Advances in technology and changing viewing patterns are accelerating the consumption of online video, a trend that could reshape the way advertisers communicate with consumers online and create new monetization opportunities for select public companies.
Foundation In Place For Rapid Online Video Growth
Several factors are powering the explosive growth in viewership of video online. Broadband penetration continues to rise globally, allowing consumers greater access to the internet. At the same time, the proliferation of smartphones and other connected devices are making that access more ubiquitous. Digital content has also gotten richer, expanding from the initial sharing of mostly text to photos and now increasingly, video. Furthermore, while the early days of online video were plagued by frustrating latency and buffering challenges, the consumer experience has come a long way due to vast improvements in the underlying infrastructure to support data delivery. This has been driven by ongoing investments in wireline and wireless network capacity by the major broadband and telecom service providers, the availability of in and out-of-home Wi-Fi networks, as well as the use of content delivery networks (which improve the user experience by caching content closer to its point of consumption). All together, these enhancements have enabled growing demand for viewership of high-quality digital video.
Exhibit 1: U.S. Digital Video and TV Viewing Patterns - U.S. Digital Video and TV Viewer Metrics, 2012-2017
|Monthly Digital Video Viewers (millions)||171.6||186.2||195.6||204.6||213.6||221.4|
|Monthly Traditional TV Viewers (millions)||283.9||286.7||285.1||282.3||278.0||272.5|
|Daily Time Spent with Digital Video (minutes)||50||52||57||64||70||77|
Source:Source: eMarketer, comScore Inc., Nielsen, and ZenithOptimedia as cited in ZenithOptimedia, "Online Video Forecasts," July 31, 2015.
It follows that we have seen not only a rise in the number of viewers of digital video domestically (Exhibit 1) but also the amount of daily consumer time spent watching video content online. According to eMarketer, U.S. adults, on average, spent over an hour each day viewing digital video in 2015, up significantly from less than 30 minutes in 2011. This represents more than 10% of the total time adults in the U.S. spend on media. eMarketer estimates that Millennials, who have become accustomed to accessing video content anytime, anywhere, are leading the charge, with 25 to 34-year-olds accounting for more than 18% of the 205 million digital video viewers in the U.S. in 2015. As these and other consumers spend a greater portion of their time consuming video online, we think digital will become an increasingly important and compelling channel for advertisers to target.
Brands Starting to Embrace Digital Video Ads
We expect spending on digital video advertising to follow the growth in online video consumption. Advertisers are taking note of the increased time spent watching content online and investigating how best to reach this growing audience. While traditional television advertising maintains the advantage of significant reach, digital advertising enables brands to more specifically target their audience, which, in some cases, can drive improved ad efficacy. Moreover, with digital video ads, advertisers are able to leverage the same enriching sight, sound and motion experience of video online.
The adoption of online video advertising has yet to catch up with digital viewing patterns. While spending on digital video ads as a percentage of total media has roughly doubled since 2013, eMarketer estimates that U.S. advertisers still allocated only 4.4% of all spending to digital video ads as of April 2015. This compares to online video's greater than 10% share of media consumption among U.S. adults, referenced above. In addition to advertiser and agency inertia around existing channels, growing pains related to measurement and attribution as well as understanding how to best communicate within the constraints of new and emerging ad formats have acted as hurdles, slowing more widespread adoption. However, major digital industry proponents, such as Google, have talked about beginning to see video ad budgets come online in a more meaningful way, a trend we think will continue.
Digital Platforms Poised to Benefit
A number of digital platforms are set up to gain from the rise in demand for online video advertising. In the U.S. alone, the market for digital video advertising is expected to grow from $7.5 billion in 2015 to almost $15 billion by 2019, according to eMarketer (Exhibit 2).
Exhibit 2: U.S. Digital Video Ad Spending, 2014-2019 $Billions
Google (now formally known as Alphabet) is one of the companies best positioned to benefit given its ownership of YouTube, an asset they acquired back in 2006. Over the years YouTube has become a go-to search destination for both short and long-form content, evidenced by the hundreds of millions of hours of video watched on the platform each day. In fact, with YouTube living room watch-time more than doubling in 2015, YouTube reaches, on mobile alone, more 18- to 49-year-olds in the U.S. than any individual cable network. With its popular TrueView format, the company places advertising before, during, or alongside of select videos, allowing users to opt-out of the ad after a brief period of watch-time. This offers an experience for consumers and advertisers that in many ways feels more akin to TV, which in combination with better measurement, has helped Google to gain early traction with brands looking to place video ads online. However, while arguably one of the first movers in online video, we think YouTube still has plenty of runway for growth ahead, given the transition of video budgets to digital is still in the initial stages.
"We think digital will become an increasingly important and compelling channel for advertisers to target."
Social media companies like Facebook are also potential beneficiaries of the rising tide for online video advertising. In part sparked by 2014's viral Ice Bucket Challenge, Facebook has seen a steady uptake in both online video contribution and viewership. The company announced reaching more than eight billion daily video views in the third quarter of last year and now has more than 500 million people watching video on their platform daily. Rising engagement with organic video content is important as it allows video advertisements to seem less intrusive, ultimately driving better value for advertisers and consumers alike. While Facebook's innovative ad formats (e.g. silent auto-play) may require advertisers to rethink their advertising creatives, we think this challenge should be surmountable over time. As such, to the extent that Facebook can continue to grow its video audience and increase levels of engagement, we think it should be able to attract additional brand ad dollars.
Traditional Media Not Standing Still
While we have a seen a rise in the consumption of online video, consumers (even within the Millennial demographic) still spend a lot of time watching TV. eMarketer estimates that adults in the U.S. continue to spend the majority of their media time on television, consuming more than four hours of TV per day on average, a fact that supports the still large market for both traditional TV distribution and advertising.
With that said, traditional media companies are not blind to the advantages that digital provides. Online platforms make it easier for consumers to discover and watch video when, how and where they want it. A number of traditional players have consequently made more of their professionally-generated content available online. Supporting our belief that the appetite for high quality content remains, consumption of video on digital properties owned by traditional media has grown at an impressive 24% compounded annual growth rate over the last three years, according to MoffettNathanson and comScore. Traditional players are experimenting with a number of ways to monetize this content, from pure advertising (such as Disney's ESPN.com), to subscription models (Time Warner's HBO Now and CBS's All Access are two examples), to a combination of both (explored by Hulu, which is partially owned by Disney, Comcast and Twenty-First Century Fox). While there is still some uncertainty regarding which model will ultimately prevail, we are confident that owners of in-demand high-quality content will be appropriately compensated.
As a result of improving technology and shifting consumer behavior, we expect demand for online video consumption to continue to rise globally. We believe consumers will not only have an appetite for user-generated content, but also continue to seek out high-quality, professionally-created content online, driving sustained monetization opportunities for traditional media. Furthermore, despite the aforementioned growing pains, we anticipate brands will ultimately embrace digital video ads, which are both data and content rich, driving budgets to follow. Within the context of a growing digital ad market, we see online video advertising as a relatively faster growing sub-segment of the market.
We see digital platform players such as Google and Facebook who are successful in growing their viewership of online video as among those well positioned to benefit. Namely, increased digital video engagement should drive additional time spent on these platforms, not only enabling the sale of incremental ad inventory but also creating the opportunity for greater monetization of that inventory (as video ads can carry a pricing premium relative to other forms of display). While some players have already started to build meaningful businesses on the back of the burgeoning video ad growth outlined, we still think it is early days and expect the benefits of this secular growth trend to largely lie ahead.