The Video Pricing Schism

If you’re waiting for premium digital in-stream video pricing to drop, don’t hold your breath. The market will continue to see a dual pricing model where premium content is elevated while mid-long tail inventory remains depressed. There’s too little high-quality inventory, too much low-quality space.

To understand why it is this way, it’s helpful to figure out first what exactly is “premium content.” The general understanding rests on the laurels of original TV programming (i.e., last night’s season finale). This content, re-appropriated in the digital space is considered premium and like anything good, there is a finite supply that commands a higher price. Recognizing limited supply, the marketplace reacts by creating more content to fulfill the advertising demand – driving mid-and-long-tail content, which inevitably has been priced at low levels. This is the beginning of the unbalanced pricing structure of in-stream video advertising.

There is good news. As the market matures, we should see original digital content, including user-generated content, become more mainstream. This should cause a shift in pricing. Once we perceive there is a balance between offline-produced content and online-produced content we will finally see a price equilibrium.

But for this to happen, the industry must solve the metrics mess. Have you noticed how terms, acronyms and trade language in offline media and online media channels come from different planets? It has certainly caused fragmentation within agency organizational structures. Standardized practices in the in-stream ad marketplace will stabilize rates. The comparability of the lean-forward (digital) and lean-back (TV) media channels needs to share a common ground in some of the metrics, starting with audience ratings, pricing models, and even cross-platform analytics. The schizophrenic nature of online video touts the CPM model, but then touches on CPEs. Perhaps we start with a GRP and then move to a CPE, or start at CPP and move to a CPA? Oh my. Just the acronyms alone have confused the marketplace. This confusion has helped to elevate CPMs, the only common language offline and online buyers speak.

As we look back to display and standardization, we see a similar story unfolding with video. Lack of standardized video ad units/formats is creating fragmentation in the way we approach the creative. Rather than configure creative to the various formats, the market gravitates to in-stream. Nonetheless varied ad-unit formats have created even more fragmentation in the digital video space, resulting in agency and client’s decision to move their marketing dollars into “premium” content that can be based on offline specifications, bringing those CPMS higher again.

A closer magnifying glass on where the budgets are coming from can help explain why we see two pricing models. Currently, CPGs are pushing the most dollars into in-stream video. Primarily driven by branding, large advertisers look at online video as an extension of offline R&Fs. These budgets are being sourced from TV. As we see in broadcast, the respective online properties can command a high CPM.

On the flip side, we find a second grouping of in-stream advertisers: folks who are primarily driven by direct-response initiatives and acquisition. Looking for performance and scalability, these marketers demand low-cost structures to make their advertising payout. Funding for these initiatives is typically sourced from performance driven channels spanning all forms of media including those beyond broadcast.

As traditional, large audience, offline programming remains the premium choice; the respective digital content CPMs will remain very high. Because of infancy, fragmentation, unstandardized units and measures, online video will continue to see a pricing schism, which won’t be resolved until the market matures. When offline and online video becomes “video buying,” we will see a stable market pricing structure.

Shattuck Groome is a partner at Gotham Direct, an independent media agency. Follow him @jsgroome.

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