Traditionally, ad sales are performed via media agencies or via direct sales teams within companies. Digital Ad platforms such as freewheel and adapt.tv based of programmatic sales are pushing into this market. This works by creating a marketplace for advertisers to select where they want to sell and for publishers (content packaging companies) to insert ads automatically and to set prices automatically based on demand and viewing figures.
This method works efficiently for online/digital video advertising and there is movement to move this technology into traditional viewing platforms, as well as diverting linear TV ad spend onto digital ad spend. Both Facebook and Google are actively targeting this revenue stream and YouTube are offering audience guarantees for advanced commitments in attempt to lure a bigger share of TV advertising dollars to their digital platform.
In particular business models such as Google Trueview where advertisers only pay for ads watched (because users can skip ads) results in better economics for the advertiser and better user behavior data to improve the ad experience for Google.
Comcast are one of the companies to have identified this space and acquired Freewheel. AOL acquired adapt.tv looking to expand into this space. TV ad spending will remain high and will continue to grow, but the opportunity in digital ad spend will grow at a faster rate. Programmatic buying is quickly becoming a method to maximize revenue and to potentially shave incremental income from competitors in the content space if the main ad platforms can be owned. This way Comcast can still earn revenue from rivals who utilize Freewheel for their ad servicing needs.
As TV viewing changes, the distinction between linear TV and other forms of content viewing will become less obvious, for example TV everywhere, where a live linear stream is accessible via an alternative screen would house the same ads as on the linear stream which muddies the allocation of revenue in the projections as show above.
Programmatic ad spending in emerging markets are growing fast, for example, Magna Global forecast total spending to reach $500M in Emerging Asian countries alone.
“The report shows that North America is by far the leading programmatic market, accounting for more than half of the world’s total programmatic spend. This is followed by other big players such as Australia, Japan, China and the UK. However, the growth rate of less mature markets shows a rapid acceleration in the industry; while the top 10 programmatic markets are growing by 39 per cent this year, the medium and smaller markets will grow between 57 per cent and 66 per cent in 2014.”
Magna also predict that programmatic ads will grow from $12 billion in 2013 to more than $32 billion in 2017.
Growth in digital ad spend ($42.8B in the US) is forecast to increase and has already overtaken broadcast TV ad revenues. Therefore, acquisitions in digital ad platforms become a strategic asset.
Ad Platform Strategy
Advertisers are the 3rd relationship in the ecosystem and ownership of this relationship is Key Avenue to revenue. By controlling this ecosystem, it is possible to use this as part of content negotiations (amount of rev share can be modified for select partners), and is also an incremental revenue stream since partners using the ad platform will generate revenue for the platform owner.
Owning the ad platform provides the owner with understanding the true market price of advertisements and gives them ownership of this data. For non-ad platform owners, it is in their interest to use ad-platforms which do not directly compete with them in any other parts of the value chain and it’s also to mitigate monopoly risk by using multiple ad platforms to ensure there is no dominant ad platform who would have greater control over ad inventory and pricing knowledge.
There’s not much value in owning content if there is no way to get this to the end user. This is where partnering or owning content distributers becomes a key part of the value chain to access consumers. Traditionally this has been either been through the airways, via cable or satellite. OTT is the main development that is disrupting the traditional methods of content distribution. This includes both mobile and wired distribution, particularly in the developing world where cabled infrastructure rollout is a major investment to deliver high-speed data networks. For example, in Indonesia 44% of households go online via mobile only, vs. a total penetration of 4% for high-speed wired data networks.
Data from the OECD shows that wireless internet access is already outgrowing fixed broadband access and this will influence how people will receive their content as wired broadband spreads and as OTT services mature.
Internet traffic continues to grow and as bandwidth increases, it will increasingly become the main medium for content delivery because the delivery mechanism already exists and does not require any extra cabling or installation to provide access to content. Mobile delivery will become a key factor as people increasingly use mobile devices to consume content and increases delivery options for people on the move. Mobilization of content will increase ‘on demand’ viewing as scheduled linear programming and windowing increasingly come under pressure. In fact HBO Asia, recently shortened their window to less than 24 hours . Broadcasters are under increasing pressure to shorten their windows to combat the on demand availability that OTT services (including piracy) provide and the demand from consumers to view content immediately.
Ownership of the customer relationship is a key strategic benefit for any company in the media value chain , and this is why there has been plenty of activity in this field because this provides the data to understand fast changing user behaviours, and buying habits. This has led to consolidation and activity in the content distribution space such as Comcast’s merger with Time Warner Cable, Google Fiber rollout in Kansas. Owning the content distribution pipeline enables flow of traffic to end users which enabled Comcast’s and Verizon’s deal with Netflix to effectively pay for access to users
Expect to see more mobile operators and delivery networks making strategic moves into the content space either by directly creating content services or via partnerships/licensing with existing players. Also expect content platforms to offload their distribution to peer to peer technology, this is one of the main traffic distribution methods for video services in China, and one that Netflix is actively researching to remove the content distributor as a gatekeeper. Traditionally, files were shared by downloading a copy from one central server, P2P works by enabling the downloader to grab parts of the same file from anyone who may have the part they are looking for. This prevents the owner of the distribution network from having a large impact on data speeds because limiting the amount of data to the central server will have less impact since the movie subscriber will be receiving the files from other people who are also consuming the content.
Another technology that is disrupting broadcast delivery is cloud technology. Aereo owns thousands of tiny digital antennas, which subscribers rent out. Each digital antenna is connected to the cloud to which can be delivered to the subscriber to watch on any device they wish, thus disrupting the retransmission fee business model a free to air company would usually pay.
Video platform companies such as Brightcove, Movideo, Kaltura and Ooyala are also lowering the cost of content distribution by providing a white-label service that allows you to create shows and distribute it to audiences without having to invest on developing the services required to broadcast content.
Since owning the distribution pipe provides access to paying users it enables bundling strategies where distribution owners can bundle internet access with pay TV and telephone lines. With the growth of mobile, this could lead to quadruple play (mobile connection) or the replacement of wired telephone lines. By bundling these services, and providing content packaging, distribution owners can bump up their subscriber numbers for content licensing purposes. Reducing the cost of content licensing increases the portfolio of content they can provide to their subscriber base to attract more subscribers.
Controlling access to the user base for OTT services provides an element of control and this can be done by throttling and managing traffic through the network and providing preferential treatment to your own data. Currently, Facebook, Google , Amazon and Twitter have written to the US telecom regulators to oppose a new net neutrality plan to oppose a potential pay to play scenario where ISPs could potentially charge companies to receive ‘preferential’ treatment over how fast their data moves through their network.
Capping data limits can also provide preferential treatment to your own video platform if you own the distribution network, for example subscribers using Comcasts Xfinity platform would be watching video without it counting towards their data cap, but if they were to use a competitor platform, it would add up towards their data cap. This provides a cost advantage to the consumer to subscribe to the content distribution owners platform.
Growing through acquisition (Comcast &Time Warner Cable) is a key strategy for increasing control on access and growing users, therefore to prevent one company from dominating too much, investment in alternative delivery methods, or ways to circumvent current controls are needed for content packaging or OTT service providers such as peer to peer technology or creating/acquiring your own networks.
This is also a defensive strategy to prevent competitors from complementary industries (Hardware/Technology etc.) from gaining a foothold by maintaining control over existing users and preventing them from moving by controlling as much content as possible, or access to content if the content is not licensed.
Due to the changing habits of millennials, content distribution ownership becomes increasingly important over time.