Ad Pot At End Of VOD’s Rainbow Remains Elusive

Whether it’s advertising or payments, on-demand video is one of the hottest digital media revenue opportunities. But some are now trying to dampen expectations for a market boom.

At Tuesday’s Westminster Media Forum, Oliver & Ohlbaum senior consultant David Cockram showed research indicating the UK’s public service broadcasters will make a combined £46 million from VOD this year – but, after costs, will get to keep less than half of that.

Cable operator Virgin Media (NSDQ: VMED) began trialling serving ads against TV VOD views back in October 2008, claiming 54 percent of viewers are receptive to the idea. Two years on, however, an episode of The X Factor I watched via my Virgin box last week still carried no advertising.

Advertising on TV video on demand is in its infancy still,” Virgin’s commercial and strategy director Asanga Gunatillaka told Westminster Media Forum. “We’re moving from that technical trial to looking at how we build the right market.

“We’re in the test-and-learn phase because we don’t want to compromise the customer experience. Consumers are pretty warm to it – we just don’t want to push it too far. Right now, we’re still working on getting it right – but with the number of views we have on our platform, we think it’s a huge opportunity.”

Rhys McLachlan, a managing partner with WPP’s ad house MediaCom, observed that – on his metrics – VOD “accounts for six percent of TV viewing, but not six percent of investment”.

While industry players still linger over an advertising opportunity they say is yet to fully materialise, VOD operators are shouldering the costs and are taking an increasingly keen interest in pay-per-view and subscription as more promising revenue models, Blinkbox CEO Michael Comish told the forum.

“The first phase was about ad-supported economics,” Comish said. “You’re going to see a lot of services switch to a mix or to pure subscription services. That’s where the economic models will play in the long term.

Comish set out the demands on VOD startups like his own: “It’s going to cost you £20 million to get up and running and your annual opex is going to be about £5 million

“If you have an ad-funded model, you’re going to need to deliver 62.5 million streams per month. There are only two sites in the UK that do that – the BBC and YouTube – which suggests everyone below that is losing money. Unless you have colossal scale, you simply can’t make the economics work … this industry is going to be highly concentrated.”

As Comish wrote on paidContent:UK recently, the coming connected-TV wave, including YouView, offers a sparkling new opportunity for such VOD services to exploit this subscription paradigm…

“It delivers the scale you’re looking for,” he told Tuesday’s event. “You move from technologically-savvy younger viewers to the mainstream. There’s a higher propensity of people to pay on TV than on PC. Subscription is a much more powerful model than pay-per-view.

“The UK DVD market is worth about £2.2 billion pounds – we think you’re looking at about 40 percent of that moving online. That’s a billion-dollar market. That’s the opportunity. On an ad-supported market alone, you’re not going to get there.”