Could Microsoft still pull off a major coup by investing in an area that Google currently has little foothold in: online video?

iMedia Connection

Microsoft is desperate to undermine Google’s dominance of the online advertising world. It pinned high hopes on the planned acquisition of Yahoo, but must now be looking elsewhere for salvation. Many media financiers expect that deal will come back, possibly after Jerry Yang has been removed for failing to maximise value for his shareholders, but Steve Ballmer and his fellow Seattle-ites will not want to depend solely on that.

Microsoft is not the only player worried about Google’s dominance. WPP CEO Martin Sorrell’s comment on the collapsed Yahoo deal was, ‘It was a shame … that those negotiations failed. Maybe they’ll come back again. To have a balanced marketplace … is important.’ And it is no secret that the big media owners are very nervous about Google developing a chokehold on their advertising revenues.
Fortunately for Microsoft and the rest, there is an obvious way to overtake Google in the online advertising world — namely by monetising online video.

Since access to broadband became the norm rather than the exception, millions of people have begun routinely watching video online. The content they watch varies widely — the most obvious is short clips, often user-generated, of scantily-clad women, men hurting themselves with bikes and skateboards and kittens playing pianos on YouTube. But professionally produced video is increasingly where eyeballs are headed. A huge amount of music is now consumed in video form online, and the launch of the BBC’s iPlayer at the turn of the year gave an enormous boost to video-on-demand TV services such as ITV.com and 4OD. There will be further acceleration when Kangaroo (the VOD JV between the BBC, ITV and C4) opens for business later this year. Professionally produced content is also driving a lot of the traffic at sites like Bebo, which just revealed that it is streaming a billion videos every month.

This large and rapidly growing audience for online video means that the Internet is going to change from a direct response medium to a display medium. U.K. Internet ad spend in 2007 was £2.8bn according to the IAB, making it the country’s third-largest medium (it was the smallest as recently as 2003). Today, advertisers still think of the internet primarily as a medium where they pay for clicks, not for views. But as Guy Phillipson, IAB CEO said at an event in April, online video allows the internet to be used more as brand-building medium.

This is going to be an enormous change in the online advertising landscape. Google dominates the pay-per-click mechanisms that populate the landscape today. But it is nowhere when it comes to online video. This may seem a strange thing to say about the owner of YouTube, but compare YouTube’s expected revenues of $100m this year with Google’s revenue of $5.2bn for the first quarter of the year alone. Google CEO Eric Schmidt recently stated that it was a priority for the business to monetise YouTube, but they still don’t seem to know how to do it.

They stopped annoying viewers with pre-roll ads a while back and now they rely heavily on captions, which sit on top of the video. Many observers think that captions will become just as irritating as pre-rolls over time, especially the ones that distract the viewer with various kinds of animation. The other option that YouTube employs is the companion ad, but research shows that viewers are pretty good at avoiding them. They may simply be playing their cards close to their chest, but so far there is no sign that Google and YouTube have any better ideas up their sleeves.

YouTube’s online rival Bebo has been more innovative and generated significant revenue with product placement. By placing the brand image or message into the heart of the content, this provides great associative value to the brand and the images do not annoy the viewer even though they cannot be skipped. Product placement is a large and growing medium in the movies, and in the TV economies where it is legal (i.e., everywhere outside the E.U.). It looks set to be a large medium in online video. Product placement is not without its problems. It must be executed sensitively, so that the image looks like it belongs. Traditional product placement is also difficult to scale, since the transaction must be agreed before shooting starts and its success depends on the full cooperation of the director, the cameraman, the actors and a host of other players.

This is why a process known as embedded advertising has been developed. The brand image is inserted into the footage digitally, after the programme has been completed. The transaction is far simpler and both advertiser and content owner can preview and, if necessary, adjust the treatment before the clip is played out. Product placement, and embedded advertising in particular, could well revolutionise the online advertising industry. Within a few short years, expenditure on ads in videos could dwarf spend on search, banners, MPUs and the rest. Google shows no sign of owning this territory, which may leave a massive opportunity for Microsoft — if they are nimble enough to move quickly.