The online video invasion has been promised for over a decade but in 2006 it finally arrived. High broadband penetration, reduced bandwidth costs, social networking sites like MySpace and easy to use video-sharing websites such as YouTube, Google Video and Guba have all contributed to explosive growth. And while the business models of the video sharing sites remain unproven, most companies are betting on advertising-supported content. AOL's shift from subscriptions to a video-ad supported model dramatically illustrated the trend.
There are more than 200 million broadband subscribers around the world.Internet research company In-Stat predicts over 400 million by 2010.
Broadband has overtaken dial-up connections in most OECD countries: the fuzzy pictures, dodgy sound and frustrating buffering are being replaced by video quality that is sending viewers online in their droves.
Watching video online is already commonplace. In March the Online Publishers Association (OPA) found that a quarter of Americans watch at least weekly and, according to Comscore, the average online video consumer watched 100 minutes in July 2006. A November report by the BBC found that one in five people in the UK watched online or mobile video at least once a week.
Traditional media companies are being forced to take notice as people spend less time with TV, print and radio because of the amount of time spent online. Television is hardest hit. A third of Americans spend less time watching the box according to an Arbitron/Edison Media Research report and nearly half the British population are watching less TV according to the BBC.
Although online advertising only represents around five per cent of total advertising spend, it is growing at around 30 per cent a year, and has already overtaken business magazine and outdoor advertising in both the US and the UK. Rich media ads that use Flash technology to expand ads outside standard banner formats, float across web pages or play video are becoming more popular.
These formats, and especially video, are proving better at persuading consumers to buy products and services than standard GIF or JPEG image formats. Dynamic Logic MarketNorms, who have analysed thousands of campaigns, found that video ads more than double intention to buy something compared to plainer image advertising.
Dividing the spoils on video sharing sites
Less than a year ago hardly anyone had heard of YouTube. Now more than 65,000 clips are uploaded and more than 100 million clips are watched on the site every day. Its simplicity and ease of use make it a perfect vehicle for sharing video and creating social networks. Sharing members' opinions, ratings and playlists in these networks is crucial because no-one has yet developed an equivalent of Google's clever text-search algorithms for video.
Of course, someone has to pay for YouTube's huge number of eyeballs. Although bandwidth is now a relatively cheap commodity, Forbes estimated YouTube's April bill at $1 million. With the 80 million monthly unique visitors reported in September, YouTube's monthly bandwidth bill would have topped $5 million.
These costs are one reason why Google's October purchase of YouTube for $1.65 billion makes good sense. Google's huge computer farms mean cheap video storage, and it can also bring the largest online network of advertisers to the party. Its large army of lawyers will be handy too, as a lot of YouTube's content violates copyright and a flood of lawsuits are inevitable as content owners clamour for a cut of Google's advertising-enriched coffers.
YouTube is still worried that the invasiveness of advertising inserted at the beginning of video clips will turn away its users, and is experimenting with other forms of advertising like the branded channel created by Warner Brothers for Paris Hilton, and "participatory video ads". These ads are rated, shared and tagged just like the other clips on the site.
Advertisers are looking for the precisely defined audiences and accurate viewing measurement that the internet can deliver. Once video viewing habits are more predictable and they can rest assured that their ads won't be placed alongside offensive or illegal material, advertisers will jump on board. It may be starting from a very small base but online video advertising should be the fastest growing medium in 2007. Broadcasters and viewers alike should be looking forward to life beyond the 30 second TV spot.