Up until six months ago, broadband was still regarded as a workplace phenomenon, but by February, according to online measurement service Nielsen/NetRatings, more than 56% of Internet users in the U.S. had tapped into broadband cables at home, turning the Web into a whatever, whenever consumer experience--like a TV that the user can program.
At the core of that changing experience is video. Video, more than any other online play, has jacked up the range and engagement of the consumer, experts say, making it the de facto standard online. Internet users choose among thousands of music videos, up-to-the-minute news, sports replays, TV show clips, movie trailers and a collection of original content like interviews or outtakes that are connected to this programming. Yet the content is still geared to the at-work user, seeking the quick clip as a way to take a break from work.
"The portals' bread and butter have been people in the workplace," said Neil Perry, an independent marketing consultant who published a study in March on broadband that was commissioned by iMedia. "It is a huge shift to the at-home user." Suddenly, for all the big-pipe promises, publishers and advertisers find themselves playing catch-up in terms of tailoring their content to the home users.
As advertisers become more interested in the best way to connect with these video viewers, the burden of what consumers want and how they want it delivered has fallen on the shoulders of the Big Three Internet portals: America Online, Microsoft's MSN and Yahoo.
Since they control most of the video inventory and 15% of non-search advertising billings, these giants will control the direction of broadband. Analysts and portal executives acknowledge that broadband is still in its infancy, but they know that the goal this year is to see whether they can draw consumers to their portals' content and entice advertisers to invest in their broadband inventory.
There is a lot at stake.
Consumers are voracious, activating 81% more video streams in 2004 than they did in 2003 for a total of 14.2 billion, according to AccuStream, which researches and publishes data on streaming media. This year, Net users are expected to stream over 21 billion.
They are not just partaking passively, either. A Nielsen/NetRatings study that compared the two groups' behavior during November 2004 revealed that broadband users spent 34% more time online and visited 35% more e-tailers than their narrowband counterparts. Some 69% of online sales were from fast-connection consumers, and they spent one-third more than their increasingly antiquated friends. Web users that do the most streaming of videos are dissatisfied with prime-time TV; twice as likely as average to purchase devices that give them more control over TV (like DVRs); and are affluent.
While a year ago marketers were just dipping their toes into the video pool, realizing the burgeoning opportunity, they have now waded up to, well, at least their ankles. Marketers dished out $121 million for online video advertising in 2004, and they are expected to hike that to $198 million this year, and to $282 million by 2006, according to figures compiled by online market research firm eMarketer.
Perhaps more tellingly, rich-media advertising, driven partly by video technologies and certainly buoyed by consumer uptake of broadband, is predicted to surpass search marketing as the largest-spending online category this year, said Mr. Perry.
"Advertisers used to complain that they couldn't accomplish much with a banner--broadband opens up the world to them," said Wenda Harris Millard, chief sales officer at Yahoo.
All three portals plan to expand content offerings for the at-home user by building out their licensed programming, and original and user-generated content, since video advertising is better suited to video content. All three grew their marketing and advertising revenue last year, and understand how important it is to seize the broadband opportunity this year. And, they have established themselves as destination sites and communication/community centers where users can view content, discuss it or pass it on through e-mail or instant messaging. But they haven't yet figured out what sort of content is going to satisfy an ADD-afflicted public at home.
If there's one content area all three are learning from as fast as they can it is music. Among the top-three rated sites are Yahoo Music (formerly Launch), AOL Music and WindowsMedia (which houses MSN Music). "You are not going to download music at the office," Mr. Perry observed. "Now that people are at home downloading broadband, it's going gangbusters." Indeed, Yahoo Music, for instance, streamed more than 336 million videos to users in January.
Web surfers' behavior with music videos may be indicative of how they want to consume all content, portal executives said. "Folks are snacking on video," observed Michael Barrett, exec VP-worldwide sales, AOL Media Networks. "They are not watching a whole NCAA game online."
Above all else what music has taught the portals is that control lies with the consumer. Executives at all three portals point out allowing the portal visitor to choose and handle what he experiences underlies their programming and advertising tactics. We have to give them "the ability to control the experience of what they are interested in when they want it," Kevin Conroy, chief operating officer of AOL Media Networks, said.
MSN points to the MSN Video play list as a way to honor online behavior because consumers can view clips as the portal organized them or build their own play list. "There's a balancing act between giving them total control and a programmed experience," said Joanne Bradford, chief media revenue officer at MSN.
Still, portal executives have yet to learn how long visitors wish to stay, how much advertising they will accept and most important how they can leverage their audience's interest in music to other entertainment areas. Yahoo has begun its content library by tapping into TV. MSN's strategy is to rely on technology, but to keep advertising revenue streams current. AOL is preoccupied with turning the ship from relying on membership to a membership/advertising model as it opens AOL.com to the general broadband-enabled audience.
Yahoo is arguably in the strongest position to try new things, with the highest ad growth and, most importantly, number of visitors.
Yahoo's advertising and marketing revenue was $2 billion for the first three quarters of 2004, a 220% increase over those same quarters in 2003. Ad revenue makes up 84% of Yahoo's worldwide revenue--far surpassing MSN and AOL.
Comparatively, MSN's advertising and marketing revenue reached $892 million, up from $624 million for the same time in 2003, according to estimates by online marketing research firm eMarketer. AOL increased revenue 19% in that same period to $69 million.
Yahoo's secret sauce is Lloyd Braun, the former head of ABC Entertainment Television Group who is behind TV hits "Desperate Housewives" and "The Sopranos." He joined the portal as head of the media division last fall. With Mr. Braun at the helm, Yahoo is making a classic TV programming play, creating a "signature, compelling event" that will define what the Internet could be as "I Love Lucy" defined what a comedy on TV could be.
"Yahoo is fertile ground for partnerships with movie studios and TV-production companies," said George Stewart, category development officer for music and broadband at Yahoo. To leverage that, Mr. Braun is moving the media unit from the Sunnyvale, Calif., headquarters to entertainment capital Los Angeles, but he hasn't yet revealed what that signature event will be. A look at what Yahoo has done over the last year, though, shows that his tactics will involve TV, the use of celebrity and branded entertainment.
An agreement with Mark Burnett Productions and his NBC reality series "The Apprentice" pre-dated Mr. Braun's employment. Other licensing agreements are with "Entertainment Tonight," as well with Showtime to rerun the entire first episode of "Fat Actress," and another Burnett pact with NBC's "The Contender" boxing reality program. The TV section of the site features video previews, outtakes and replays of programs, along with games and other interactive elements, such as a reminder that clips can be e-mailed to friends. The shows' advertisers are messaging across the pages. Yahoo has used this programming to cut its teeth on branded-entertainment placements for itself and its advertisers.
For example, in one episode of season two of "The Apprentice," contestants had to create a new flavor of Ciao Bella Ice Cream and market it. The specialty ice cream was only sold in 18 stores in the New York and San Francisco, but Yahoo got the manufacturer to place the product in 760 stores across the U.S. A promotion at the end of the episode pushed viewers to Yahoo's Local online search engine to look for the store nearest them to buy the frozen treat. By 5 P.M. the next day, the ice cream was sold out. Thanks to its registration database, Yahoo was able to provide Ciao Bella with the age and gender of respondents.
"Yahoo is establishing itself in bringing television to the Internet," said Matt Wasserlauf, CEO of streaming-video network Broadband Enterprises. "Broadband is going to be much bigger than any one vertical or any one type of content use. Branded entertainment will be a well-produced aspect of this business."
MSN has no Lloyd Braun, but what it does have, analysts and media buyers say, is a first-mover advantage. Having rolled out MSN Video Player a year ago, the portal has had time to iron out the kinks in its technology, build up a video library and assert the Windows Media Player site as a destination in users' minds.
But as a unit of Microsoft, MSN's main play is technological. "Microsoft's portal strategy is really about selling Microsoft technology," said Joe Wilcox, a senior analyst at Jupiter Research, who monitors Microsoft. "Microsoft leverages its own technology to deliver a content and service. MSN Video produces content related to ads, but at the same time the content showcases the technology because it's Microsoft technology."
Developing MSN Video is a way to research how people view content and ads--to the Internet and beyond. "Inherently, Microsoft is a software company," said Rishad Tobaccowala, chief innovation officer, Publicis Groupe Media. "It wants to be sure it is the software company that owns the software, distribution and rights management for video. They would like to be the software provider for the digital home."
Meanwhile, MSN portal has content agreements with Fox Sports, MSNBC, CNBC and Discovery Networks to provide content. Ads provide a nice chunk of MSN's revenue. For the second fiscal quarter of 2005, for instance, ad revenue grew 17% or $49 million on a total MSN revenue of $588 million. "It still has to make money," Mr. Wilcox pointed out.
In March, MSN boosted its branded-entertainment capabilities by renaming its custom-publishing division as the branded-entertainment experiences team. It doubled the unit's staff, fattened its budget and announced that it would focus more on entertainment and entertainment-type sites. Among the eight advertisers were Gillette, which sponsored a "year's best play" contest on Fox Sports with video ads among sports clips. And Volkswagen and Sprite are also on board. "Marketers know their challenge is to connect with consumers online and need software to make that connection," MSN's Ms. Bradford said.
Some media buyers are skeptical. "Clearly MSN is trying to position itself as we can do anything anyone else can do," said Greg Smith, exec VP- director of insight, planning and data intelligence, Carat Interactive. "MSN is saying, not only can we aggregate it, we can produce good content and deliver an audience for it. Yahoo and AOL had content and audience in larger numbers than MSN ever did."
MSN executives said that its year of experimentation also taught the portal to strike a balance between programmed content and giving the MSN visitor control. Consumers can create their own play list from content in news, business, technology, sports, entertainment, house and home within MSN Video, but they also are obligated to watch one ad for each of two content clips. There is no way to click out of the ad if you want to see the content. People expect to have to watch a commercial to be able to enjoy free content, said Joanne Bradford, chief media officer. "The easy thing would have been to put an ad in every single segment, but we decided the user experience had to outweigh the advertiser's."
Behind the wall
AOL, though behind the other two portals because of the walled garden, members-only model it relied on until last fall, is perhaps in a better situation to bolster its video content once it catches up to the other portals, analysts said. That's because AOL's parent, Time Warner, could provide a never-ending stream of stuff to watch.
That's a possibility, but such deals "have to benefit both parties," said Mike Kelly, president, AOL Media Networks, indicating the content is an option, but by no means an open spigot.
AOL also benefits users and advertisers because of its longevity. It has carried videos from Time Warner, Turner, WB, Warner Bros. Television, HBO and movie studios Warner Bros. and New Line, among others. Outside the family, deals have included ABC, NBC, CBS, Miramax and Disney, and most of the major sports leagues.
"In 2001, 2002 and 2003, we were focused on how to do interesting, innovative things for those who are our paid members," Mr. Conroy said. "It's a shift in business strategy, but we're still doing interesting, innovative things ... focused on creating the unique broadband experience," he said, pointing to recent clips of TV series "Jack and Bobby" and recaps of "Desperate Housewives."
AOL's boulder to push uphill is not content deals, but devising advertising tactics, an area in which it has less experience. Meanwhile, the portal is fast-tracking to modernize its advertising format, making it compatible with all Internet Advertising Bureau standards by next summer when the wall comes down. Mr. Conroy said. "We will have completely caught up with the market by April," he claimed. Also this month, AOL will launch a video player compatible with all players on the market. "In designing an approach that supports more third-party solutions as well as industry standards, we will be more attractive to advertisers." Although AOL has been losing about 2 million subscribers a year, its 23 million remaining members "are a captive audience," Mr. Marshall said.
Providing content is expensive, Jeff Lanctot, VP-media, Avenue A/ Razorfish pointed out. In building up content, all three portals face the same dilemma: "They are playing this balancing act of providing more content and getting consumers to watch it. If you have content but don't position it in a way for consumers to watch it, you've lost out," he said.
But the potential to own an ever more Internet-focused audience is too great for any of the portals to ignore, so balancing act or not, the big pipe battle has only just begun.