Online Video Ads: Just Wait

Poke around on Yahoo! (YHOO) a bit, and you'd think online video advertising is already flourishing. A trailer for the latest Harry Potter film is prominently located on Yahoo's home page. On the portal's food site, there's a Hellmann's mayonnaise ad that features a video of a man steaming salmon on his car engine. And a search for "funny videos" reveals an entire Yahoo channel devoted to online commercials.

But a new report by eMarketer, released July 16, suggests Web surfers ain't seen nothing yet. Video ad sales are expected to grow from an estimated $775 million this year to $3.1 billion in 2010 and then to $4.3 billion in 2011. That's up from a November projection in which eMarketer estimated 2010's video ad sales at less than $3 billion (see BusinessWeek.com, 11/7/06, "Up Next: Online Video Ad Boom?").

Though the numbers sound large, the expected activity over the next four years suggests that advertisers will be merely experimenting with the medium. Even at $4.3 billion, spending on video ads would account for just $1 of every $10 of Internet advertising.
Much More to Come

It's after 2011 that the floodgates will really open, says eMarketer senior analyst David Hallerman. By then, the distinction between television and Web video will be so blurred that advertisers will begin directing more of their marketing budgets to the online version. "All you have to do is take a few percentages off of a TV advertiser's typical budget and that is going to be a large amount of money," says Hallerman. Television advertising is expected to top $46.3 billion in 2011, according to PricewaterhouseCoopers.

The lines are already blurring. Sony plans to transform its online video site Grouper into a farm team, of sorts, for professional media talent. The decision marks a move away from the riskier user-generated content that advertisers have been reluctant to embrace, and toward making online video more television-quality, and presumably more advertiser-friendly.

By 2011, online commercials will likely appear in multiple forms beyond today's pre-roll ads, which users must sit through before watching a video clip. For example, some interactive banners will play an ad whenever a user clicks it or rolls the cursor over it. And graphics along the bottom or side of a video clip will encourage users to watch a commercial.

Hallerman also expects that more online video ads will offer rewards in exchange for the user's time. Potential payoffs may include free content, games, coupons, or ways for users to personalize commercials. Ads that don't offer such compensation will have to be sufficiently entertaining so that users aren't turned off. A study by Burst Media found that 77% of users find video ads intrusive.
New Formats in the Offing

Companies are already experimenting with the new video ad formats. Yahoo, for example, is working with animated window-shade ads that a user can pull down over a video. It is also testing graphical ads that appear during a video in the same way that TV networks now show ads at the bottom of the screen—say, to promote a new sitcom—while another program is being aired. "Ads will change to be less obtrusive to the user," says Mike Folgner, general manager of Yahoo! Video and former CEO of Jumpcut, which Yahoo acquired in September (see BusinessWeek.com, 10/2/06, "Yahoo's Strategy: Growth by Acquisition"). Folgner also sees advertisers integrating more user-generated video in ad campaigns. Already, PepsiCo's (PEP) Doritos and other brands have held contests with Yahoo encouraging users to create videos about their products.

VideoEgg,a startup that distributes video ads in its own player across social networks, has been serving overlaid graphic ads with its video content. The company is working with close to 100 advertisers, including Rockstar Games and General Motors (GM), says Troy Young, VideoEgg's chief marketing officer. Young says new formats are necessary to keep from annoying audiences. "Pre-roll is a really challenging advertising execution in terms of meeting the needs of the community. You don't want to start off alienating someone," says Young. "We are trying to bring a variety of ad types to the market."
Making the Medium More Accessible

The new forms of online video advertising are only partly responsible for marketer interest in the medium. The other culprit is cost. Internet video is relatively cheap compared to the millions it can cost to produce a regular TV commercial and secure a 30-second network slot.

TurnHere, a startup that produces Internet videos for businesses ranging from the corner bistro to global hotel chains, can produce an online commercial for as little as $500, says Bradley Inman, TurnHere's founder and CEO. Producers of conventional TV commercials "spend more on the catering trucks than we do on the video," says Inman.

The company has 2,000 independent filmmakers around the world available to shoot films for local businesses. Many of TurnHere's commercials take the form of short documentaries about each business. Think of the concierge at a hotel showing users around the grounds. The ads can be featured on a company's Web page or on local search sites such as IAC/InterActive Corp.'s (IACI) Citysearch.com.

Internet advertising leader Google (GOOG) is also trying to make the medium more accessible. In May, it began distributing click-to-play commercials through its AdSense network, a group of Web sites that post ads in exchange for a slice of the revenue (see BusinessWeek.com, 5/24/07, "Google's In-Video Ad Experiment").

No doubt online video advertising still has a way to go before every business has an Internet commercial. But users should be prepared for the Web to look a lot more like TV.