Dynamic Viewing: The Struggle of Online Video Providers to go Mainstream in the Face of the Continued Dominance of Traditional Television Viewing

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Dynamic Viewing:

The Struggle of Online Video Providers to go Mainstream in the Face of the Continued Dominance of Traditional Television Viewing.

Nina KauffmanIndependent Study

May 13, 2011



In the past five years, the audience of online video has tripled among the

population 12 and over, from 12 percent in 2006 to 38 percent today.1

As we migrate

further and further online to access premium, long-form video content, a working

business model can¶t be that far behind. While there are currently both subscriber and ad-

supported online video providers (as well as services like iTunes and Amazon, which

allow viewers to pay for and download videos à la carte), there is not yet a model that has

been proven to effectively lure away traditional television viewers.

In order to bring that about, online video will need to have a combined

subscription/ad-supported model similar to cable, but with a more flexible or expansive

content library ± meaning one will no longer have to sign up for bundled cable channels

that they don¶t watch. Cable providers are uniquely positioned to offer this type of

service in line with their TV Everywhere or HBO GO, but as they are reluctant to open

these services to non-subscribers (for a fee), the future business model of online content

is still unknown. The best idea of how this might unfold seems to be a partnership with

the traditional content providers and online content providers in order to gain the most

viewers and revenue.

But until that happens, and until content creators, providers, cable companies,

networks, advertisers and studios figure out how to address the intricacies of licensing

and audience metrics, television remains the behemoth of video content provision, and

online video serves merely as a supplemental proposition. Once the population migrates

further online (most likely as the younger demographic ages into a higher

income/education bracket), then the advertisers (and the content providers) will follow.

1 Edison Research and Arbitron, The Infinite Dial 2011: Navigating Digital Platforms (Sommerville:Edison Research and Arbitron, April 5, 2011), 30.



The Emerging Trend of Online Video Consumption

The rise of content viewing online can be attributed mainly to the near ubiquity of

broadband (or high speed) Internet that allows for streaming videos with little lag or

delay. First introduced in 2000 with 4.4 percent nation-wide adoption, this method of

Internet access let users download and view content quicker and more easily than dial up,

making access to online video feasible for consumers.2

Before the days of widespread broadband adoption, experts were divided on how

consumers would approach content on the web, with many believing that the interactive

experience of the Internet was at odds with the ³lean back´ experience of traditional

entertainment. At the Networked Entertainment World Conference in 1998, Douglas

Rushkoff, a media expert who went on to write several books on the information age,

declared, ³The Net's not about entertainment, or playing with stuff. It's about interacting

with each other. Entertainment is hypnosis, it's zoning out ... They don't call it TV

programming for nothing."3

At the time of the conference, most of the world still associated entertainment

with the passive media of television, film, print and radio, and many thought that a

medium that required engagement would not be considered a leisure activity. However,

Hala Makowska, a former vice president at Time Inc New Media (before the AOL

merger), disagreed with Rushkoff, stating, "To say entertainment means you've got to

shut your brain off is a wrong assessment."4 Even then, panelists at the conference

2 Finley Engineering, ³NTIA Report: Broadband Adoption Rate Soared Over Past Decade,´ Telecom Blog,entry posted February, 2011, http://fecinc.com/blog/ntia-report-broadband-adoption-rate-soared-over-past-decade/ (accessed May 10, 2011).3 Janelle Brown, ³Will Net, Entertainment Ever Mix?´ W ired , February 13, 1998, page nr.http://www.wired.com/culture/lifestyle/news/1998/02/10285 (accessed April 3, 2011).4 Ibid.



speculated about the changes that broadband would bring about, hoping it would provide

compelling, narrative content with video and audio.

Most present on their minds: How would we access this content in the future, via

PC or TV? Many of the panelists insisted that interactivity was strictly for the web,

accessed by PC, and that passive entertainment was strictly for TV, with little room for

reversal. Former CEO of Worldgate Communications (a company that produces video

phones for business customers) Hal Krisbergh said at the 1998 conference:

³The idea of the TV and PC converging is just not sensible. The TV platform isan entertainment platform and you're not going to watch Sunday night at the

movies on your PC. When people ask, µTV or PC?¶ what they really mean is, arecomputing technologies going to make their way into the TV set?´5

While Krisbergh may not have forseen the surge of consumers toward web video,

he had a valid point. As the entire entertainment industry struggles to define the growing

relationship (and competition) between traditional TV and web video, many wonder if

the two media can coexist. While news media often proclaims that TV is dead, it still

holds the lion¶s share of viewers, with most consumers using their PCs or mobile devices

as a ³second screen´ to augment their viewing experience, before making the jump to

viewing content exclusively online. Mike Proulx, SVP and Director of Digital Strategy at

Hill Holiday (an advertising and marketing firm), confirmed this method of media

reinforcement in an interview posted on BostonInnovation. ³It allows the TV screen to be

what it¶s made for (displaying content) and using the second screen (the iPad, or other

5 Ibid.



mobile device) as a means to interact andengage more deeply with that content (and

without cluttering up the TV screen),´ he says.6

While this is how most Americans are utilizing online content, currently the

younger demographic is leading the charge to extensive online video consumption. A

recent study by the Pew Research Center reveals that 78 percent of respondents ages 18 ±

29 watch online video, compared to the (rapidly rising) 66 percent in adults ages 30 ± 49

and 45 percent of those ages 50 plus.7

However, it¶s important to note that this study

includes all video, such as short-form amateur content or educational or news videos.

Below is a chart complied by Pew that breaks down the demographics of those viewing

video online.

6 Austin Gardner-Smith, ³What the Internet TV Revolution Means for Advertisers and Marketers,´BostonInnovation, entry posted December 9, 2010, http://bostinnovation.com/2010/12/09/what-the-internet-tv-revolution-means-for-advertisers-and-marketers/ (accessed April 7, 2011).7 Kristin Purcell, The State of Online Video (Washington, D.C.: Pew Internet and American Life Project,June 3, 2010), 4.



8

As shown above, men are more likely than women to view video online, as well

as those with a higher education and income level. Additionally, online video viewers are

pulled not just by the promise of another content provider, but of a content provider that

8 Ibid.



allows more choice about how and when to access (though not always ³what´). Younger

viewers are less used to ³appointment TV,´ where they will turn into a show at the same

time every week, and online video providers allow them to access programming

according to their schedules.

This shift to online video isn¶t the only thing broadband has changed about the

way we consume media. According to a recent survey by Ipsos OTX MediaCT, people

are now spending one-half of their waking days interacting with media, and have

increased their media consumption by an hour per day over the last two years ± more

time than they spend working or sleeping.

9

While not all of this time is spent accessing

online video, the study illustrates the shift in how we obtain media and content, and how

high speed Internet has brought about this shift.

And while traditional television viewing still accounts for 78 percent of hours

viewed, non-traditional methods (DVR, VOD and online video) now account for almost a

quarter of hours viewed.10 A report by eMarketer supports the view that while traditional

TV still holds the lion¶s share of viewers, online video is on an upward trajectory. The

report states that: ³Audience levels and stream counts are rising, the demographic range

of the viewing population is expanding and the content mix is evolving from short,

snack-type clips to long-form content such as TV shows and feature films.´11 A chart

below reflects eMarketer¶s projections for online video viewers and penetration through

9 Ipsos OTX MediaCT, ³Ipsos OTX MediaCT Releases Latest Results from its Longitudinal MediaeXperience Study ± Offering a Full View of the American Consumers¶ Media Experience,´ press release,September 28, 2010, http://www.ipsos-na.com/news-polls/pressrelease.aspx?id=4957 (accessed May 10,2011).10 Ibid.11 Paul Verna, ³Video Content: A Premium Opportunity,´ eMarketer (August 2009),http://www.emarketer.com/Report.aspx?code=emarketer_2000603 (accessed March 20, 2011).



2013, which shows that they expect the market to continue to grow steadily over the next

few years.

A more recent measurement conducted by comScore Video Metrix actually shows

that eMarketer¶s projections fell short, with 174 million U.S. Internet users watching

online video content in March of 2011, a 5.5 percent increase from the amount expected

above.12 As consumers migrate further online, they are moving beyond short video clips

to longer-form, premium content. This shift is the result of several factors, such as greater

content availability, the growing popularity of venues such as Hulu and Netflix, better

technology and a growing comfort with online video.13 The charts below reflect the types

of online video content consumed in 2007 and the number of adult U.S. viewers who

have consistently watched a full-length TV show online through 2011.

12 Greg Jarboe, ³AOL Video Ranked #2 Most-Trafficked Online Video Platform by comScore VideoMetrix,´ Search Engine Watch, entry posted April 14, 2011, http://blog.searchenginewatch.com/110414-092406 (accessed May 1, 2011).13 Paul Verna, ³Video Content and Syndication: Long-Form Content on the Rise,´ eMarketer (July 2010),http://www.emarketer.com/Reports/All/Emarketer_2000684.aspx (accessed May 10, 2011).



In 2007, viewers were much more attracted to shorter clips of video of five

minutes or less, such as news and information, or comedy and music videos. These types

of clips were watched by 40 percent of the US online video audience at the time.14 While

some consumers viewed full TV show episodes, many more simply utilized it to view

show clips or previews. However, eMarketer researchers believed even than that viewers

would be drawn to longer, more compelling content as technology got better. Two years

later, eMarketer came back with a report that showed just that. Researchers found the

population of consumers watching TV shows and movies online had grown 43 percent

since 2008.15

Cord-Cutting: Ditching Pay TV for Online Offerings

14 David Hallerman, ³Online Video Content: The New TV Audience,´ eMarketer (February 2008),http://www.emarketer.com/Reports/All/Emarketer_2000454.aspx (accessed April 10, 2011).15 Paul Verna, ³Video Content and Syndication: Long-Form Content on the Rise.´



This large increase has led to a phenomenon (or reported phenomenon) called

³cord-cutting´ ± when consumers cancel their cable subscriptions in favor of online

content. Conflicting research makes it difficult to be sure whether this trend is as

widespread as is often reported, but the data seems to reveal that consumers are cutting

back on their cable.

As cable and satellite grew more expensive, cord-cutting began in earnest

following the economic downturn in 2008. Marketing Firm Centris found in 2009 that 8

percent of U.S. households were likely to cancel their pay TV, and nearly half of

households contacted TV providers for discounts or cheaper packages.

16

And research

firm SNL Kagan revealed in November 2010 that 741,000 households stopped

subscribing to basic cable in the third quarter of 2010, the biggest drop in subscribers in

30 years.17

Additionally, a 2010 survey by Credit Suisse showed that some Netflix users were

substituting the service for cable. Analysts found that 37 percent of Netflix subscribers

aged 25 to 34 substitute Netflix for pay television, 30 percent of users 18 to 24 are doing

so, and that 17 percent subscribers of all ages and incomes are substituting that service

for cable.18 The analysts added that:³Netflix¶s low-cost, subscription streaming service

16 Mark Glaser, ³Your Guide to Cutting the Cord to Cable TV,´ MediaShift, entry posted January 8, 2010,http://www.pbs.org/mediashift/2010/01/your-guide-to-cutting-the-cord-to-cable-tv008.html (accessed May12, 2011).17 John R. Quain, ³TV Everywhere? We're Already There,´ Fox News Personal Tech, entry posted

November 23, 2010, http://www.foxnews.com/scitech/2010/11/23/tv-everywhere-mobile-dtv-mobitv/ (accessed May 10, 2011).18 John Melloy, ³Third of Young Netflix Users Cut Cable,´ Fast Money, entry posted September 16, 2010,http://www.cnbc.com/id/39213429/Third_of_Young_Netflix_Users_Cut_Cable (accessed April 20, 2011).



(with improving content) is our biggest worry and could become µgood enough¶ for

consumers with moderate income and TV usage to use as a substitute for pay TV.´19

Furthermore, consumers are finding that they don¶t want to pay for the bundled content

offered by their cable provider. Online video sites allow them to customize their choices

so they can access what they want, when they want, rather than being forced into an

expensive contract.20

Online Video Business Models

While Apple¶s iTunes offers an à la carte system where consumers download

content onto their hard drives, this is often an expensive and impractical way to consume

video content ± especially if they are casual TV viewers as opposed to rabid fans. If one

wanted to download a pass to the current season of Gossip Girl, it would cost $39.99. For

just one episode, it¶s $1.99.21

Many do not feel as attached to their steady weekly stream

of TV shows as they do to their favorite movies, and are therefore less likely to pay for

them at such a hiked-up rate (especially if they¶re available for free on a show¶s

website).22Several other systems and devices exist for accessing content (such as Boxee

and Roku, digital video players that allow you to stream Internet content on your TV) but

these mostly exist as a way to make the online viewing experience more enjoyable, rather

than providing content themselves.As consumers access videos online, they are presented

with essentially two main ways of accessing long-form streaming content: by ad-

supported sites or by subscription-based ones.

19 Todd Spangler, ³The Netflix Niche,´ Multichannel News, January 31, 2011.http://www.multichannel.com/article/463188-The_Netflix_Niche.php (accessed March 16, 2011).20 Mark Glaser, ³Why TV Everywhere Will Fail,´ MediaShift, entry posted March 22, 2010,http://www.pbs.org/mediashift/2010/03/why-tv-everywhere-will-fail081.html (accessed March 12, 2011).21 ³Gossip Girl Season 4,´ iTunes, http://itunes.apple.com/us/tv-season/gossip-girl-season-4/id389011077?showLC=true (accessed May 12, 2011).22 Gardner-Smith, ³What the Internet TV Revolution Means for Advertisers and Marketers.´



Most notable of the ad-supported models is Hulu, a joint venture among NBC

Universal, Disney and NewsCorp., whereby viewers can access current TV shows

(usually the past five episodes) as well as older TV shows and movies for free. Created in

2007, Hulu emerged as one of the first destinations for premium, long-form content, and

by September 2009, they were the second most-watched video site on the web (after

YouTube). That month, Hulu had 437 million streams and 13.5 million users (compared

to YouTube¶s 6.7 billion streams and 106.1 million users).23

The site now boasts 44

million monthly unique users and streams more than 1 billion videos a month, according

to a2011 comScore report.

24

As Hulu¶s ad-supported model is similar to traditional broadcast TV¶s (albeit at a

much smaller scale); advertisers are drawn to the site, hoping to reach viewers in a way

that¶s similar to their TV buys, but in a more targeted, interactive way. Because of this,

Hulu is able to charge a premium on CPMs (or cost-per-thousand) compared to broadcast

television. In 2008, broadcast CPMs averaged $10.25,25 while Hulu boasted $40 CPMs.26

However, it¶s not just the targeting that¶s more expensive: because traditional TV has

about four times the ads as the online service, Hulu must charge that premium in order to

compete.

Not surprisingly, Hulu is full of contradictions like these. While the model seems

viable, one must remember that all the content is owned by Hulu¶s parent companies,

meaning Hulu pays no licensing fees to run the content on the site, and that they share the

23 Nielsen Online¶s VideoCensus. ³Time Spent Viewing Online Up 25 Percent.´ October 13, 2009.http://blog.nielsen.com/nielsenwire/online_mobile/time-spent-viewing-video-online-up-25-per-viewer/ (accessed October 17, 2009).24 Farhad Manjoo, ³Hulu-flix,´ F ast Company no. 149 (October 2010): page nr, via EBSCO.25 ³How Much Ads Cost,´ eMarketer TV, entry posted April 23, 2009,http://www.emarketer.tv/Article.aspx?R=1007053 (accessed May 12, 2011).26 Michael Learmonth, ³Hulu's a Towering Success--just About Every Way but Financially,´ Advertising

Age 81, no. 13 (March 29, 2010): page nr, via EBSCO.



revenues.27 Additionally, because the site is run by three of the biggest media companies,

Hulu doesn¶t face the type of pressure other sites may when it comes to pulling in

revenue. With that in mind, Hulu posted the following chart this May to compare their

average ad revenue per half hour (prime time) to broadcast¶s and cable¶s, showing that

overall, Hulu seems to be doing fairly well.28

So far, consumers seem to enjoy using it as a time-shifting device when they can¶t

(or won¶t) catch their favorite programs live. According to CEO Jason Kilar, they also

turn to Hulu for less ads, convenience and to interact more fully with their favorite shows

by viewing clips and web extras.29And advertisers enjoy the large amount of viewer

impressions they rack up at Hulu: comScore¶s March 2011 measurement showed that

Hulu generated the highest number of video ad impressions on the Internet at more than

27 Noreen O¶Leary, ³Searching For Life On Hulu,´ Brandweek 50, no. 21 (May 25, 2009): 5, via EBSCO.28 Jason Kilar, ³Stewart, Colbert, and Hulu¶s Thoughts About the Future of TV,´ Hulu Blog, entry postedFebruary 2, 2011, http://blog.hulu.com/2011/02/02/stewart-colbert-and-hulus-thoughts-about-the-future-of-tv/ (accessed May 12, 2011).29 Ibid.



1.2 billion, reaching 8.9 percent of the total U.S. population.30 But is Hulu the way of the

future? Many in the media disagree. In a 2010 Advertising Age article, an unnamed media

executive said, "[Hulu] does have to move to a premium model. If you look at the

business, it's just not economically feasible to give away programming at low rates."31 A

paragraph later, Curt Hecht, president of Publicis innovations unit Vivaki, says, "There's

room for an ad-supported model for TV online. Hulu is a great environment with great

programming; the onus is on us to help figure out the business model."

Hulu seems to operate as a niche site for casually viewing recent content, but with

Hulu Plus, it offers a broader selection of content (full seasons and sometimes full series)

for $7.99 a month.32 This combination of ad-supported and subscriber-based models is an

excellent way to give the consumer the free content they want, and up sell them if they

desire more. Additionally, this expands Hulu¶s revenue streams and allows them to serve

two customers: advertisers and viewers.

Hulu¶s attempts to capture viewers seems to be working. In an online survey of

118 respondents conducted by the author from April 7 through April 14, 2011,

respondents overwhelmingly turned to the site to watch programming compared to other

points of access. Twenty-seven percent watched programming there, but close behind it

was Netflix, with 20 percent. A chart below compares how viewers access programming

content online.

30 Jarboe, ³AOL Video Ranked #2 Most-Trafficked Online Video Platform by comScore Video Metrix.´31 Learmonth, ³Hulu's a Towering Success--just About Every Way but Financially.´32 ³Hulu Plus,´ Hulu, http://www.hulu.com/plus (accessed May 12, 2011).



While Hulu experiments with multiple revenue streams, Netflix sticks to just one,

pulling in $7.99 a month for unlimited access to their ³Watch Instantly´ online selections

(to add DVDs to the plan, it¶s $2 more).33 Although they do not benefit from advertiser

revenue, Netflix has positioned themselves extremely well as a comprehensive

distribution site where one can access TV shows and films, both recent (after the 28-day

window from DVD release for films, and usually past seasons for TV) and old, wildly

popular and little-seen.

Originally begun as pay-per-view online video rental service offering DVD

delivery only, Netflix was formed in 1997, began its subscription service in 1999 and

33 ³How It Works,´ Netlfix, http://www.netflix.com/HowItWorks(accessed May 12, 2011).



went public in 200234. In January of 2007, Netflix introduced ³Watch Now,´ (now titled

³Watch Instantly´) which was the organization¶s entrance into streaming video, allowing

customers to immediately watch select titles on their PCs (and later, their gaming

consoles and Internet-enabled TVs).35 In 2010, their online streams surpassed their DVD

rentals for the first time, with 66 percent of users making use of the ³Watch Instantly´

feature, leading their CEO Reed Hastings to state that, ³By every measure, we are now

primarily a streaming company that also offers DVD-by-mail.´36

Currently, Netflix

boasts 20 million subscribers37, approximately 20,000 titles available to watch instantly38,

and over 100,000 DVD titles

39

. Below you can see a comprehensive breakdown of their

operations.

34 Jeffrey M. O'Brien, ³The Netflix Effect,´ W ired , December 2002, page nr.http://www.wired.com/wired/archive/10.12/netflix.html?pg=1&topic=&topic_set= (accessed April 20,2011).35 Netflix, ³Netflix Offers Subscribers the Option of Instantly Watching Movies on Their PCs,´ pressrelease, January 16, 2007, http://www.netflix.com/MediaCenter?id=5384 (accessed April 20, 2011).36 Paul Bond, ³Netflix: Online Streams to Surpass DVD Rentals,´ Hollywood Reporter , October 20, 2010.

http://www.hollywoodreporter.com/news/netflix-online-streams-surpass-dvd-31692 (accessed April 20,2011).37 Netflix, ³Netflix 2010 Financials,´ 1, annual report, February 18, 2011, http://ir.netflix.com/annuals.cfm (accessed April 20, 2011).38 Dan Rayburn, ³Is Netflix's Inventory of Streaming Content Growing Fast Enough?´ Streaming Media,entry posted October 7, 2010, http://blog.streamingmedia.com/the_business_of_online_vi/2010/10/is-netflixs-inventory-of-streaming-content-growing-fast-enough.html (accessed April 20, 2011).39 Netflix, ³Netflix Passes 10 Million Subscribers, With 600,000 Net Additions Since the First of the Year,´

press release, February 12, 2009, http://netflix.mediaroom.com/index.php?s=43&item=307 (accessed April20, 2011).



40

However expansive their DVD offerings, Netflix intends to move away from

physical distribution as it moves forward, not just to offer customer convenience, but to

cut down on its postage costs, which were over $500 million to the U.S. Postal Service to

deliver DVDs by mail.41The company estimates that its mail business will peak in 2013,

and soon it will spend more on licensing deals than it does on postage.42 Regardless of

this shift from physical distribution, the company will face myriad issues as it moves

further into the online space: as studios see how prevalent Netflix use has become, they

will want to increase the costs for licensing, the market¶s barriers to entry are fairly low

(stated by the company itself in its annual report)

43

and Internet pipe providers might

40 Spangler, ³The Netflix Niche.´41 Ibid.42 Manjoo, ³Hulu-flix.´43 Netflix, ³Netflix 2010 Financials,´ 1.



choke the extensive Internet traffic that Netflix demands (depending on how Net

Neutrality proceeds).

Netflix is also seeing some backlash from the media industry. Many of its deals

were made before it gained its current high profile, prompting RBC Capital Markets

analyst David Bank to write in a January 2011 research note: ³We aren¶t saying that

Netflix or other [over-the-top] providers will never get premium subscription content

again, but our channel checks indicate that willingness to license such content, especially

for any real length of time, is decreasing dramatically.´44 Netflix argues against this view,

stating that it augments the content business, rather than cannibalizing it. The number of

Starz subscribers has actually grown since Netflix began Starz Play content in October

2008, while HBO¶s has declined over that time. ³In other words, the evidence is pretty

clear that content that is also licensed to Netflix generates more money for its owners

than content that is withheld from Netflix,´ Netflix CEO Reed Hastings and CFO David

Wells wrote in their 2010 shareholder letter.45

Other studios seem to agree. Netflix has struck several large content deals over

the past year, including one with Epix (apremium channel that is a joint venture of

Paramount, MGM and Lionsgate) worth almost $1 billion over five years to provide

movies 90 days after they premiere on linear TV.More recently, Netflix has partnered

with Disney and CBS for expanded content offerings, worth around $200 million

each.46With these deals in place, Netflix receives content from each of the four major

broadcast networks, and aims to continue expanding its other content deals. Its buzz,

44 Spangler, ³The Netflix Niche.´45 Ibid.46 Brian Stelter, ³In Deal With Netflix, New Revenue for CBS,´ Media Decoder, entry posted February 23,2011, http://mediadecoder.blogs.nytimes.com/2011/02/23/in-deal-with-netflix-new-revenue-for-cbs/ (accessed May 12, 2011).



brand loyalty and high share prices seem to make Netflix the online video competitor to

beat.

The Persistent Allure of Traditional Television

While Netflix and Hulu aim to challenge the way we consume content, there is no

question that traditional television continues to dominate our viewing habits.A 2009

study conducted on behalf of the Nielsen-funded Council for Research Excellence (CRE)

by Ball State University's Center for Media Design (CMD) and Sequent Partners showed

that, ³Contrary to some recent popular media coverage suggesting that more Americans

are rediscovering µfree TV¶ via the Internet, computer video tends to be quite small with

an average time of just two minutes (a little more than 0.5 percent) a day.´47 Though this

amount of time is disputed in other, more recent studies, the fact remains that television is

still a major part of our lives, accounting for approximately 78 percent of total hours

viewed (as opposed to DVR, VOD and online video).48

The reasons for this are myriad. Many attribute it to the idea of television as a

social activity, where people want to connect with others about their favorite shows.

Thomas Ebeling, chief executive officer of ProSiebenSat.1, Germany's biggest private

broadcaster, said, ³Consumers want shows and events that bring family and friends

together in front of the TV set and which they can discuss with everyone in the office the

47 Council for Research Excellence, ³Ground-Breaking Study of Video Viewing Finds Younger BoomersConsume More Video Media Than Any Other Group,´ press release, March 26, 2009,http://www.researchexcellence.com/news/032609_vcm.php (accessed April 15, 2011).48 Brent Lang, ³Ipsos Otx Study: People Spend More Than Half Their Day Consuming Media,´ The Grill,entry posted September 20, 2010, http://www.thewrap.com/media/column-post/people-spend-more-12-day-consuming-media-study-finds-21005(accessed May 1, 2011).



next day.´49 Massive competition shows that invite viewers to vote for their favorite

performer (such as American Idol , Dancing with the Stars and The Voice) have ratings

that hover around 20 million total viewers50, and live shows like these encourage live TV

viewing in turn.

Again, these shows (and other large events, such as the Oscars or the Super Bowl)

make viewers feel that they need to watch an event or show in real time to be part of a

³telecommunity,´ and if they watch via DVR or online, they are out of sync with the

social interaction these shows encourage.51Accordingly, Nielsen found in a 2011 survey

that:

³The audience overlap between visitors to network and broadcast media sites andsocial networking [and] blog sites is significant. In January 2011 alone, 49 percentof social networking [and] blog site visitors also visited TV network and broadcast media sites.´52

Television excels at holding the attention of a large number of people for a long

period of time. While viewers might be diverted from TV by their other digital devices,

TV accounts for a massive amount of our media consumption: more than time spent

surfing the web, sending e-mails, watching DVDs, playing computer games, reading

newspapers and talking on mobile phones put together.53

49 Matthew Campbell, Simon Thiel and Jonathan Browning, ³Couch Potatoes Prop Up Viacom, ProSiebenin TV Market Battle,´ Bloomberg , November 21, 2010. http://www.bloomberg.com/news/2010-11-22/couch-potatoes-prop-up-viacom-prosieben-in-tv-market-battle.html (accessed May 11, 2011).50 Robert Seidman, ³TV Ratings Broadcast Top 25: 'American Idol,' 'The Voice,' 'Modern Family,''Dancing with the Stars,' 'NCIS' Top Week 33 Viewing,´ TV by the Numbers, entry posted May 10, 2011,

http://tvbythenumbers.zap2it.com/2011/05/10/tv-ratings-broadcast-top-25-american-idol-the-voice-modern-family-dancing-with-the-stars-ncis-top-week-33-viewing/92076/ (accessed May 11, 2011).51 Susan Rush, ³How Can Advertisers and Programmers Leverage Social TV?´ SmartBlog on SocialMedia, entry posted January 11, 2011, http://smartblogs.com/socialmedia/2011/01/11/how-can-advertisers-and-programmers-leverage-social-tv/(accessed May 11, 2011).52 The Nielsen Company, ³An Upfront Look at U.S. TV Audiences and Trends,´ Nielsen Wire, entry

posted April 21, 2011, http://blog.nielsen.com/nielsenwire/media_entertainment/an-upfront-look-at-u-s-tv-audiences-and-trends/ (accessed May 1, 2011).53 Council for Research Excellence, ³Ground-Breaking Study of Video Viewing Finds Younger BoomersConsume More Video Media Than Any Other Group.´





more respondents age 25 ± 34 stated that they primarily watched TV on a traditional set,

rather than over the Internet. Below isa chart examining program viewing by age.

And while some data has shown that cord-cutting is a concern, many believe its

effect is being overstated.According to a report released by ESPN in December 2010, the

percentage of households who have cut the cord is less than 0.2 percent of all viewers,

and that those defecting from cable or satellite are attributed to reductions in household

income, rather than adoption of online video sites as a replacement.57 Another study,

conducted by Nielsen on behalf of the Cable & Telecommunications Association for

Marketing, showed that of the consumers who watched TV via the Internet, 84 percent

57 ESPN, ³First Nationally Projectable Study Shows Multichannel Loss to µCord Cutters¶ Just 0.1 Percentof US Households,´ press release, December 6, 2010,http://www.espnmediazone3.com/us/2010/12/06/study-on-cord-cutting/ (accessed May 10, 2011).



are still watching the same amount of traditional TV and have no plans to cancel their

paid TV subscriptions.58

Instead of replacing their traditional TV watching with Internet

TV, they are supplementing it, and intend to continue doing so.

Methods of TV Viewing and Advertising

Because of this massive audience that continues to watch traditional TV, ad-

spending is still quite high ± and the ads more effective. In Deloitte¶s most recent "State

of the Media Democracy´ survey, ³86 [percent] of Americans stated that TV advertising

still has the most impact on their buying decisions.´

59

Additionally, the survey found that

Internet channels (along with mobile and social media) enhanced the overall TV viewing

experience, pushing more people to watch TV live. Phil Admundson, Vice Chairman

Deloitte LLP, stated that this usage of Internet platforms encouraged audiences to discuss

and drive awareness to their favorite programs, maintaining television¶s hold on the

public.³And, because television has embraced the Internet and social media so

effectively, the traditional television advertising model is alive and well,´ Asmundson

added.60

Because of the highly effective nature of TV, and because it remains the most

widely-consumed media in the United States, advertisers are still flocking there en masse

to disseminate their messages. Television ad-spending grew 9.7 percent in 2010, despite

58 Frederic Lardinois, ³New Study Says Cord Cutting Remains a Myth,´ Read Write Web, entry posted November 15, 2010, http://www.readwriteweb.com/archives/new_study_says_cord-cutting_remains_a_myth.php (accessed May 14, 2011).59 Jack Loechner, ³TV Advertising Most Influential,´ MediaPost Research Brief, entry posted March 23,2011, http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=147033 (accessed May1, 2011).60 Ibid.



the continued economic downturn.61 While audience fragmentation is a growing concern,

television is still the only medium that draws mass viewers, even if the days of 30 million

people tuning in to Walter Cronkite nightly are long gone. As television ad-spending

continues to grow, Internet spending is, too, with estimates suggesting that by 2015,

Internet ad-spending will grow by 66 percent (TV ad-spending is expected to grow only 7

percent in that same period).62

61 Sam Gustin, ³TV Ad Spending Still Tops, But Web Growing Fast: Study,´ Wired Epicenter, entry postedMarch 29, 2011, http://www.wired.com/epicenter/2011/03/tv/ (accessed May 1, 2011).62 Ibid.



While both audiences and ad-spending is high, the fact remains that TV

advertising is untargeted at best, and comprises a lot of wasted effort and money at worst.

Television has always been unusual in deriving so much of its revenue from something

that annoys its customers.63 It could target advertisements much more precisely, and

instead of providing viewers with ads that are unrelated, it could encourage interaction

and participation, a much more valuable way to get a message across. Measuring

audiences is no longer just a matter of counting the masses, as advertisers want to dig

deeper and understand the behavior of the smaller audiences that are drawn to different

kinds of viewing. George Shababb, chief operating officer of TNS Media Research, states

that, "With the amount of fragmentation that is created both in terms of channels as well

as the different formats by which advertising is being delivered, it is putting pressure on

traditional audience and measurement services."64

And as advertisers decide they need more sophisticated tracking and targeting,

they¶re making the decision to move ad dollars online. In 2011, approximately one in

every ten dollars spent for advertising on the Internet will be for video advertising. As

advertisers continue to shift budgets from television advertising, video ads will become a

driving force in overall Internet ad spending gains.65David Lubars, chief creative officer

at BBDO New York, has stated that, "TV is still the only place where you can get 70

63 ³An Interactive Future,´ The Economist , April 29, 2010, page nr.http://www.economist.com/node/15980787?story_id=15980787 (accessed April 7, 2011).64 Brian Steinberg, ³It's Not Just Size of the Audience That Matters,´ Advertising Age 79, no. 13 (March 31,2008): page nr., via EBSCO.65 David Hallerman, ³Video Advertising Online: Spending and Audience,´ eMarketer (July 2007),http://www.emarketer.com/Reports/All/Emarketer_2000403.aspx (accessed April 10, 2011).



million eyeballs on an ad, but now, if your message is engaging enough, you can get

people to voluntarily spend 10, 20, 30 minutes, totally engaged with a brand."66

From an advertiser viewpoint, this engagement is key. However, what has

prevented them from moving spending online is the difficulty in measuring engagement,

and what that necessarily means. At the Consumer Electronics Show in January 2011, a

panel on Social TV examined what would need to happen for measurement in the online

arena to move forward.Marty Roberts of thePlatform states, ³Measurement as a whole is

a disaster right now,´ noting that TV advertising has a metric that everyone understands,

but on the interactive side, advertisers are asking for all different things.

67

One method that may help is by tying advertising to content, rather than devices

or platforms, which could give brands a broader reach in adevice-agnostic world.

Consumer identification with specific content brands is something that has massive

appeal for marketers, because it also increases the likelihood that views will interact with

a brand even while watching the content. Mike Proulx, the Hill Holiday SVP and

Director of Digital Strategy mentioned earlier, asks, ³If a piece of content resonates with

a brand¶s target audience, shouldn¶t the sponsorship/advertising µfollow¶ the content in its

portable form?´68 Until that part of the market is figured out, advertisers will be faced

with the challenge of measuring how much impact their work is having in order to justify

client expenditures ± which makes them skittish to head online.

Marketers do see hope for the future, though. A 2011 BrightRoll survey of media

buyers found that 28 percent of respondents expect to see the greatest increase in ad

66 James P. Othmer, ³Interactive Advertising's Coming Out Party,´ W ired , June 25, 2008, page nr.http://www.wired.com/techbiz/media/news/2008/06/portfolio_0625 (accessed May 5, 2011).67 Rush, ³How Can Advertisers and Programmers Leverage Social TV?´68 Gardner-Smith, ³What the Internet TV Revolution Means for Advertisers and Marketers.´



spending in the online video category.69 Additionally, 86 percent of respondents said they

are shifting at least part of their display dollars over to online video, while 64 percent

plan to shift TV dollars there. BrightRoll attributes this shift to the emergence of mobile

video inventory, increased adoption of industry standards and better targeting tools.In

fact, targeting was the factor listed by respondents as being the most valuable when

spending ad dollars on online video, as evidenced by the chart below.

69 Gavin O'Malley, ³Media Buyers Predict Upswing in Online Video Ad Spend,´ M ediaPost - Online

M edia, May 3, 2011. http://www.mediapost.com/publications/?fa=Articles.showArticle&art_aid=149695 (accessed May 10, 2011).



70

Conclusion

There is no doubt that viewers are increasingly drawn to the convenience of

online video, and as more and more move online, the industry will need to develop a

business model that works for advertisers, distributors, content creators and audiences. As

online video becomes more standardized, those in the industry should look to sites as

partners, rather than simply competitors to traditional TV. With online video viewers, it¶s

less about ³cutting the cord´ than it is about the freedom to leave the living room, and

instead utilize laptops, iPhones and tablets to access content almost anywhere. While

70 Daryl McNutt and Charlie Whittingham, BrightRoll Video Advertising Report ± Q1, 2011, SanFrancisco: BrightRoll Research, May 2011.



some cable companies and other service providers are beginning to understand the utility

of online video, the market is still in its infancy. Nonetheless, they see the value in

³reach[ing] as many customers with as much content on as many platforms as possible,

allowing consumers to make the choice of how they want to watch cable TV content.´71

When examined from this viewpoint, the idea that sites such as Netflix and Hulu

are cannibalizing viewers seems beside the point. Viewers are mostly using these sites to

augment their live viewing, to either catch up on missed shows or old season, rather than

to fully replace their paid TV viewing. With this in mind, it¶s important for media

companies to come together to decide how their content will be viewed in the future ±

and how much it will cost.

Advertising is such an important part of the industry that it would be futile to

eradicate it altogether in favor of a subscription-only model. Hulu Plus seems to be the

site that best understands how the future of online video viewing will look: separate tiers

of subscription content with various levels of advertising. While still in its early stages,

by adding more content from its providers (including premium content from cable

channels like HBO, AMC or Starz), Hulu Plus may be uniquely positioned to lead the

way into the online future. Rather than seeking out separate sites for separate content,

viewers are looking for convenience in a viewing experience, meaning they¶d rather go to

one portal to access all of their content. Although this may be difficult as Hulu is owned

by a partnership between Disney, NBCU and NewsCorp., with good licensing

agreements in place and a mature revenue sharing model, the site may be able to emerge

as the premier destination for online video content.

71 Ryan Lawler, ³Is TV Everywhere Working For Comcast?´ GigaOM, entry posted February 16, 2011,http://gigaom.com/video/comcast-4q2010-tv-everywhere/ (accessed May 10, 2011).



In a F ast Company article from last October, Farhad Manjoo posits the

acquisition of Hulu by Netflix, stating that:

³Their more powerful rivals--the nation's cable, satellite, and phone companies,

not to mention Amazon, Apple, and soon Google TV-are rushing to provideInternet-enabled on-demand TV and movie services, something the two pioneershave done successfully for a few years now. The combined company could offer an irresistibly cheap alternative that's sure to attract those of us who are sick of forking over a fortune to the cable guy every month.´

72

Manjoo believes the two companies are heading on a collision course, and that a

joint company could protect the assets and market share of both, as Netflix¶s revenue is

much higher than Hulu¶s, but Hulu maintains advertiser support and a tier of free content.

He maintains that the sticking point is Hulu¶s multipart parentage, but if the three parent

companies were to divest a significant amount of interest (or even to transfer the holding

to its studios), the two might be able to broker a deal ± and become an unstoppable force

in the future of online video.

Netflix would have to convince the traditional TV behemoths that they'd be better

off with the licensing revenue from the new venture¶s programming rather than running

their own services and worrying about whether Hulu's revenue could ever equal

broadcast TV's. Amazon and Apple¶s emergenceintoonline video subscription market

could also help Netflix make the sale. If Netflix offered a high price and made it seem as

if it were doing Comcast, Disney, and News Corp. a favor by battling its tech rivals, it

could seal the deal.73

Regardless of what happens between the two companies, the industry is rapidly

shifting and both Hulu and Netflix are at the forefront of the shift ± and in the best

72 Manjoo, ³Hulu-flix.´73 Ibid.



position to decide what the future of online video will be. The emergence of TV

Everywhere is another player, but as it¶s limited to those with cable subscriptions only, it

is holding itself back from being a true game-changer in the industry.

Viewers are looking for convenience most of all when involved in content

consumption. If the industry gets to a point where it¶s easier and cheaper to view content

online, and if the advertisers find a universal measuring method for viewing of online

ads, it¶s only a matter of time before we are on the couch in front of our TV ± while

watching online content.

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Documents

Dynamic Viewing: The Struggle of Online Video Providers to go Mainstream in the Face of the Continued Dominance of Traditional Television Viewing