Video Advertising: The Incredible Disappearing Audience

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Advertisers turn to broadcast TV to get to a big audience fast, but this selling point is quickly deteriorating.  Top programs are drawing fewer viewers every year as the audience is spread over a wider range of choices, and those viewers increasingly avoid advertising via DVRs and by multi-tasking on portable devices.  Meanwhile, the rise of these devices and of connected TVs are fueling big growth in web-based video, which has begun compete for advertising dollars with more precise audience targeting and increasingly sophisticated ad placement packages.  These opposing trends portend pressure on TV ad spending within 2 years, and increase focus on alternatives to traditional 30/60 second spots.  We believe this is favorable to on-line video providers, ad agencies, and web-savvy networks, and unfavorable for multichannel network operators and overly cautious networks.

 

Advertisers still favor TV advertising, largely due to its perceived ability to deliver a large national audience in a short window of time.  TV execs stress the ability of their networks to reach many millions of viewers at one time, concentrating the advertising message in a narrow time window.  This has been a key factor in TV sustaining its share of ad spending, despite the rapid growth of internet advertising, which has crushed newspapers and the yellow pages.

 

However, this advantage is rapidly deteriorating with audience diffusion, time shifting, and multi-screen viewing. In 2001-2, 6 TV shows averaged better than 20 million viewers per week.  By 2007, that number had fallen to 3, and for this season, thus far, no program has achieved that threshold.  With overall TV viewership is shrinking and split amongst a growing roster of broadcast and cable networks, we expect audiences to decline even further.  Moreover, the rise of time shifting and the distraction of the internet on portable devices means that TV spots are increasingly skipped or ignored, blunting their impact.  

 

Rise of tablets and connected TV increase the reach and appeal of web video for advertisers.  The explosive growth of tablets and connected TV sets over the past 2 years sets the stage for Internet video purveyors to take a meaningful share of the primetime audience, exacerbating the problem for the TV networks.  While advertisers still appreciate the reach of TV, they are willing to pay a 40% premium for on-line video impressions due to their superior targeting and interactivity.

 

Increasingly sophisticated web-based video providers packaging ad placement to meet advertiser audience and timing needs.  Earlier this month, 6 on-line video sites, led by Google’s YouTube, crashed the network upfronts for the first time to present their own cases for advertisers.  Armed with rapidly rising viewership, sophisticated audience analysis tools, flexible ad placement packages, and the support of new 3rd party ratings metrics, these upfront presentations are emblematic of a more organized and appealing pitch to advertisers, who appear to be growing ever more comfortable with increasing web video in their budgets.

 

Alternatives to 30/60 second spots gaining traction – sponsorship, product placement, quick hits, and “advertainment”.  In response to the changing environment, advertisers have begun to change their approach.  Traditional 30 and 60 second spots now feature popular music direct from the charts, a function of both the need to capture attention and the need of artists to monetize their work now that the record industry has collapsed.  Importantly, alternative ad formats are also emerging.  Advertisers are increasingly sponsoring programs directly or embedding their message through product placements.  On-line, advertisers are buying 15 second quick hits to fit viewer tolerance for disruption.  Very sophisticated advertisers are also producing long form ads that can attract web viewers on their own merits as entertainment.  In this vein, several of this year’s Superbowl ads were first launched in long form on-line.

 

These trends suggest serious pressure on television ad market within 2 years.  Stable TV ad spending over the past few years gives television analysts false hope that the situation is sustainable.  More than 5% of US video advertising spending is already going to on-line, with the total spend up 50% YoY.  With falling overall viewership, rapidly shrinking audiences for top shows, increasing time shifting/ad skipping, more multi-screen distractions, improving internet content, better access to internet content and an advertising community growing comfortable with the advantages of on-line video, we believe that the impact on television advertising will be apparent once the Olympics and the presidential election advertising bumps are over.

 

Internet video platforms, web savvy networks, and ad agencies will benefit, cable/satellite operators and cautious networks will not.  The biggest beneficiaries of shifting ad spending will be internet video services.  Of these, we believe the major platforms – Google, Apple and Amazon – and network-owned Hulu are best positioned.  Broadcast and cable networks face both a threat and an opportunity.  Those that best manage the transition stand to prosper – CBS and NewsCorp’s FOX come to mind – while those that are overly loyal to the channelized model could suffer.  Advertising agencies should play a key role in helping their clients adjust to the shifting media landscape, while multichannel distributers- i.e. cable and satellite – bear significant long term risks.

 

For our full research notes, please visit our published research site.

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