• by David Koretz , September 18, 2008

While the online advertising industry struggles, one sector is purposely restraining its growth.

Online video advertising could be a $20 billion juggernaut virtually overnight. The television networks just need to be willing to eat their own young.

And it has nothing to do with ad formats.

Our industry has this perverse need to "innovate" even when the best solution already exists. We have all suffered through countless arguments about pre-rolls versus post-rolls, the correct length of ads, and how to integrate interactivity into ads.

These arguments overlook the simplest fact of video advertising: the current format works. 15-, 30-, and 60-second interruptive commercials are just fine. Hulu proved this when it sold out six months of interruptive commercials in advance. Advertisers are comfortable buying this format, and users are willing to watch them. In fact, this ad model works even better online, because viewers can't fast-forward their TiVo or flip the channel. While format innovation might yield some incremental gain, it won't move the needle in the grand scheme of things.

TV is the most engaging and memorable advertising format available. Quant geeks waste breath arguing about the lack of measurement in offline ads, while ignoring the human aspect of advertising. Great brands tell a story, and that story is much easier to tell with TV ads than banner ads.

Two Markets Disguised as One
The real reason these format arguments happen is that all online video is mistakenly lumped into a single industry, when in fact it is two industries, driven by very different dynamics.

Short-form, mostly amateur video is one market, and long-form professional content is the other. And the lion's share of revenue will come from long-form.

Google's YouTube, the 800-pound gorilla in short-form, may be gobbling up all the impressions, but it's barely making a whisper in the revenue department. Its struggle highlights two fundamental problems with short-form video:

First, the tolerance for interruptive ads on short-form is much lower. Being forced to see a 30-second ad to watch a two-minute video is too high a price to pay for your time.

Second, analysts estimate that only 3% of YouTube's views can be monetized due to copyright concerns, whereas professional content sites like Hulu can monetize 100% of their views.

While short-form struggles, long-form video sites have artificially constrained their growth in two key ways:

The Fear of Real-Time Broadcast
Current audience measurement tools foolishly split online video into a separate category. Television stations are not going to risk simulcasting new shows online and offline if it will damage their Nielsen ratings.

As a result, video sites add an artificial delay, making them a destination for outdated content. You cannot arrange to meet friends to watch the latest "90210" episode if you don't know when the CW is going to get around to adding it online. For regular shows, this is a problem; for sports, it is a non-starter.

Until rating systems properly recognize online viewing, online video will not become a real-time broadcast medium and usage patterns will suffer.

The Library Effect
Today, Hulu is a great place to see that show you missed last week, but offers little more.

If Hulu were to offer every episode ever made, instead of the five most recent episodes, the usage patterns would change instantly. This may seem obvious, but the effect is not.

There are millions of fans that religiously watch, TiVo, and buy the DVD sets for their favorite shows. If Hulu became a reliable source for the entire collection of episodes, the market for television shows on DVD would tank.

While a Historical Video Library is hugely appealing to users, creating one would require content creators to intentionally cannibalize their DVD sales. Until DVD sales fall off a cliff naturally, or an illegal alternative emerges that accelerates the process, the Historical Video Library will be just a pipe dream.

These two self-imposed constraints leave the online video market sitting in the no-man's land of random entertainment: too old to be a broadcast medium, and too incomplete to be a Historical Library.

If only the rest of the online advertising industry had such high-class problems.

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