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The difficulties facing video ad networks

Here’s a recent link on VideoEgg raising money and trying to start an ad network: GigaOM » VideoEgg Lays on Ad Network, Funding.

Following on the previous post about YouTube, it’s clear that there will be a footrace to create a video ad network. This is all well and good, but I hope these guys realize that they have one well-pocketed competitor that will probably crush them. (Well, maybe two well-pocketed competitors) For most people, it’ll be obvious who these competitors are.

Why are they at such a disadvantage? Well, the reason is that these guys are going to fundamentally try to compete on Brand advertising. Because of how these ads will be set up (pre-roll to user-generated content), there’s no reason people will click the ad to get off of the site. Also, because of the ad unit is video, and it’s expensive to develop effective creative, only deep-pocketed ad agencies will have the money to do it.

The funny thing about Brand advertising is that it’s very backwards to what you’d expect. Most rational nerd-types would approach it with, "Well, just prove that the branding works and you’re good, right?" But NO. That’s not how it works. Branding is just not ROI driven for most advertisers. (Whether or not it should be is another question) So because of that, and because effectiveness is difficult and expensive to measure, people just use TRUST and RELATIONSHIPS as proxies. Furthermore, rather than Google’s 200k advertisers, which look like the Yellow Pages, with lots of mom-and-pop stores, instead, all the dollars belong to 4 or 5 major brand agency conglomerates.

That’s right, it means that some of VideoEgg’s $12 million needs to go towards opening a big office in Midtown Manhattan and hiring some very expensive ad sales people. And it’ll be an uphill battle even then, because they have zero track record and no brand. Why would the advertising agencies, which act as gatekeepers for ad dollars, go with something as unsafe as VideoEgg when they can put their ads on Yahoo, ESPN, CNN, and all the other major outlets? It will take a long, long time for them to develop enough track record to get connected into the insular world of NYC brand advertising.

So who has the best chance to develop a video ad network? Well, what companies have the largest online ad sales forces today? And who could just sell these pre-roll ads as part of a larger media bundle, which is always easier. Basically, you sell a $500k ad deal across your huge brand network, and 10% of that is line-itemed towards video without anyone really noticing. That’s the best way to get started.

In my opinion, Yahoo and Microsoft have the best chances to create a video ad network. They have huge brand ad sales teams, already take video input, and have the pockets to go buy a bunch of video inventory by acquiring one of these video-sharing companies. They just have to bundle this as part of a larger deal, tap their New York relationships, and it’s all good.

Of the startups, the first one to take a strategic round from one of the major ad agency conglomerates will have the best chance. (Think Siebel and Accenture’s equity relationship for a background on that) Or, they need to open big NYC offices and hire very expensive (and in-demand) advertising guys. Otherwise, if these video companies don’t get themselves deep into the ass-backwards world of NYC brand advertising, they will be screwed.

(IMHO)

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