The Ad-Supported Video Industry: A Consumer Evolution, Not a Revolution - Brian Wieser

Originally published: 4/27/2011

Many observers of the media industry, citing ongoing changes in consumer behaviors - for example, cord cutting or commercial skipping - say these changes will impact the business of video advertising in general and linear TV advertising more specifically.

While it is intuitively appealing to begin by analyzing changes in consumer habits, I contend that evolution is far more likely than revolution in years ahead.

Let's break down the industry into some underlying components, collectively referred to as its Value Chain:

The revenue models for each of these components have been well established for years. Content creators such as actors and writers tend to sell their work/performance rights to producers. Individual producers of television content generally find it most profitable to sell content to packagers such as TV networks, who buy from multiple producers (some of who they directly control). Packagers' business models often feature revenue streams from advertisers as well as distributors. Distributors of television content, who have the direct relationship into a consumer's home, come in a variety of forms (and usually with a range of bundled services alongside video); many distributors can re-sell the same packaging. What we are calling "display" is even more diverse, but conventionally involves a device which receives content, such as a set-top box, and another one which renders it on a screen, such as a television set.

How will each of these components evolve? While the creation function remains mostly constant (other than, perhaps, the increased use of computer-generated content), others are more subject to potential change.

For example, producers will refine their concepts of "windows" (exclusive rights to different packagers at different points in time) to maximize profits. The dominant windows will be those which capture the bulk of revenue faster than any others. For the most part, on television this will likely be the conventional first-run broadcast or cable window as long as the majority of the population accesses content as they do today.

Similarly seeking to maximize revenues, packagers will continue to seek higher distribution fees as long as they can be passed along to consumers. Concurrently, packagers will continue to seek advertising budgets as long as packages of their inventory uniquely satisfy objectives of advertisers (which television does because of its reach-frequency dominance). By contrast, for the present time and foreseeable future, packagers who are primarily based online are limited in their scale – and thus their sustainable clout with producers – because of the bottlenecks in distribution capacity of content through the "last mile" to the home.

Capacity bottlenecks will require billions of dollars and years of innovation to overcome, depending on the efforts of distributors to invest in delivering more bandwidth. However, competitive incentives to offer significantly more bandwidth at low prices are limited, as the required investments are high, and unlikely to be undertaken by additional players on a widespread basis.

By contrast, display devices benefit from a sustained innovation by virtue of the fact that there are many manufacturers of video display equipment. With new means for authenticating subscribers (a la "TV Everywhere"), consumers will have the option to consume content on a wider range of devices. But scalable change is also limited. One reason is that the life cycle of a television – from purchase to disposal – can exceed a decade, and thus innovation can take time to become widespread within homes.

More importantly, typical consumers may not be seeking to change all that much: much of television consumption is fundamentally passive. As much as 45% occurs as a secondary activity, according to the Council for Research Excellence. And much of the rest of viewing is genre-based rather than program-based: only a small sub-set of TV viewing is focused on specific programs. A useful proxy to consider is the ~20% of TV viewing which occurs on a DVR during prime time in homes with DVRs. Arguably, this is the segment of viewing which new forms of video consumption will likely compete against. To point, online video and video on demand consumption each currently equate to less than 2% of traditional viewing, even though much of the best content is now available on these platforms.

This comes down to why consumers watch TV: it is an escape from daily activity which allows individuals to be passive and relaxed. Contrary to many expectations, this remains the form in which the consumer has expressed a desire for control. Any other changes will require more fundamental changes in habits, which can take extended periods of time.

None of this is to deny that change will occur. Change will occur in the form of sustained improvements within individual components of the business. Meanwhile, we expect to see television evolving as the industry continuously takes a good product and makes it better.

Brian Wieser is CMO of Simulmedia, an audience-targeted advertising network for linear television founded by veterans of companies including 24/7 Real Media and Tacoda. He can be reached at brian@simulmedia.com.

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Brian Wieser

Brian Wieser is a Senior Analyst at Pivotal Research Group, where he covers securities which are impacted by the advertising economy, including Facebook, Google, Yahoo, Interpublic, Omnicom, WPP, Publicis, Nielsen, CBS, Viacom and Discovery Communications.... read more