By Bruce May, July 2008 The digital media revolution is stimulating economic development on a scale not seen since the first dot-com era. If you have read Thomas Friedman’s book, The World is Flat, then you know that we are well on our way into the second era, often now referred to as Internet 2.0. The technology that was lacking in those early days has finally arrived and it is now possible to move forward with business models that, back then, were too far ahead of their time. The evolution of online ad networks and the arrival of third party video platforms in particular, provide the critical pieces of the puzzle necessary to support new media business plans. If you are a content producer or content aggregator seeking to build a business plan around the revenue streams available for broadband distribution you will need to get your arms around the hard facts about revenue potential and operational costs. Video production companies know well enough how to calculate the costs involved in the creation of their content but everyone looking at online distribution struggles with the critical factors affecting costs and revenues. We will address them both here. Costs can be difficult to define in new media business models for a number of reasons. Estimates require fairly accurate projections of audience growth; a well grounded understanding of the pricing models for all the services needed to support your content management and distribution strategy; the costs associated with specific revenue streams used to monetize your content; and of course, content production costs. Let’s begin by looking at the revenue streams and the potential costs associated with each one.
Revenue Streams
The two most common revenue streams available to monetize content are pay-per-view and advertising. Pay-per-view (PPV) represents a tiny part of the total market. When it is available it is something that you don’t want to give up since it can generate enormous levels of revenue compared to ad driven models. Even a $10 ticket price creates the equivalent CPM for a PPV event of $10,000! The costs associated with PPV can include all the standard pricing used by your solution provider and in most cases, an additional percentage of the gross. That percentage can be set up as either a constant or a sliding scale and can run anywhere from a few points to as much as 30%. In some cases the revenue sharing model for PPV will waive all fees for bandwidth and other services. This is not likely in those cases where the revenue sharing percentage of the gross sale retained by the solution provider is on the low end of the range. Many solution providers will use the same basic pricing model for both revenue sharing models and non revenue models with the exception that the prices are often discounted when revenue sharing is involved. Typical fees include a setup charge, a monthly maintenance or operating fee and a bandwidth fee. Sometimes the bandwidth fees are wrapped into the monthly fees which obscure the actual bandwidth costs. For clients who experience heavy usage, solution providers will usually negotiate bandwidth fees independently of other costs. It is critically important that you have a clear understanding of what your bandwidth costs will be. (For an explanation of bandwidth costs see our article How to Understand Broadband Distribution Costs). Sometimes solution providers will have separate fees for technical support, storage, back-up and other miscellaneous services. The other variable that has to be considered in analyzing costs is the use of multiple vendors. If a content provider puts together a smorgasbord of solution providers they may well end up piling on costs that overwhelm their own business model. That is one reason that solution providers that can provide one stop shopping offer an attractive alternative for content providers. Often such solution providers will roll all the costs from multiple vendors into a single pricing model. Great care should be taken in evaluating all the services provided by a particular solution provider to ensure that they offer everything you really need. Trelios DMG offers help in dealing with these issues by bringing multiple solution providers together in an alliance network. With our help, content providers can better find the overall solution they need and if necessary, work with Trelios DMG to design a plan to craft an integrated solution from multiple vendors that provides everything required for a particular project.
Interactive Advertising Revenue
Interactive Advertising is changing, but not necessarily for the better. Expanding banner ads, video ads, and increased interactivity all create potential disruption to the user experience. This is even more so for broadband television. Most of these new ad formats are far too disruptive to the television experience. Most video content aggregators use a third party solution provider that offers some form of video or media player. This adds a secondary layer of code between the content provider and the ad network. The digital media ecosystem is just now in the process of resolving the integration issues between third party solution providers and the ad networks. In some cases these integrations will provide meaningful solutions. In others, third party solution providers are contemplating creating their own ad networks. In still other cases the content providers are becoming their own ad networks, as is the case with the major television networks.
If you use a third party solution provider you will need to understand what services they offer in connection with ad serving, if any. In some cases, simple web solutions provide i-frames that allow ads to be served directly into the frame with no additional cost. That is ideal but it may not be a model offered by the solution provider you choose to work with. Those companies that have the best to offer in terms of Content Management Systems (CMS) and user experiences created through the use of highly interactive video players may charge additional fees for connecting you to an ad network. If so, these fees will usually be passed on in the same form as the ad fees charged by ad networks themselves. Ad networks usually charge in two ways.
First, ad networks most commonly charge on an impression basis. If you are using an embedded video player, banner ads appearing on the page are measured simply in page views. If you are using a video player that has integrated banner ads into the player itself then actual ads served may be tracked independently by the company providing the player. This is an area where the disconnect between ad networks and broadband television solutions creates some problems. Some video player solutions solve this by making ad calls to the ad networks with a timing mechanism that allows additional ads to be served during some specified interval (15 seconds, 30 seconds, etc.). This overcomes the inability of the ad network to distinguish between a “dumb” page and a sophisticated user interface like a video player. Since the third party solution provider is providing the tracking and ad calls necessary to make this work they are justified is asking for additional fees based on the ad serving they enable. This also provides a better way to monetize video content since the ads can rotate. Banners that do not change on a static web page produce only a single impression for a video session that may last for quite some time. The advent of interstitial video commercials inserted into the video content will become the standard ad product for long from video content in the very near future.
The second way in which ad networks typically charge is on click-through ads. Third party solution providers would not typically charge additional fees for click-through ads since this feature is automatically included in the ad itself and the ad network easily tracks and reports this data. Another area where third party ad networks are beginning to offer added ad function is in what we call “click-in” ads. A Click-in ad experience is one created in the video player itself. Potentially there is tremendous value in a click-in experience, particularly for broadband television since the viewer remains engaged with the video player rather than being pulled away to another web site by a click-through advertisement. Neither the content producer nor the viewer has any real interest in leaving a television like experience in order to surf the web for information about a product. As advertisers come to realize the uniqueness of a broadband television environment, compared to a simple web page, they are likely to support more sophisticated click-in solutions.
Third party solution providers are naturally entitled to charge for creating this added value. The difficulty for them is that to do so, they have to become an ad network in their own right, providing creative ads custom designed to work inside their players. The extent to which this kind of service will become available remains unknown. Since it challenges the business model of the ad networks themselves, this creates tension and competition between two different business entities which may not be able to maintain relations under these conditions. The possibility remains for both the ad networks themselves to develop their own video players and for the third party solution providers to create their own, exclusive ad networks, working independently from the existing ad networks. (If you are a CEO of either type of business maybe you should call us to learn more).
We hope we have offered a rough sketch of the landscape so that you can better understand how these revenue streams can be incorporated into your business plan along with their associated costs. The most important piece of your plan remains your potential audience. You will need to have a concrete plan for bringing viewers in to watch and a strategy for growing your audience to achieve the critical mass you need to build a successful business delivering content over the Internet. The cost to deliver video content to an individual viewer is higher than it is with traditional television but the benefit to broadband delivery is in the ability to deliver to relatively small audiences as compared to the mass audiences required for traditional television or cable delivery. The big opportunity for content producers and aggregators lies in recognizing that these smaller audiences represent niche markets that can have high market value in contrast to the mass audiences catered to by the traditional broadcast industry. It is worth noting that the big dogs in the television market have not adjusted their content strategies to take advantage of this key difference. They may well do so in the future but for now, the opportunity is sitting out there waiting for the first, market savvy producers to exploit. Be our guest… and call us so we can help you achieve your goals more quickly.
