Internet video? It's a mere blip in the ad market. Projected annual spending of just $198 million would finance barely a day and a half of ads on TV -- a $48 billion business. Yet in the marketing departments of some of the world's biggest advertisers, from General Motors Corp. (GM ) to Unilever, online video represents a golden opportunity to move beyond the 30-second spots that TV viewers so often zap or ignore. These advertisers view online video as a laboratory for new ways to connect with customers. And they're busy figuring out ways to use the Internet to transform the most powerful advertising tool in history: television.
Activity is frenetic. Lincoln Mercury has ginned up online videos that have the quirky look and feel of an episode of Twin Peaks. American Express Co. (AXP ) ran spots directed by Barry Levinson of Rain Man fame. And Converse Inc. (NKE ) is drawing viewers to its site with a series of quirky amateur videos hawking its sneakers. Meantime, companies are searching for ways to grab Web surfers' attention with short bursts of video, whether it's an invitation to click on a David Ortiz home run or a banner ad featuring a striptease. Add it all together, and video ads are outpacing the torrid growth in Internet advertising, including search, which according to researcher eMarketer Inc., will expand 33.7% this year, to $12.9 billion. The biggest obstacle to growth? Not enough Web sites are configured to run video ads, so that marketers often have to book their slots months in advance.
It's a lot of fuss for fuzzy pictures and iffy sound. Click on that Ortiz round-tripper, and the clip looks downright primitive by today's TV standards. So what's special about the Net? Three things: If your finger is aching to click on the home run -- packaged with an ad -- this means the advertiser has targeted and found you. That's vital. Second, in many cases, Web surfers knowingly click on ads. The ads promise entertainment. It is this model -- tracking consumers and enticing them -- that gives Internet video much of its allure. Moreover, online video ads also can be cheap to produce -- often only a fraction of $300,000 to make a standard 30-second TV spot. Even better, popular video ads are e-mailed by the thousands, giving advertisers a free boost, whereas on TV they pay a fat fee for each airing.
What does this mean for TV? Not much in the short term. Even as big advertisers such as McDonald's Corp. shift budgets toward the Net, spending at the four major networks is expected to inch up 2% this year, to $16.8 billion, says ad agency Universal/McCann. But networks and cable kings are already scrambling to tie in their own Internet offerings -- and fend off challenges from the likes of Yahoo! Inc.(YHOO ) and Microsoft Corp. (MSFT ). In time, the Net is on track to bull its way into their core business -- and shake up the economics of TV. Says John Skipper, ESPN's executive vice-president for ad sales, new media, and consumer products: "Five or 10 years from now I wouldn't want to be just selling TV commercials."
The internet has been promising this video invasion for a decade. But the growth of broadband connections is finally bringing video into the mainstream. Some 36% of American households now have fast, always-on hookups, according to eMarketer. And while broadband penetration badly trails parts of Europe and Asia, fully 60% of U.S. homes are expected to be hooked up by 2009. Broadband catapults Internet video into the realm of the mass market. Indeed, as many as 20 million online viewers click on video every week, says a report by Arbitron Inc. and Edison Media Research. That nearly matches the number who watch FOX Broadcasting Co.'s (NWS ) hit American Idol. And most of the video-watchers are the young consumers advertisers crave. "We're delivering the kinds of eyeballs that advertisers want," says Todd Herman, streaming media expert at Microsoft's MSN Video, which has deals with advertisers such as Pfizer and Buick.
Internet norms are already crashing into the TV world. The shift starts with the TiVo (TIVO ) box and its assorted kin. These digital video recorders (DVRS), now offered by cable and satellite companies, are expected to reach one-third of U.S. households by 2007. Along with video on demand, DVRs give users the kind of power and choice they've grown accustomed to on the Internet. They can watch programming -- and skip ads -- whenever they want. But these set-ups, like the Net, also provide advertisers with vital minute-by-minute information about which shows are watched -- and which ads are zapped. This brings the metrics of the Net, and eventually much of its business model, into television.
For now, the trend is to use video ads online as extensions of TV campaigns. "Every piece of the mix helps," says Steve Wadsworth, president of Walt Disney Co.'s (DIS ) Internet group. Here's how it works: TV shouts the message. The Net follows it up, tracking down customers in their online niches, measuring their behavior, and -- if possible -- luring them into online showrooms. Last year, for example, American Express says its online traffic grew by 31% when it ran a Jerry Seinfeld ad on its Web site -- and promoted it on TV.
A leading force in linking TV and the Net is McDonald's. Only four years ago, the fast-food giant poured 80% of its ad budget on prime-time TV. These days, McDonald's is spending less than half of its budget on prime-time TV and is trolling far more for young customers online. It scored a success in France, where the burger behemoth says a campaign featuring Net-only videos helped boost its young-adult share by 9%. The company is featuring video by pop group Destiny's Child on its European sites, and it plans to bring the campaign to the U.S. this summer. "We're following where the customer is," says M. Lawrence Light, McDonald's chief marketing officer.
Not all advertisers are pulling back on TV. But most of the big ones -- in tech, cars, and consumer goods -- are finding ways to reach viewers online. Using everything from five-second bursts to short films, they're shaking up the nature of video ads, which have been stuck in a 30-second rut for decades.
The trick, of course, is getting people to watch the videos. Brevity can be key. In January, GM launched its Cadillac V-Series with five-second ads online that ran before sports and news clips on sites like ESPN.com. And GM turned the whole thing into a game. The short ads tied into a contest for amateur filmmakers to submit their own five-second ads. It drew 3,000 entries in three weeks as well as a mountain of commentary on blogs, says the carmaker. "We can achieve a much deeper and higher-quality conversation with our customers online than in any other media," says Betsy Lazar, GM's general director of media and advertising. Cadillac, one of eight GM brands, is doubling its online media budget this year, to nearly $20 million.
FRIEND TO FRIEND
In this new ad world, it's often better to whisper the brand than to shout it. Why? The key is to create buzz and to spread from friend to friend across the Net. Take Mercury's offbeat soap opera, Meet the Lucky Ones. It was launched online last November to draw a younger audience to its Mariner SUV. Using ads on Yahoo! and more youth-oriented Web sites such as theonion.com, Mercury managed to attract 500,000 viewers to the Lucky Ones site in six months. More than half of the site's visitors were under 45, compared with Mercury's typical 60-year-old customer, says Linda Perry-Lube, Lincoln-Mercury manager for e-business and consumer relationships. While the SUV was barely featured in the ads, two-thirds of the visitors went on to view pages devoted to the Mariner. Mercury attributes some 500 Mariner sales directly to the Lucky Ones site.
Online interactive video advertising not only reached the ad-shy customers that Mercury was trying to target but was also cost-effective. While Perry-Lube won't discuss dollar figures, she says that producing the entire 35 minutes of Meet the Lucky Ones cost about as much as a one-time airing of two 30-second spots during a hit prime-time TV show. That's about $700,000, say industry sources.
TV execs are positioning themselves to scoop up these online ads for themselves. In April, CBS created a sales team to link its TV ads to online offerings on such sites as CBSSportsLine.com (VIA ). Fox is also seeking crossover magic. Last year it launched an online talk show sponsored by Ford (F ) to follow its TV hit 24. This year, says George Blue, FOX's vice-president for Internet sales, it intends to gear up its efforts even more. Why not? For now, anyway, TV and the Internet are playing the same game.
By Ronald Grover, with Kathleen Kerwin in Detroit, Michael Arndt in Chicago, and Tom Lowry and David Kiley in New York