One can hardly read an industry publication without stumbling across another headline that relates to over-the-top (OTT) services. It's the new-new thing – as exciting and byzantine as the internet was in its early days, when we were riddled with acronyms such as ADSL, HTML, HTTP and URL. And we were fascinated.
Today, OTT is often referred to alongside other acronyms like VOD, CTV, VPP and MVPD (or video on demand, connected TV, video partner program and multichannel video program distributor, for any of you playing catch-up). And we're confused.
Relax. We're not going to try to explain any of those related terms. Instead, we'll offer a practical, financial perspective: how to understand the sudden explosion of video advertising and how a media company might capitalize on it. Moreover, we'll offer a unique perspective on what's become the hottest new revenue opportunity for many media companies.
By now, after nearly three decades of hearing about disruptive innovation, we should be quite familiar with the pattern that OTT is carving across the media landscape. Like any disruptor, OTT isn't feeding off traditional revenue (such as broadcast and cable dollars) so much as it's creating an entirely new marketplace.
The overwhelming majority of OTT buyers have never purchased TV advertising, and more than one-third are actually adding money to their budgets to pay for it instead of taking money from something else, according to research from my company, Borrell Associates. Yet, viewed through the lens of a linear TV business model, this new and phenomenally large OTT opportunity is difficult to see.
What Exactly Is OTT?
You may think of OTT as the programming we watch on our living room TVs through YouTube, Hulu, Pluto, Peacock or other apps. The Interactive Advertising Bureau (IAB) has a broader definition, declaring OTT to be "any content streamed over the internet to a connected device [primarily connected TV, as well as other options like tablets] without the need for set-top boxes or converters."
By that definition, the 71-minute finale of Ozark is OTT; a four-minute YouTube video from a backyard mechanic on how to clean a carburetor is OTT; and a grainy eight-second TikTok video of a partygoer falling into a pool is OTT. And everything in between.
Advertising inserted within longer-form programs is the smallest part of the OTT opportunity. Looking narrowly at the "TV viewing" portion of the IAB's definition of OTT, programs watched via streaming platforms accounted for 28% of all video viewing. That's according to eMarketer, which puts broadcast TV viewing at another 28% and cable viewing at 37%.
Breaking down that 28% of all streamed TV viewing figure, at least 25% is devoid of any advertising. That's Netflix's portion. Other platforms like Hulu sell premium access that strips out the advertising.
Bottom line: at least 80% of ad-supported TV viewing is still done via cable, broadcast or satellite connectivity. And because Netflix and many other OTT platforms are advertising-free, ad-supported streaming video services garner less than 20% of the overall TV viewing pie.
Yet the longform streamed programming is all that a lot of people in the media industry focus on, mainly because it fits nicely into the old TV model we've known for generations. Rambling, amateurish YouTube videos and short, racy TikTok clips seem, well, too small to pursue and not a good fit for the business model.
And that's the hallmark of a disruptor: it starts out small, cheap and below the standards of the industry it will eventually disrupt.
Make no mistake: local-market OTT ad spending is significant. Borrell's 2022 forecast pegs the total for OTT video advertising at $21.3 billion, up 20% from 2021. By 2025, the total is forecast to surpass $26 billion, representing nearly 18% of all local advertising expenditures.
For smaller markets, we estimate that the amount spent on OTT is already in the tens of millions of dollars. In Augusta, GA, local businesses are forecast to spend $32.5 million on it this year. In Baltimore, $168 million. In Cedar Rapids, $66.1 million. In Davenport, IA, $44.6 million.
How has the spending become so large? First, consider that size is relative. Those who feel the most disrupted (in this case, broadcast TV and cable) are more focused on something vital: preserving their share of existing customers' ad budgets. So that's all the OTT spending they tend to see.
However, most of the money for OTT is not being shifted from broadcast TV budgets to OTT budgets. Here's one bit of proof: according to Statista, YouTube's ad revenue nearly matched that of NBC, CBS and Fox in 2019 and has grown a phenomenal 90% in the past two years. At the same time, national network advertising for those three broadcast companies declined about 2%. So, the money being plowed into YouTube advertising clearly isn't being carved from network TV budgets.
Another phenomenon of disruptive innovations is that nearly all early growth is derived from new business, not disrupted business. Here's proof: in 2021, 91% of local businesses buying OTT weren't broadcast TV buyers. These early adapters won't collapse TV advertising because they don't have any TV budgets to tap.
At the local level (where we'll remain for the rest of this article), the amount of money that businesses spend annually on streaming video advertising, or OTT, has grown 40% since the pandemic. In 2021, local OTT video ad revenue had swollen to $17.9 billion, accounting for 13.7% of all locally spent advertising and nearly twice as much money as was spent on local spot TV, according to Borrell estimates.
Looking at the internet from its earliest stages of advertising, video represents the third wave. The first started in 2000, as everyone turned to search engines such as Yahoo! and Google to explore what the internet had to offer. The second wave began as people started searching for something else – other people. Social media sites such as Myspace, Facebook, Instagram and Snapchat were born.
The third wave is unfolding now, as broadband speeds have made video more practical and as higher-quality smartphone cameras and microphones have made everyone a video content provider. The growth of OTT is so great that, within four years, spending is forecast to outstrip that of paid search.
Unlike search and social media advertising, however, the video wave has far greater potential to remain a local phenomenon. That's because it's exceedingly easy to purchase keywords such as "Ford dealership in Albuquerque" or to create and boost a Facebook post about a BOGO offer at your local dress shop.
On the flip side, it's not exceedingly easy to create a promotional video. How do you make it look and sound better than a Zoom video from your couch? There's lighting to consider. A script. What to wear? Where exactly should it be distributed?
The Local Opportunity
Enter a local media sales consultant. Roughly two-thirds of newspapers, TV stations, radio stations and cable systems are also peddling video production and video placement for these local businesses. And, as stated earlier, the buyers are not sophisticated TV advertisers that often come to the table with an idea of what they want to place and how it should look. They need advice. They need media expertise.
To further understand how local businesses are buying OTT, Borrell asked who's selling it to them. Turns out that nearly two-thirds of those who buy OTT are purchasing it from a local media sales rep. And not all are working with TV reps. In fact, more than one in five are buying OTT from a radio sales rep, and about one in ten buys from a newspaper sales rep. It's further proof that video is a local phenomenon, especially when considering that the vast majority of those who buy search engine marketing and social media buy directly from Google and Facebook.
Not all businesses that market themselves with OTT are actually buying advertising avails within streamed TV programs. A survey of 2,881 local ad buyers in 2021 showed that, while 41% said they engaged in streaming video/OTT marketing for their business, only 14% (about one-third of all businesses who use OTT marketing) were actually "buying" OTT advertising.
Average spending among local businesses using OTT marketing last year was $31,316, which is $10,284 more than businesses that bought OTT advertising alone. This indicates they're spending a significant amount of money on the development of those videos – another source of income for those local media companies that have ventured into offering marketing services as a pathway to creating and keeping new customer relationships.
On average, local businesses that buy OTT advertising availabilities were spending more on video-streaming service opportunities than their average spending on newspapers, direct mail or social media, and slightly less than buyers were spending on radio advertising. (That excludes the amount they spend on OTT video development.)
The budget for streaming video advertising comes from various sources. One-third of advertisers that responded to the Borrell survey said they created new budget in 2021 to spend money on OTT, while half said they carved the money from another media budget. Surprisingly, it wasn't just cable or TV spending that eroded. Twenty-eight percent of newspapers advertisers said they trimmed their print budget to spend on OTT advertising, and 17% of radio buyers said they trimmed radio.
Whether broadcast, cable, outdoor and print media will be able to seize this new opportunity remains to be seen. Many already have embarked on that path. In fact, in April 2022, more than one-third of 220 local media managers surveyed by Borrell said OTT was their hottest-selling digital product. For 18%, it was already their No. 1 revenue producer among all digital products. Half of all TV managers surveyed said streaming video was their top revenue producer.
There is much growth ahead for OTT. A leading indicator is the type of business that currently buys it. It's the larger advertisers with more money to experiment. Among more than 2,400 local OTT users surveyed, the total average annual ad budget was $370,173, more than five times the annual ad budget of non-OTT users ($68,632).
When larger advertisers begin experimenting and getting results, the environment becomes less speculative for the smaller businesses. There is much growth ahead, and much opportunity for local media companies in this fast-growing area.
This article was originally published in the Jul/Aug issue of TFM.
Gordon Borrell is CEO of the research firm Borrell Associates. He can be reached at (757) 221-6641 or email@example.com.
Click the social buttons to share this story with colleagues and friends.
The opinions expressed here are the author's views and do not necessarily represent the views of MediaVillage.com/MyersBizNet.