Notes from Digital Hollywood: Online Video Companies Struggle for Means to Turn Online Content into Profits
Santa Monica, California: This is the second in a series of reports from Digital Hollywood. Digital Hollywood is a conference for businesses trying to make money from delivery of online content, such as video and gaming. It attracts online video production companies, game manufacturers, media conglomerates, well-known interactive website operators, advertising agencies, Hollywood "talent," service providers like me and many others. A prominent theme throughout this year's convention is confusion over how to make money from delivery of online content such as video and gaming.
The revenue problem for online video content
Generators of online content make money from a variety of sources including subscription fees, micro-transactions and advertising. The dominant means for producers of original online content to generate revenue is from ad sales. However, according to the advertising agency sources, at present advertisers are spending 90% of their ad dollars on traditional print and broadcast media but only 10% on online content. In addition, advertisers are often only willing for online content at rates that about 20% in cpm (cost per thousand viewers) of the rates they will pay for broadcast media. This double squeeze makes it virtually impossible from producers of online content to turn a profit.
So another common theme at Digital Hollywood is the struggle that producers of online content are going through to attract more revenue dollars. Some argue that online content should be judged with different metrics than cpm, the measure commonly used for broadcast media. Others argue that the key is to get advertisers to value the feedback that they get from online sales efforts, feedback that is not available from consumers of broadcast media.
The targeted advertising solution
A frequently proposed solution for attracting more ad dollars is to use the capabilities of the Internet to offer more targeted content to advertisers -- which theoretically could be sold at increased rates. Readers of this site are already familiar with the common use of behavioral targeting, in which a user's demographics, browsing history, etc., are used to target ads to him or her. And, readers of this site are also familiar with the privacy concerns that behaviorally targeted ads create.
Another method for creating targeted ads is to synch the closed captioning for a video with the video itself, and then use it to trigger ads that are displayed to the user on a real-time basis along with the video to which they relate. For example, if the characters in a video start talking about going on a trip to Miami, their words can be used to trigger Florida travel ads to the user. This type of targeted advertising would provide a non-privacy invasive alternative to behavioral targeting. Of course, video-content based targeting could be combined with behavioral targeting to make the targeting even more specific -- thus resurrecting privacy concerns.
Some of the strongest skeptics of targeted advertising are found among advertising agency executives. Their skepticism arises from the fact that they find it hard to make money from targeted advertising campaigns. Advertising agencies often front the cost of creating ads. Targeting can mean that many more ads have to be created -- each for a small slice of the market. If you were an ad agency, which would you prefer: paying for the creation of multiple ads that would be delivered to far fewer viewers per ad and at far lower rates, thus generating far lower commissions per ad, or creating a single ad that will be delivered to a single audience at far higher rates, thus generating far higher total commissions? Given these economics, it's no wonder that ad agencies often aren't wild about Internet ad campaigns.
Facing the inevitable
Despite the lower ad dollars currently available on the Internet, the Internet continues to create an irresistible gravitational pull on businesses that make money from advertising -- because traditional media continues to lose users to the Internet. Some industry insiders believe that this just means that the advertising agencies and media companies that live off ad dollars will just have to get used to years of turmoil in which they make less money.
This prediction could be in line with simple economics of supply as demand. The Internet has lowered the barriers to entry into the market from creation of all types of media content. This has created a far greater supply of content. However, the demand for advertising has remained fairly stagnant. With greater supply, but stagnant demand, lower prices and profits are inevitable.
I predict that the future will not be so bleak. Online content providers will find new sources of revenue -- from subscriptions, from micropayments, and perhaps from sharing of internet service provider fees or other sources we haven't even thought of yet. Unfortunately, many online companies will not live to see the promised land.
David D. Johnson is a business lawyer whose practice focuses on litigation and other issues relating to digital media and consumer electronics companies. David can be contacted at (310) 785-5371 or DJohnson@jmbm.com.
