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What Works in Online Video Advertising?

When it comes to advertisements in online videos, Web surfers don't know what to expect. Watch an episode of The Office on Hulu, and you'll get a couple of 15-second ads from sponsors like Target (TGT). View a National Geographic Channel clip about emperor penguins on YouTube, and you might see clickable ads for an Arctic cruise company across the lower portion of the video. Other sites opt for a lowly display ad off to one side of the screen.

Whatever form they take, online video ads are confusing for consumers. Can an ad be skipped, and what happens when you click on a banner or link—those are just some of the questions that leave Internet users scratching their heads.

And if all that variety is a stumbling block for viewers, it poses an even bigger challenge to the companies trying to reach customers. For instance, advertisers need to worry about tailoring their various ads to a host of different standards, and then come up with a way to measure the effectiveness of a broad range of approaches. "With so many different formats for video online, we incur incremental production costs every time we enter a new format," says Nancy Ryan, media director for insurance company Allstate (ALL). As a result, some companies are avoiding online video advertising altogether.

Jumping into the Pool

In the interest of lowering the hurdles, Allstate and other advertisers signed on to the Pool, an effort among marketers and Web publishers to agree on a standard format for online video ads. The hope is that by working together, the group will more efficiently find out what kinds of ads work best, thereby giving marketers more reason to shift ad dollars toward the Web. "It would have been extremely difficult for a single publisher to have undertaken this breadth of research on its own," says Beth Uyenco, global research director in the advertiser and publisher solutions group at Microsoft (MSFT), a participating company.

Proponents of a common standard liken their quest to the search four decades ago that made the 30-second spot the gold standard for television advertising. "In terms of advertising spending, television didn't take off until it got a 30-second unit," says Tracey Scheppach, senior vice-president of video innovations at Starcom MediaVest. Starcom, a unit of global ad giant Publicis Groupe (PUBP.PA), spearheaded the Pool late last year by asking Microsoft, Yahoo! (YHOO), Hulu, CBS Interactive (CBS), Discovery Communications (DISCK), AOL (TWX), and online video ad network Broadband Enterprises to propose a total of 30 different types of ads. The group then invited advertisers, including Allstate, Applebee's, and Capital One (COF), to the table, and took a group vote on which ads they believed would be most effective.

On Jan. 21, the ad agency began testing the top five candidates with panels of viewers in various U.S. cities, and plans to announce a winner in February 2010. While companies and Web publishers won't be bound to use the "winning" format, participants hope their efforts will single out an ad format that has the strongest likelihood of attracting eyeballs and interest.

Betting on the "Pre-Roll"

Starcom MediaVest and its partners decline to name which formats are still in the running. But it says the competing formats are being tested against one of the most common kinds of online video ad, the "pre-roll," a 15- to 30-second ad viewers commonly sit through before watching a video. (For more information about the pre-roll and four other common online video ad formats, see this sidebar.)

The "pre-roll" is by far the most common format asked for by clients of Brightroll, a large online network for video ads. "Pre-roll tends to outperform on nearly every metric tracked by advertisers—duration viewed, click-through rate, cost per view, brand lift, and change in purchase intent," Brightroll Chief Executive Tod Sacerdoti wrote in his recent quarterly note on the industry. And in an economy where measurability and cost-efficiency are paramount, the ubiquity of the pre-roll is growing: In the fourth quarter of 2008, pre-roll accounted for 83% of ads placed by Brightroll, up from 63% in the same quarter a year earlier.

The similarity of pre-rolls to television commercials is part of the appeal to advertisers, some of whom are looking for the easiest way to shift ad spending from television to online. But some argue that pre-roll ads don't take advantage of the unique opportunities afforded by the Web, like interactivity and customization.

Online Viewers Are Impatient

"You have this war that continually goes on: On the one hand, you want to standardize for the simplicity of doing business and the ability to do more business," says Randall Rothenberg, chief executive of the Interactive Advertising Bureau, a trade group that provides research and other services to media and advertising companies. "On the other hand, you have a medium that allows for infinite customization." Last May, the IAB published its own guidelines for several different formats of digital video ads.

Running 15- and 30-second ads before videos may deter online viewers, who are more impatient than TV watchers. "A pre-roll interrupts the fundamental experience of online video consumption, which is snacking," or watching short clips, says Brent Stafford, vice-president of business development at VideoClix. Based in Vancouver, VideoClix licenses a technology that lets Web publishers make people and objects within videos clickable—say, the jeans worn by Kevin Rose on his popular online show Diggnation. Click on the garment and a panel appears on the side of the screen with a description of the jeans and links to sites where they can be bought.

YouTube, the Google (GOOG)-owned site that streams more videos than any other publisher, has experimented with several alternatives to pre-roll. The site began letting advertisers overlay videos with "click to buy" links corresponding with what viewers are watching. For example, viewers of Monty Python clips on the group's official YouTube channel are shown links to buy classic DVDs like Life of Brian and The Meaning of Life on e-commerce site (AMZN). According to Google, those links have helped the British comedy group increase sales of its DVDs by 23,000% since November, and surge in ranking on Amazon's lists of best sellers. Google, the one major Web publisher not participating in the Pool, declined to comment for this article.

Solving the Problem

Although pre-roll has long been considered the standard, the industry is likely to support any format that a wide cross-section of advertisers puts its dollars behind. "We're all waiting for the advertisers to allocate budgets to ad units," says Brightroll's Sacerdoti. "This is why the idea of a pool makes sense: If you get everyone in a room to agree and commit dollars, you could solve the problem."

Douglas MacMillan is a staff writer for BusinessWeek in New York.

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