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Real Time Bidding – the Future of Online Video?

Apr 10
2012

 

No need to be a Wall-Street veteran to  analyze the performance of OTT companies. The current situation is that Netflix is struggling with the studios about content costs making it very difficult to maintain high margins as the studios raise prices time after time. Hulu, the super-group of the content business is not profitable, and not to mention  YouTube which still loses hundreds of millions. And still, everyone is trying to jump on the bandwagon.

The inevitable question is why we see such a gold-rush when there are no evidence for gold?

General Patton said once “If everyone is thinking alike, then somebody isn’t thinking.”, is that the case? As of now, it sure is.

Let’s take a look at the four monetization models available today:

1. Subscription: this classic model being long-used by traditional cable/satellite operators, and in the past years, Netflix is using the same model but slashing down the price due to two main reasons:

I. Netflix does not have the pipe costs like the cable/DBS operators have, and therefore they are not paying for maintaining the infrastructure. Netflix does bear a cost which is not part of the traditional world and this is the streaming costs.

II. The content deals Netflix did in the past were based on extending the DVD sales business, and therefore, received really great prices for the content. However, now when the studios understand that they are actually injuring their cash-cow, the relationship with the cable guys, the studios are either canceling the previous contracts or negotiating new contracts at much higher prices, which makes the business pretty shaky for Netflix.

2. Ad-Based Model: Another classic model taken from the free-to-air networks, and performing very badly on the intenrnet, cuasing all major payers such as  YouTube and Hulu to lose tons of money, and to add various different models in order to support the Ad model. Hulu has added the Hulu+ model (see clause No. 1), while YouTube is adding sponsorships and banner placements. As of now, the bottom line is not changing and both companies still lose money.

3. Pay-Per-View: Yet another model taken from the old-world at the times we physically went to a video store to rent a movie. The reason why Blockbuster went out of business is  that this model was always too expensive and worked only when we had no alternatives. Today when you can have an all-you-can-eat package either from Netflix or from Hulu for $7.99, it just doesn’t make any sense to rent a single chapter of  “Dexter” for $1, as in 8 days of watching only a single chapter a night is less worthy, and as we know we have on average 30 nights to spend with our TV…

4. Buy the Video: This format will surely disappear or will become very rare. Unlike music where you tend to listen to a song for a million times, I can’t see many people watching movies which are not “The Godfather” or “Pulp Fiction”  more than once. To pay $15 for the pleasure of  watching a movie once when you can rent it for $1 (and rent it again and again for 15 times) just doesn’t make any sense.

So where does it leave us? Confused, I guess.

It just doesn’t make any sense that TV ads on a broadcast channel is a great business and when it comes to the internet it is worth only a fraction of it. The ads on a broadcast channel are not fragmented, not to mention personal whereas the options on the web in regards to personalization and content enrichment are truly endless.

The reason why all the media companies are putting so much efforts in penetrating the new platforms is because they understand that this gap will be filled in the near future.

And still the big question remains open – Will the future for OTT be bright?

There are many answers and predictions about the future for online video and OTT but there is no magic solution to the conflict between the ceaseless greediness of the studios versus the desire of the viewers to get the content for free.

There is however, one solution which I find very interesting as it addresses the biggest challenge of online video ads – how to gain more CPM per ad, or in other words how to earn more money!

It is called Real-Time Bidding or RTB.

So what exactly is RTB?

Real-time bidding (RTB) is a new advertising technology that enables online advertising to be purchased in realtime. This is a major difference from the old-days when advertisers were buying inventory and paying in advance for it.

Why bidding? just like a stock, advertisers bid on each ad impression. The impression goes to the highest bidder and their ad is served on the page.

And why is this new concept is so interesting for TV? Personal data is being collected by the serving site/platform about the users/viewers and being forwarded to the real-time bidding platform, giving the advertisers a value information about the target audience and the chances that the ad will become relevant to them.

And this is a real value! No more Kotex ads for men, but rather a specific ad for men from Omega while watching a James Bond movie in the Hamptons. If someone else would watch the same movie for that matter in a less established suburb, the same ad could be purchased by Dominos Pizza for example.

Real Time Bidding - Click to Enlarge

How hot is the trend? Check out the numbers:

In 2011, US online video RTB spending accounted for $190 million, in 2012 Forrester predicts RTB spending will increase to $387 million and by 2013, RTB spending will increase to $667 million. We’re talking here about a 251% growth over two years!

RTB Projected Growth in Video Ads 2011-2013

 

So is RTB going to save the OTT industry? I wouldn’t count on that as the absolute numbers are still fairly low compared with the revenues made by the pay TV industry, and I believe that hybrid models of ads combined with subscription are the future of this industry (similar to the offering of  Hulu together with the Hulu+), but there is no doubt that the biggest space for innovation is in ad targeting based on personal preferences. This way the CPM will go much higher and the viewer might continue with a real-time transaction of an Omega watch or a pizza and won’t take a toilet break while the ad is running.

 

 

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3 Responses to “Real Time Bidding – the Future of Online Video?”

  1. avatar
    Shiri Ziegelman says:

    Danny,

    I believe RTB turns the ad-based business model to a very interesting monetization option for the OTT industry. It enables programmatic ad buying which results in effective, efficient and measurable advertising on the one hand, while keeping the transparency, control and granularity which characterizes direct ad sales on the other hand:
    1. Effective – Advertisers will reach the right person at the right place at the right time, with high-impact big-screen affect, ultimately increasing the return on their investment. It might be Pizza in the less established suburb during the evening, as you indicated, but if the same program is watched by the same person during the day, it might be Starbucks Coffee just as well.
    2. Efficient – The road to reach a customer is much shorter. RTB turns advertising to be very precise. No more mass advertising. You might pay more, but for the right user and for his fair market price (auction based).
    3. Measurable –Not only will real time purchase through the ad become measurable, but other real-time interactions with the ad will be measured and point to the level of engagement the user had with the product/service. The user can purchase the Pizza, but the advertiser will also be able to measure in real-time whether the user just downloaded the coupon, asked to locate the nearest store and much more indicatives to campaign effectiveness. Moreover, with such feedback on the campaign, advertisers can make smart decisions on how to better allocate their budgets in terms of media, audience, time, place etc.
    4. Transparency, control, and granularity – Last but not least, this is all done with the essential information the buyers and sellers of ad spots base their decisions on. Real-time might imply very quick programmatic decision making, but this is bound to restrictions by both sides. The content provider, for example, can decide on very specific rules on who buys a spot on a specific show and the advertiser, on his side, might decide not to put the ad in content which contradicts his pitch/philosophy (Marlboro wouldn’t want to advertise in a movie on cancer even if it is the right user in the right place at the right time).
    To sum up, when ads are relevant, users are much more open to them. And if that comes with lower costs for content, I think this business model has huge potential for OTT. Since RTB is a relatively new technology (3 years since its first introduction in the US), and since it already operates on the other two platforms, i.e. web and mobile, I believe the best is yet to come.

  2. Danny
    Danny says:

    Thank you Shiri for your comment.
    I absolutely agree with everything you wrote.
    The only problem with the theory is that the budgets are controlled by Ad agencies and until they will not understand how they make more money (or at least not less) from RTB they will not recommend it to their costumers who are already confused with the too many options and the impossible to manage fragmentation of the digital world.

  3. avatar
    Shiri Ziegelman says:

    Danny,

    Thanks for your prompt reply. Indeed budgets have been held by ad agencies for a long time due to the digital ecosystem fragmentation, but three significant trends may indicate the industry will overcome this barrier relatively soon:
    1. Consolidation has already started. Extensive M&A activity by different players, which results in both vertical and horizontal value chain integration, makes the digital ecosystem not only simpler and more efficient, but also one that starts enabling cross-platform advertising. Several recent examples: the recent acquisition of Buddy Media by Salesforce.com, the acquisition of the already whole cross-platform of MediaMind by DG, the not long ago Admeld’s acquisition by Google, and many more.
    2. Companies focus on technologies that enable results-oriented products. If digital can precisely indicate lift in brand favorability and purchase intent, which can ultimately be translated to ROI, confusion will probably be reduced and agencies will find it easier to sell digital advertising to their clients. Several examples here: the IAB’s 3MS initiative, Google’s Active GRP and Active View, Xaxis (Group M’s) Brilliant Solutions, and Matomy’s BrandX.
    3. Different players work hard on educating the market through extensive marketing and research efforts. Technology companies as well as industry governance and research institutes in the digital ecosystem know that advertisers and their agencies look at new technologies as disruptive at the beginning and therefore invest in webinars, case studies, buyer guides, and extensive support to enable learning, testing and adjusting to the opportunity. One small example is Pubmatic’s 2011 ad revenue report, for which the company commissioned IDC to explain, explore and evaluate the RTB opportunity in major countries. Another example is Forrester’s Insights from Buyers and Sellers on the RTB Opportunity, commissioned by Google .There is also the extensive efforts by the IAB to spread the word of new technologies through wide range of events, road-shows and industry-wide initiatives. And finally, Media Mind, ValueClick, Adobe, and some more players invite advertisers, agencies, and publishers a couple of times a year to events they hold to educate and share latest technologies and ideas.

    So, while RTB might be perceived as part of the fragmentation problem, I believe it might also be part of the solution. The trends indicated above and the benefits driven directly by the RTB opportunity might turn the digital arena, including of course the OTT, simpler than ever before and advertisers who would want to stay in the game will have to adapt.

    Shiri.

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