SAN FRANCISCO (AdAge.com) -- As with everything in mobile, hype precedes reality and mobile video is no exception. Despite being more than 5 years old, it is a nascent medium searching for a mass audience in a fragmented landscape.
This year, 6% of U.S. mobile users, or 18 million people, will watch videos on their cellphones, according to IDC, and by 2013 that number will rise to 27 million. Even then, mobile video's reach is eclipsed by what mobile ad networks already deliver today: Millenial Media said it was reaching 44 million mobile users as of June.
"The campaigns we've run to date have shown a lot of promise, but I think the key is that because of the limited reach of mobile video, it works best when combined with other pieces of the mobile marketing toolkit -- things like mobile display ads, a solid mobile website for the brand, and even SMS," said Jeremy Lockhorn, director of emerging media at Razorfish. "Essentially, mobile video can be a bit of a shiny object -- much like iPhone applications -- sexy and powerful, but chasing after it with irrational exuberance can be dangerous."
Unlike the desktop environment where people simply head to a website to watch video, in mobile, video-viewing can take place on an app, a mobile website or over the carrier's streaming TV service.
"Everyone's trying different things to see what sticks," said Wayne Purboo, CEO of QuickPlay Media, which powers mobile TV services for carriers such as Alltel and Leap Wireless. "It's a big sandbox."
Some startups, like mobile video ad network Transpera, help media companies build free, ad-supported videos that are viewed via an app or the companies' websites. Transpera charges media clients a service fee for delivering video and shares ad revenue with them. Rhythm New Media, which produces smartphone apps for TV properties suchas "Entertainment Tonight," charges for some apps but not others, though advertising lives inside all its apps.
Others, like MobiTV, Quickplay Media and MediaFlo, aggregate many channels, replicating a linear TV-viewing experience. They sell their services to carriers, which in some cases brand them as their own and charge viewers a monthly subscription fee, akin to the cable model. Carriers, hungry for data revenue to offset declining voice revenue, realize it's these types of services that will drive consumers to buy data plans and in some cases are throwing their marketing weight behind them and giving vendors a cut of the subscription revenue. MobiTV also makes money from selling the advertising inventory that comes with licensing its channel partners' content.
For consumers, the plethora of choices between carrier-branded vs. third-party video services and various ways to access video all add up to a somewhat convoluted landscape. But one trend is starting to emerge: It's often not free.
After watching online publishers try to unwind the free content giveaway of the last 15 years, some mobile video providers are skeptical that advertising alone can sustain their business. They face the same profitability hurdles that saddle their online peers, including expensive bandwidth, infrastructure and hardware -- both Hulu and YouTube, for example, have yet to turn a profit, though both say they're close.
"There is no one making money today on ad-supported video," said Mr. Purboo, adding that his company will be profitable within 12 months, and cash flow positive in nine. "I just don't think we're going to move to 'all content is free.' We'll move to a mixed model where some content will be free, and quality content that people are willing to pay for will not be free."
Forrester analyst Neil Strother agrees: "We'll live in this hybrid world where you can grab some stuff for free but for the richer, deeper content -- advertising won't support that. These guys watched what's happened with online content and they're trying to put the genie back in the bottle."
An open question is whether enough consumers are prepared to pay for small-screen video. Fifty-eight percent of those who have never watched TV on the go rank cost as the top reason for not doing so, according to a survey commissioned by QuickPlay. But the growing subscriber base of channel aggregator mobiTV, which has almost doubled to eight million from a year ago, argues for a more optimistic estimation. The success of Apple's iTunes, which owns 69% of digital music sales, also suggests consumers will pay for certain content.
And while consumers believe free is an entitlement in the online world, it helps that they haven't been conditioned to that idea in mobile, where content like ringtones still cost money. There's also less fear from media owners that mobile channels will cannibalize TV viewing, which means channels like ESPN, which aren't yet offered in full on the PC web for fear it will cut into its TV audience, are offered through mobile.
Handset fragmentation poses another challenge, and the numerous platforms, ranging from Java to Android, that video providers have to cater to, could potentially sink profitability ambitions.
"Each platform requires new development and costs, and could ultimately either break the model or require consumers to pay more," said MobiTV President and Co-founder Paul Scanlan. "Getting critical mass and meaningful revenue becomes harder to find and-or keep."
There are a few other things that will need to happen for mobile video to go mass. The first is that more people will need to adopt mobile broadband. Only about 20% of U.S. mobile users have all-you-can-eat data plans, according to Chetan Sharma Consulting. There will also need to be a shift from older, conventional cellphones, whose tiny screens and slow processing power stall video adoption, to smartphones, whose large interactive screens help deliver a better experience. IPhone users, for example, watch six times as much mobile video as a typical mobile subscriber.
That shift is already under way and those in the business say mobile video is on the cusp of significant growth.
"It was only really in 2005 that the [online video] category started to break out and 2006 that it exploded," said Frank Barbieri, CEO of Transpera. "Mobile video is very close to where online was in early 2005."