In 2004 Mitsubishi came up with an ad called See What Happens. It turned into a remarkable success. “They cut off the end of the commercial so that the only way you could see it was to go onto their website,” remembers Ari Bluman, the CEO of 24/7 Real Media, an ad services network that brings video content and ads together.

Mitsubishi was targeting the sophisticated video consumers who took the time to research their auto purchases before buying. “They drove the users to one of the two places where they could do that research—the dealership or the Web—to see what happens,” Bluman continues. “It was a phenomenal success and the sales followed.”

Marketers must articulate a meaningful strategy for the end-user video experience. Even more to the point, the lesson from Mitsubishi is that well-matched video content-and-ad combinations which demonstrate excellent production values and are meaningful to the viewing audience will succeed if they’re translated seamlessly across media platforms, whether it’s to or from TV, the web, PDAs, cell phones or iPods.

Prior to Mitsubishi’s integrated campaign, viral videos were hardly unknown. Indeed, a number of now-famous campaigns made a number of dot boom companies quite infamous. It is remarkable that more companies are not taking advantage of the efficiency of viral video campaigns.

The implementation of that strategy is gradually becoming more common. Relatively speaking, though, it’s largely an untapped potential. “If you’re looking to attract the user and generate an acquisition, if you’re looking to increase your purchasing content and message recall, obviously utilizing the same message across platforms just makes sense,” reasons Bluman. “But very few do today.”

Defining topography and terms

There are three segments (see iVOD value chain) of providers in the emerging space:

1. Content creators

2. Publishers/video hosting and enablement

3. Ad services (networks, ad reps, servers)

Advertisers, and others who need a beginning or refresher course in what online video is all about, can start by getting to know what certain key terms mean.

CGM, or consumer-generated media, is the democratizing wave of the future in the streaming video space, where control—even creation—of the medium and the message moves towards the end-user. Right now, that power is largely confined in what Ian Blaine, the CEO of thePlatform, a digital media publishing interface for content owners and distributors, calls “the walled garden.” MSO’s – multiple service operators, specifically cable operators—control what the consumer can access and make it available through a very proprietary infrastructure. “They control the box and what goes to it,” states Blaine.

There can be an infinite number of social-networking communities to share video over the web. Slivercasting is content that targets these small, highly-customized groups of consumers.

Content providers generally derive revenue for their video through pay-per-view subscriptions or online video ads. Sometimes these are called in-page video ads. The Interactive Advertising Bureau, which is the sole trade association advocating for online advertisers, thinks of them as broadband ads. CPC ads are video ads paid for on a cost-per-click basis.

In-stream video ads is a catchall term for three versions of online video ads:

• pre-roll ads, which are typically five to 30 seconds long and placed before the content;

• mid-roll ads, which are placed mid way through a video and usually go into longer pieces of content; and

• post-roll ads, which are put behind, or after the content. They’re frequently longer than pre-roll ads, but only about half as expensive.

Not all content is created equal, so to speak. The highest quality, or tier one content, is a professional job all around—made by professionals, with professional production values on professional equipment. The NBC Nightly News and the ABC dramedy hit Desperate Housewives, both downloadable through Apple’s iTunes service, fall in this category. Major content providers dominate this tier, and this is the content in highest demand. Advertisers want to link up with this content online, but their challenge is finding content relationships that aren’t prohibitively costly for them.

You can find a lot of tier two content through sources like iFilm. In this case, professionals create the material using amateur equipment, or amateurs make the content with professional equipment. As the production quality and sophistication of this content improves and state-of-the-art production equipment becomes more readily available and affordable, this is likely to become the hottest online video content.

Tier three content, found on sites like College Humor, is amateur on both ends. This content is more diverse and more abundant—yet least aggregated—of all online video. As content aggregators like Vidiac move to concentrate this material so that the content-makers can get it distributed to the right audiences through website-based channels, it will get wider play and, ostensibly, more paid support.

With so much of this content out there, the challenge for content providers and aggregators is how to package and promote it so that advertisers can effectively pitch the specialized viewers who watch it.

Matt Sanchez, co-founder of Videoegg.com, a core technology provider of a web plug-in solution that crosses browsers and platforms, thinks the answer involves an understanding of the context of the video in question. The content made by what Sanchez calls the “prosumer”—a sophisticated consumer who might be good enough to get his film short bought by a studio—is markedly different from the mass of consumer-generated product. “The production threshold is always going to be much much higher than user-generated media could ever attain,” he observes. “But what becomes most important is the relevance of the content.”

It may be video with your friends co-starring, or a site where new parents share videos with grandparents. Here the information value trumps the entertainment value that’s paramount in tier one and most tier two video.

“From an advertiser perspective, this gets very intriguing because when you put this video into context and understand who your consumer is, you can drill far down into some pretty interesting slices or segments of your audience and can target advertising to them,” Sanchez explains. That’s when this content becomes a very valuable asset. “Of course, each of these sites will only be viewed, say, 600 times vs. 600,000 times” for video with widespread commercial entertainment appeal. “But there will be a massive amount of those videos,” he says

Sanchez believes the time for this hasn’t come because everybody’s still focused on entertainment value, i.e., “how do you take an entertainment platform and get eyeballs on it?

“In our whole discussion of the industry, I don’t think we’ve gotten there yet.”

The learning curve for advertisers

A quick visit to CNET, iFilm or MSN Video will demonstrate that advertisers have already started putting streaming video ads online. Companies like Honda, Dell, American Express and Panasonic are amongst dozens of others already online. At the beginning of 2006 MSN was reported to have sold out of their video inventory a year in advance.

Advertisers are starting to—and must—push beyond the familiar premium sites if they want to reach the difficult to pin down 18-35 male audience. Laggards are in luck--The largest iVOD growth area for that demographic appears to be in consumer generated videos—remaining largely untapped by advertisers. eMarketer projects that the ad buys in this space will be $1.5 billion by the end of the decade. So there’s still a tremendous gap between what the publishers are providing and what the advertisers and their agencies are sponsoring.

In part, this situation exists because many advertisers themselves don’t really understand what streaming video and its marketplace are all about. Also, the product brands that depend upon high-profile exposure to consumers have trouble connecting up with a big chunk of their target audience because much of the audience—particularly the tough-to-reach 18-34-year-old males—are watching video from mostly unaggregated small publishers.

While mainstream “reach” sites are “sold out”, advertisers are not clamoring to get into online video—there is a fear surrounding the challenges of combining the right content, the right network and the right deal to get the exposure they need. Networks who want advertisers to realize the potential of cross-platform exposure have to devise solutions that are particular to video but work effectively with both brand values and other channels of communication.

A disconnected value chain plagues the industry and blocks it from generating the kind of revenue it portends.

Video hosting companies are both nascent and abundant. We’ve tracked over two dozen in our research for this paper. They tend to differ in several key ways:

• Are they producing content themselves?

• Are they pursuing a portal or enablement strategy`

• Do they accept advertising?

• Are they filtering content for copyright infringement? Pornographic material? Violent material?

• Do they allow downloading?

• How do they support their offering?

• How is or isn’t sharing enabled?

Advertising services firms appear to be remarkably unprepared for the onslaught of tier three content. This has led to quite a bit of disagreement inside the traditional media buying companies around the “appropriateness” of third tier content. Partnerships have been slow to form between hosting services and ad services. Ad services tagging technology is not as precise as it needs to be, nor are the ad serving tools as functional as they need to be to fully exploit the rush of new content and audience.

We see much of the argument around brand appropriateness as academic in that the audience has clearly arrived for third tier content. The challenge is to connect brands with content that is appropriate--a problem that plagues many of the portal aggregators. Sites like Google Video and YouTube will need to rely on (heretofore undemonstrated) advanced tagging technology in order to defend advertisers from violating brand values.

Further shame falls on agencies that have not created content for these sites. Brands that can create compelling content can get what is essentially free exposure for their content. Indeed, as more high-quality ads come into online video, they could take center stage in the medium. “In the future, advertising may become the content,” offers Rob Petty, CEO and founder of Roo Media, a turnkey video solutions provider for content creators, websites, publishers and advertisers.

Even so, Matt Wasserlauf, CEO of Broadband Enterprises, the largest online video network, doesn’t make light of advertiser reticence to embrace the people’s (user-generated) content yet. “Advertisers are holding back because there’s just too many questions, it’s really too risky right now for a major advertiser to appropriate or associate brand with that content.” So, Wasserlauf thinks it’ll take some time before the broadband potential of third-tier content manifests itself—and that this will happen once the risks are removed.

“Maybe the nearest, or closest solution we have for this is some type of rating system where it does get viewed, analyzed and rated so that a major sponsor, say a Proctor & Gamble, can feel comfortable enough with putting its Pampers Ad in front of it,” he surmises. “I’m not saying this system is going to be created within six months but it will be at some not-so-far-off point in the future.”

Wasserlauf thinks economic necessity will drive this, too, estimating that about 20% of streaming inventory today is user-generated content. “Out of 4 billion available streams a month, 20% is a real number.”

While it is true that brands like Chevrolet and Converse have done consumer-generated video campaigns far too few brands have taken what is essentially the more conservative and proven path of releasing content they’ve built onto the web via these portal sites. Fewer still have taken advantage of the multiple fan sites that are enabled with video and exploited them in a way that connects the user with the brand in the single least cluttered media environment available.

All this is not to say there isn’t a rush to provide advertising services to connect traditional advertisers to the new channel.

Tremor Network does this by starting out to do what ad networks normally do—provide an ad tag that targets recognizable triggers to call everybody in its advertiser base. “Now, to do that on a web page is very easy,” says CEO Jason Glickman. “But doing this in a video player – such as a flash video or Windows media video player—becomes difficult. We have the ability to get into the player and do this same calling of an ad tag to our advertisers in that arena.”

The middlemen who have technological keys to the flash, media and quick-time players et al. will have the flexibility to make things happen. “In many cases, you have to work with an advertiser to make sure their ads can work with all these players,” Glickman emphasizes.

It would seem that companies with the biggest ad footprints in the online video market—like Comcast and Viacom, for instance—would have the deep pockets to cut out the middlemen entirely and set up their own conduits for their ads. But Philip Kaplan, CEO of content delivery network VitalStream, which counts that telecom duo among its clients, cautions against that approach.

“Certainly some companies with advertising as their core business are big enough to think about doing it all, but the reality is it’s not that easy to do technically,” he says. “There’s several barriers to entry.”

Building a quality network involves more than just spending the $20-$30-$40 million that a mega-corporation could afford. “But making it work and doing the maintenance required in terms of technical product development isn’t easy,” Kaplan continues. “Software development for those companies is an IT function, not their core business. Whereas bringing these kinds of products to market is what we do.” As well, VitalStream and others in their space can optimize the transaction costs, which would be much higher for advertising-based businesses.

Making an impression with impressions

As online video draws more and more players and interest, there may be growing pressure, especially from big corporations, to standardize the rules of doing business so that the process is simpler and more efficient for everybody along the value chain—content owners and distributors, advertisers, and business and technology enablers. Blaine supposes that may happen at some point in the future, but that for now, the opposite is true. “You’ve got multiple formats, competing standards, new devices coming out all the time and a very fractured marketplace and value chain,” he contends. “What the future holds right now is more complexity, a broader universe of possible distribution points and advertising models that are going to be in fairly constant churn as [advertisers] try to determine what models work.”

It’s a not-always-so Brave New World that Wasserlauf likens to a rough-and-tumble period in U.S. history.

“I call it the Wild Wild West because we’re making a market that’s really without any systems or organizations and efficiencies for that matter,” he says. “We’re doing a lot to try to tether together the buying and the selling, bring some systems into place and make it a lot more efficient.”

That brings the discussion full circle, back to the gap between available content and the advertisers who want in but don’t yet see the value proposition to make a commitment. It’s kind of a chicken-and-egg situation, according to Blaine: advertisers want properties that have succeeded on cable and are transitioning to broadband, while there have to be enough “aggregated impressions lined up to make the advertising purchase worth it or there’s no model.” The content has to be in place and it has to be tracked and reported so that advertisers can identify their target demographics. Yet content owners and distributors have to be mobilized and convinced to put that content in place.

How can this circle be squared? Blaine suggests one of two ways. Big distributors who already have strong brand identification with the public are the logical place where content aggregation and expanded sales will occur first. Then, as the video demand matures, multitudes of small sites will become concentrated into large super-affiliate networks.

Effective specialization by outfits like Klipmart is one way a lot of content is brought into the equation. An online video specialist since its inception in 2000, Klipmart was present at the creation of online video advertising and has gotten to the point where CEO Chris Young estimates that Klipmart served 1 billion impressions in March.

“Our strength is that video is all we ever do, so we’ve definitely developed a singular focus,” says Young. “There’s a lot of risk in companies becoming unfocused and too diversified, in taking their eyes of the ball. We could have made a lot of money doing floating ads or expandable ads or whatnot, but we’ve stayed focused on video and probably left money on the table over the years.”

The money from video only isn’t too shabby, though. Young just looked at an advertiser’s plan for 160 million impressions. “You take 160 and multiply it by $2.50 an impression, the math is close to half a million dollars in revenue,” he points out.

Taking the worry and work out of technology

The common ground making everything possible in the online video space is the enabling technology and the ever-expanding possibilities it creates. But keeping up with the technology advances, and understanding their inner workings, isn’t what content providers, advertisers or end-users want to do. That’s a niche that FeedRoom.com, among others, is filling.

FeedRoom began as a streaming video destination that aggregated content from media companies and configured it into a unique user interface. Then it saw the value of creating a hub-and-spoke network to show local and national content and selling against that network. But it saw its best opportunity in technology.

“We made the right decision that we didn’t want to be in the ad selling business, the revenue share business,” remembers FeedRoom CEO Bart Feder. “We wanted to license our technology and provide services around it to allow companies to take advantage of the broadband space. We wanted to create the enabling technology and use our domain expertise and best practices to help these companies succeed.”

Having the right technology isn’t enough, though. It’s also necessary to measure the results it yields and develop synergistic relationships between the technology and all the other elements that go into video ad campaigns. Ad service facilitators like Eyewonder do this by assembling dedicated-function teams which work solely with advertisers, agencies or publishing sites and then coordinate their efforts to produce campaigns that make deadlines and budgets without compromising quality.

“There’s a lot of variables in play in every project—timeline, creative and technology and the most important thing we have to do is address everybody’s expectations up front so that everybody’s on the same page about what’s going to happen,” informs Eyewonder CEO Jason Scheidt.

Scheidt’s technology offering doesn’t make clients adhere to a platform template, so they can be more creative. It also identifies ROI for them with a recording system that gives them pertinent post-campaign data.

Pre-campaign, it aligns its formats and features with client campaign objectives so that clients get the most bang for their bucks. “This isn’t a business where you can just put a video inside a banner ad,” insists Scheidt. “This is a business where we need to guide our customers so they can generate the most positive occurrences.”

Eyewonder claims a pioneering role in meeting one such objective—maximizing brand endorsements with built-in viral features “that allow the initial recipient to actually co-opt the message or portions of the ad unit and forward them,” says Scheidt. These become “informed vs. random” impressions because the sender believes they have value to the next recipients. The bonus is that all but the first impression don’t cost the advertiser a cent.

Making end-user communities large enough

Every video hosting service has its own idea of how many viewers it needs to make to make video communities ad worthy, especially for tier three content. According to Co-founder Jakob Lodwick, Vimeo may be a good generic gauge of that magic number because it hasn’t yet built its community to a size where it’s ready to put ads on video. Monetizing the community through video is his goal, and he’s talking about post-roll ads with one company and probably doing text-based ads, too.

Of its 40,000 registered users, only a small subset are passionate about it. “If we can get to the point where we have 1,000 of these – logging in every day and making friends in real life from the service—that would be a pretty good benchmark,” decides Lodwick. “Once you have that many people it’s inevitable that they’re going to bring in their friends.”

There’s no set formula for growing dedicated audiences for top-tier video, but Fifth Network, which sells and networks video content, believes the way to do it is by consolidating high-quality video with a high-quality playback experience so that it’s easy to buy. If the content category is extreme sports, say, Fifth Network combs the top 30 or so extreme sports web sites and assembles it into a network. “But once we find that high-quality content, we dictate to a publisher that it has to have the right user and advertiser playback experience,” asserts COO Tom Bosco. If the publisher is deficient in one or the other of those two facets, Fifth Network provides the back-end technology support—for content management, ad service facilitation and the like—to insert that quality.

Bosco does one more thing, too—he requires publishers to enter into exclusive relationships with Fifth Network and guarantee him a set number of monthly impressions. The point is to make things predictable, and therefore simple, for the media buyer. “That tells the media buyer that we’re for real, that they can touch and feel our network and know what they’ll get. That makes it much easier to buy and explain,” Bosco points out.

“A lot of publishers kind of shake their heads at first about committing to us exclusively for a number of impressions,” he admits. “But frankly if we can’t get that from a publisher we can’t keep our promises to the ad community to make things simple, and they can’t be part of our network.”

So, the kinds of partnerships, and the nature of those relationships, is critical to the success of a network’s business model. At Sharkle.com, CEO Trevor Wright is going to build brand relationships by clearly identifying content preferences for the older and younger demographic end-user and then partnering with advertisers to target them. He sees that getting underway for Sharkle by this summer.

Wright sees a lot of potential for Sharkle in going after the user-generated video created by semi-professionals and amateurs—his terms for second-and-third-tier content. “Marketers can benefit from interacting with those two tiers,” he observes. “Sharkle is very interested in that third tier and how to interact with advertisers there.”

Into the crystal ball

“Content wants to be free”, while sounding nostalgic, is still a rule of thumb for online video. Looking into the business as it matures we see a number of inevitable events. First and foremost is consolidation and entrenchment of two valid business models. Interestingly, given advertiser demand, few companies are making any money streaming video. MSN and Google are currently adopting a loss leader strategy to fend off share loss. YouTube is in transition and hasn’t tipped their hand whether they intend to adopt an advertiser-supported business model or a paid distribution model.

We suspect that eventually all video services will be driven to ad dollars as advertisers become more comfortable with negotiating the challenges of slivercasting and embrace the “web as frequency” model and abandon efforts to find broadcast size audience pre-aggregated to receive communication.

There’s another looming obstacle in the paid subscription path—the possibility that the end-user pie could be cut up into too many pieces. That concerns people like Eric Eller, the senior director of product marketing at Advertising.com, which aggregates premium content inventory for single media-buy availability to advertisers. “Online video faces the fragmentation of users and of their time,” he believes. “So if a truly compelling kind of video-on-demand service emerged that actually reduced peoples’ online viewing time that could be a challenge.” He does suggest that this could be countered if online video “continues to enjoy a huge upswing in consuming more and more of a consumer’s time.”

Still we suspect many providers will be stymied by the slow pace of advertiser adoption. That’s driven by old-fashioned thinking that values reach over targeting, where ad buyers still cling to old methods to justify spending. This puts huge pressure on the ad networks to sell the power of the new medium and account for its effectiveness. We expect to see aggressive consolidation in the ad nets and ad services as companies fail to deliver on both sides of a very difficult equation.

Google, YouTube, and MSN, along with relatively smaller players like iFilm, ManiaTV, Heavy and Putfile, are firmly rooted in the portal strategy. We think the portal strategy makes sense for the biggest players—but will be extremely tough on the me-too’s. Entering the business now with a portal strategy seems foolhardy. Despite its first mover advantage and strategic partnership with Viacom, iFilms growth is lackluster when compared to the space as a whole.

Newer players like BrightCove, Vidiac and Revver have a much better shot at surviving the first cut. We like the idea of video enablement as a web service—particularly where revenue sharing can occur. These newer models face challenges too, as larger communities are developing their own video tools and services. These service models are also challenged to establish independent measurement of their aggregated reach as their models enable content to appear anywhere on the web.

In fact YouTube has caught on recently by adding link tools to their embedded player. This added functionality keeps the firm flexible as it looks for revenue models that will match the popularity of YouTube’s tool. One thing that is clear: the battle over persistent branding of content is only just beginning.

Competitive survival

Even with so much content coming into web-based video and so much advertising that’s ripe for it, there may be only so much room for companies trying to bring them together in network-enabling solutions. Petty thinks the advantage will go to companies, like his, that have been there from the start and worked through the growing pains so that they could build a large base of website, content and advertising partners.

“Getting that leadership position with market share is very very important,” he contends. “I really think the start-up phase opportunity is gone. The technology is such that it really takes two years to build anything that’s competitive, regardless of money.”