Online Video: An Unfolding Megatrend
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
More than 100 million Americans watch video content online. This number has risen 43% from the previous year and there are no signs it’s letting up. The explosive growth of smartphones and tablets has leaped online video viewership to the next level. You can thank innovation and science later. In the meantime, welcome to the exciting world of megatrend investing.
A megatrend should be so easy to understand that a fifth grader can grasp it. If they can’t, chances are you’re overcomplicating things, or what you believe to be a megatrend isn’t one at all. The premise is simple here. As more eyeballs watch online video, advertisers will begin to take notice. As the trend asserts itself, advertisers will chase after those eyeballs.
Long-term investors love megatrends because they do the hard work for you. All it takes is investing in the right companies early on and sticking with them. In theory, this is a cakewalk. The problem with theories is they lack experience. Sitting on your hands while making sure you’ve nailed it is more difficult than you’d think. But if you can endure the ride, it could mean game changing returns.
In the coming years, the online advertising industry is going to see an influx of new dollars directed towards online video. But before we get down to business, let’s start by breaking down the industry prospects.
Online vs. Television
According to eMarketer, online video will prove so disruptive that TV advertisers will have no choice but to embrace it. They believe the proof lies within the greater availably of high quality content and the plethora of devices it can be streamed from. Considering that the TV ad industry is good for $64 billion a year, this is a huge opportunity for online video purveyors.
Data suggests that online video ad spending is starting to increase at an accelerated rate. In the last two years alone, online ad spending has more than doubled to $2.93 billion. Even with all this growth, it represents less than 5% of total TV ad spending.
High quality content and more available screens won’t be enough to get advertisers onboard. It’s going to take a touch of innovation, and a lot of convincing.
Shaping the Landscape
In order to attract more advertisers, online video giant AOL (NYSE: AOL) has developed a model that television advertisers can relate to. They’ve teamed up with Nielsen to offer guaranteed viewership, just like the TV industry. If successful, the implications are great. It could reshape the digital video industry by bringing in higher ad premiums.
Currently, AOL is one of the few majors that's pioneering this approach. Considering they are the number two leader in online videos, second only to Google’s ) YouTube, they have created a tremendous opportunity for themselves.
If AOL changes the game for the better, Google would naturally adopt the same approach. For Google, implementing this practice would create an opportunity unprecedented in scale. In August, Google served 13.7 billion videos to over 150 million unique visitors. And that’s in the US alone. If you combined all the videos the remaining top 10 competitors served, they fell short of Google by nearly 10 billion views.
And that’s not all. Compared to the average competitor, the typical Google streamer is engaged ten times longer. More views, more visitors, and longer engagement, all put Google in a position of dominance.
Google isn’t the only winner here. The online video industry as a whole would likely benefit from this formula. In particular, I’m thinking about Hulu and the content consortium that formed them. That makes Disney (NYSE: DIS), News Corp ), and Comcast ) as potential benefactors.
They all come from the TV world, already have advertising contracts, and are delivering a model that falls right in line with their experience. Combined, they offer an enormously appealing library, which they could host exclusively on Hulu.
Content is the key commodity in the world of online video. Those who control it have all the power. It will be interesting to see how Hulu behaves when advertisers begin taking online video more seriously. Given the cable network’s fear of Google (think TV boxes), it’s entirely possible Hulu adopts a future policy of more protectionism.
To boot, the companies behind Hulu are a little gun shy to release more of their libraries for online consumption. I can’t blame them. In terms of size, they have a much greater vested interest in the TV industry, making Hulu look more like a hobby. Perhaps they are waiting and seeing how this megatrend unfolds before fully embracing online video. Developing an online streaming platform is their way to hedge their interests and buy time.
As more web properties begin adopting a Nielsen-esque model like AOL, the perception that online video is a “cheap” platform will likely change. It’s only going to take mild success to get the ball rolling in the right direction. There’s $64 billion at stake, the opportunity is tremendous, and new leaders will emerge. If I had to pick just one winner, it’s Google. YouTube is a gargantuan and the competition doesn’t even come close to their level.
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