" activities.

The inevitable progression of technological innovation is commoditization and disintermediation of established business models. At some point during this decade, commoditization will catch up to even the most protected media assets and those that have developed alternative revenue models will be thankful they did.