Last week Steve Jobs presented a new version of the Apple TV device and announced that it would stream only rented content and that TV episodes would be available at a lower price point of $0.99. With these changes Apple addressed weak points in its video strategy, which had caused lackluster sales. However, while consumers may be pleased it seems that the lower price ponit is a point of contention with the television networks. So far only ABC and FOX have signed on to Apple TV, and many speculate that ABC did so since since Steve Jobs is on the board of directors for Disney while in FOX got the OK since Rupert Murdoch is interested in working with Apple on iPad projects that support Newscorp’s publishing business.

Ignoring political alliances, I wondered just what the floor price should be for an Apple TV rental. The blog TVByTheNumbers had a provocative post, hyposthesizing that on average broadcast networks make $0.80 in advertising per viewer during a one-hour broadcast show.

CPM of $25 = $0.03 per view x 32 spots = $0.80 per viewer per episode

I considered this $0.80 should be the benchmark by which a substitution view should be judged. I then set out to estimate the revnues other platforms created on a per viewer basis and compare. The revenue models accounted for the following factors:

• Revenue stream (advertising or user payment)
• Advertisements per episode stream (applicable only to Broadcast TV, Hulu and Hulus Plus)
• Viewers per episode stream (dependent upon the delivery screen)
• Viewings (greater than 1 if the episode has been purchased)

I decided to ignore advertising commissions and distribution fees, which could be a major factor for networks to estimate the benefit, or lack thereof, in distributing their shows via iTunes and Apple TV. At the end of this post are all the calculations for each of the platforms. The following graph summarizes the results:

Even with the higher CPM prices (cited in the Appendix) it seems that Hulu offers the lowest revenue per user. However, Hulu Plus’ dual revenue stream (similar to cable TV), which accounts for a $9.99 monthly fee as well as advertising, jumps the gap and manages to post the highest revenue per user, clearly the winning model. The per-episode purchase models of Amazon and iTunes also pose a decent revenue of $0.66 per viewer while Apple TV’s rental model comes in at a lower $0.50 per customer, which might be too low for certain networks.

As I mentioned before this price doesn’t reflect any distribution fees that Apple might take so the comparison for iTunes and Apple TV might not be accurate. I might also be ignoring other factors. For example, episode purchases through Amazon might have more viewers per episode than Apple iTunes since the Amazon service has more streaming options to televisions.

Another thing to consider is that although broadcast television may take in around an average of $0.80 per viewer during every hour of primetime, these viewers are also likely to continue watching the same channel, contributing to further revenue on the channel during the next show. They are also going to be exposed to TV spots promoting the network’s other content. These are benefits that would might be incurred towards a limited extent with Hulu (which does promote a network and its other content), but would be completely absent with Amazon and Apple. Therefore, there is a much larger set of intangible benefits to a viewer watching a show on a network, that can’t be simply accounted for in the subscriber, rental or advertising revenue of alternate platforms.

I want to also highlight that DVDs are sold after a television show ends, so this aggregate revenue stream doesn’t directly compete with a broadcast audience like Hulu, Amazon or Apple’s services, so it has a different set objectives of to fulfill; not so much to compensate for an audience which is not watching the show on television as helping pay for the production costs- typically a broadcast production only covers 50% to 75% of its costs through broadcast distribution; the rest has to be recouped through syndication and other sources like DVD sales.

Even though I do think these models are inherently limited in their ability to compare the platforms, I still believe the comparison illustrates well some of the factors that are involved in the pricing and negotiation of these deals, and indicate why the new Apple TV rental model is not currently accepted by CBS, NBC and other networks.

Appendix

For Hulu, I calculated the advertising based on a CPM of $63 since according to Wired their rates run about two to three times that of broadcast television. This sounds a bit high to me but it’s possible since the Hulu has better targeting, higher valued demos, and lower commercial skipping/avoidance than broadcast TV.

Hulu: CPM of $63 x 6 spots = $0.38 per viewer per episode

In the case of Hulu Plus I added the $9.99 monthly fee, divided by 18.8 episodes per month (this was estimated by taking the average monthly minutes per Hulu viewer by 47, 44 minutes of content plus six 15-second spots).

Hulu Plus: $9.99 monthly fee / 18.8 episodes = $0.53 in fees per episode + $0.38 in ad revenues = $0.91 per viewer per episode

Since Amazon, iTunes and Apple TV are strictly purchased or rented models, advertising was not part of equation. For Apple TV I assumed that an average of two viewers would watch each rented episode since it streamed to a television. In the case of Amazon and iTunes I assumed an average of only 1.5 viewers since their models could stream to computers that inhibited group viewing. I also assumed that content purchased via Amazon and iTuens would be viewed more than once.

Amazon: $1.99 purchase fee / 1.5 viewers / 2 viewings = $0.66 per viewer per episode
iTunes: $1.99 purchase fee / 1.5 viewers / 2 viewings = $0.66 per viewer per episode
Apple TV: $1.99 purchase fee / 2 viewers / 1 viewing = $0.50 per viewer per episode

The model for DVDs was similar to iTunes and Amazon, only substituting a $2.50 price per episode based on the retail price of $60 for a DVD set with 24 episodes.

DVD: $2.50 purchase fee / 2.0 viewers / 2 viewings = $0.63 per viewer per episode

The digital video market, being nascent, promising and hot, is the equivalent of a precocious young celebrity. They both attract a lot of attention, press coverage, and debate concerning which projects and relationships are worth pursuing. Of course, I have my own opinion, but just about digital video and not celebrities.

If you divide the digital video market by delivery methods (streaming or downloaded) and business models (consumer paid or ad supported), four sectors emerge.

Companies within the ad-supported streamed quadrant (upper left-hand corner) have received a lot of criticism lately for basically giving away for their content. Although YouTube attracts between 40 to 60% of total internet video streams the company places ads in only about 9% of these streams. Hulu has been somewhat more successful since it’s selling about 60% of its ad inventory, but the site has much less traffic, and runs only two minutes of spots per 22 minute program (a quarter of the standard amount on television). Hulu’s annual sales are running at about $120 million, a third less than estimates at the beginning of the year.

Unsurprisingly, there is much speculation about Hulu beginning a subscription service option, which would extend its presence towards the lower left-hand quadrant, along with the likes of Netflix and the “TV Everywhere” project currently being developed by Time Warner and Comcast. Such a business model might offer Hulu a greater revenue per viewer than what advertising currently yields, even at a high $50 CPM. Interestingly Amazon’s versatile Unbox service offers both paid streaming and downloaded options, placing it across both the lower left-hand and right-hand quadrants. Just within the paid downloaded quadrant iTunes is probably the biggest player.

Most of these companies do not yet have mobile video platforms. The only options seem to be YouTube, iTunes and Podcasts. Hulu may have an iPhone App in the works, but it seems to be on hold until their subscription service launches. This would leave Podcasts as the only mobile ad-supported downloaded service. It seems to me that this is an opportunity worth exploring.

Mobile video content has a strong value proposition. It offers portable viewing of video, anywhere and at anytime, and doesn’t require a network connection which can very unreliable or inaccessible in many situations. Mobile video also offers a higher level of viewer engagement than with television or computers where consumers can change channels or application windows. The only catch is that in order to make the most of this, you would have to “pause” or disable the fast-forward button during commercial breaks. Of course, the downloaded content would also have to an “expiration date,” as is the case with any video content, but this could be easily implemented with mobile devices just as Apple has restricted the length of time for viewing rented movies from its iTunes store.

I posted my idea for an ad-supported downloaded video on a recent article by Dan Rayburn concerning Hulu’s possible iPhone app, and how Hulu could opt for this route . His response:

Sure, it’s possible, but I don’t think likely as the consumer experience would suffer and the content would not be available instantly.

I respectfully disagree since consumers do want to be able to watch video content without relying on AT&T’s 3G network. Perhaps in the long term when mobile networks switch to 4G downloadable content would not offer the same value, but it remains to be seen how quickly mobile networks upgrade, and how data pricing plans also evolve. I also believe that consumers would be willing to temporarily cede their FF button in return for the right to see the latest episode of their favorite TV show anytime and anywhere. Viewers don’t mind sitting through the unskippable commercial breaks in Hulu and this proposition would be fairly similar.

The most important thing to remember is the immense market potential of mobile video. According to Nielsen, consumers currently spend about 3.5 hours per month watching video on a mobile device; that’s only 1.8% of the total time they spend watching video. Everybody is expecting this market to explode and the sooner or later a diversity of video options will be offered to satisfy a range of demands. Perhaps the downloaded ad-supported models won’t be the majority, but they will certainly be available. The only question is which companies will offer the service.

I recently attended Advertising Week in New York City and had a lot to hear from some very eloquent speakers. Here are the top 10 moments that I found to be inspiring, provocative or at least original.

(10) Changing Roles: It seemed to me that change was a prevalent theme at the conference and that all participants expressed a willingness to reconsider what roles their companies should be playing.

• Given the freedom of digital distribution, marketers are beginning to produce their own content.
• Given commercial skipping and other market pressures, media companies are beginning to integrate marketing messages into their programming.
• Given the economic demands and their talented personnel, agencies are beginning to develop their own products or services, similar to “private labels” at department stores.

Everywhere the status quo is being questioned and resources are being redirected. Still, the norm is established for a reason and as Rob Norman CEO of GroupM put it, agencies exist for the creation, distribution and measurement of brands and messages across various media, and it seems to me that this is value that marketers will need for some time to come.

(9) Ad Spending: Subsequently, despite the economic downturn and cuts in certain media overall ad spending can still be expected to grow roughly along with the GDP at 1 to 2% per year. Ad spending will fragment however among more media platforms and channels, and this increased competition will yield a greater “purchasing power” for advertisers; a “bigger bang for their buck” in other words.

(8) Compensation options: A related subject to ad spending was how new compensation options were being considered, including performance-based compensation options and even equity stakes by the agencies in the projects they were involved with. All of these options sounded like they were still works in progress.

(7) Attention Deficit: At the Betawave panel a dynamic video showed how much marketing messages have flooded people’s lives while they’ve become more busy resulting in an “attention crisis.” “Is an impression an impression when the viewer doesn’t see it?” And if traditional reach is no longer a valid currency to trade, “why can’t clients buy attention?” It was a provocative presentation but it seems to me that the industry has yet to supply a satisfactory answer.

(6) Measurement Issues: This problem with attention ties into the dissatisfaction with media measurement. More than once I heard the term “archaic” used in reference to the current standards for media measurement which don’t take into account new media viewing. Carol Kruse of Coca-Cola also said that traditional demos are “not so useful” for the targeting that marketers now practice. The Advertising Research Foundation (ARF) opened up their conference with a presentation by NBC President of Research Alan Wurtzel of the Coalition for Innovation in Media Measurement (CIMM), whose name pretty much explains its objective. As Alan Wurtzel succintly said, “We cannot not do this.” While instigating progress, CIMM is aiming neither to challenge or supplants Nielsen’s services. For their part, Nielsen has stated that online viewing will be added to their television measurement within a year, with mobile viewing to follow by around 2011.

(5) Forget measurement, let’s predict!: Another presentation at the ARF by Damon Ragusa, CEO of ThinkVine seemed to pique a lot of interest even among other panelists. The company offers a marketing simulation model called “The Emerging Marketplaces” that predicts customer transactions as a result of a product’s media marketing mix. The presentation cited an 8-9% M.A.P.E. between its predictions and actual transactions. The model could also account for short-term or quarterly changes in strategy, as well as for word of mouth and social media marketing. Impressive stuff.

(4) How much is that little show in the window?: At a panel titled “To Pay or Not to Pay?” with participants from MLB, the YES Network and FiOS an opening argument was presented that 1) the music industry failed since it “did nothing” and decided not to offer consumers its content via online channels, that 2) the newspaper industry made the opposite mistake by offering its content for free, and that 3) the television industry needed to find a middle path with a viable monetization strategy. Certain criticisms were levied against Hulu models that could end up cannibalizing television viewership and transforming FiOS and cable MSO’s into an industry of “dumb pipes.” At the core of this debate is how much to charge for content online, whether it’s through advertising or a direct audience fee.

(3) “Big” Opportunities: Marc Cuban also created a slight ruckus at MediaPost’s “The Future of Media” panel when he commented about how he attended a football game at the new Dallas Cowboys $1.2 billion stadium and the only thing people kept commenting about was the seven story tall screen. Given this attention, the current capacity or captive audience of 80,000 and the probable drop in the screen’s $40 million price, Marc Cuban declared that this was a ginormous media opportunity that the industry should probably think big instead of focusing on small screens, meaning mobile and laptops.

(2) The Three i’s: At the same panel Marc Cuban mentioned how any industry was populated by the “three i’s: innovators, imitators and idiots” and how participants should be honest about which role they were following, in order to neither decieve their customers nor themselves. This type of honesty is about being “authentic” company or brand…

(1) Authenticity: This buzzword was probably the most important one I heard, driven by how much the ad industry landscape has change as a result of social media’s effects. Advertising is no longer just about the message or the medium, it is also about the actual product, and how it has to deliver on its proposal to the consumer. If it’s not authentic, it will create a consumer backlash that will echo in social media and be too strong to control via any traditional means or channels. Consequently a lot of panel speakers recommended that companies bring in their PR departments under marketing, and that they also consider how agencies should be involved in their product development to help connect the good to the message.

As disparate as this list may seem, this last point actually ties back to the initial one of  how roles are changing and demonstrates how all of the issues affecting the industry are related.

Following yesterday’s post regarding the rising in the overall online video market I wanted to focus today on individual site performance. However, I ran into a small problem regarding information availability. Usually online video press releases just delve into unique users or total video streams. These dimensions can be attractive for their simplicity but they don’t paint the whole picture.

To truly see how much video activity a site is attracting, three dimensions have to combined:

1. Amount of unique viewers
2. Amount of streams viewed
3. Video time being viewed (per stream or per viewer)

Of course online video measurement firms know this but limit the public dissemination of information, particularly it seems regarding the element of time. However, comScore has provided time information regarding the average time per viewer for Hulu and the average duration for all online videos at any site. Based on this information it is possible to draw a comparison of Hulu’s comparison to the market as a whole.

Based on this information, there was a total of 1.3 billion hours of video consumed online in the U.S. during the month of July. This is 71% more than the 770 million hours viewed in December 2008. Hulu’s traffic has also grown, serving up 46.4 million hours of video in July, up from 40.5 million hours in December 2008.

Although Hulu’s popularity has been rising, its share of the total video market has been falling. This is because it is attracting more unique viewers at a lower rate than other properties. According to comScore, 76% of the total unique viewers use YouTube (up from 66% in December) while Hulu has about a 24% share. Another challenge for Hulu is that their average video consumption is falling. In December 2009 a viewer watched 99 minutes of video but in July the figure had fallen to 73 minutes. Since Hulu has 14 million more unique viewers in July, this may be a result of lighter users entering their user base.

Unfortunately information regarding viewing time was not available for YouTube, MySpace or other video sites. I’ll keep an eye out in the future for such information. A comparison between these sites would be much more interesting.

Perhaps owing to similar reasons that have led to a strong summer for cable network ratings, according to both Nielsen Online and comScore new highs have recently been set in the online video market. According to Nielsen, a record audience of almost 136 million viewers watched video online during the month of July, up 14.2% year-over-year. ComScore measured a larger audience of 158.4 million viewers for the month of July, an increase of 11.8 % over comScore’s measurement in May 2008.

At the beginning of this summer there was a debate concerning online video measurement and Hulu’s traffic; I compared the numbers for Hulu in a July posting. Based on the latest numbers, Nielsen and comScore differ about 16% in regards to the U.S. online video audience (total unique users). This is probably attributable to some difference in their research methodology, which is unclear since they both seem to use panel based projections combined with server data for validation purposes. Nielsen promotes that they were the first to market and that their panel as being “truly random,” being assembled from two separate samples of 200,000 members, 20,000 of which are selected for a “more scientific” panel through their “street addresses and phone numbers.” Nielsen also stresses that their panel “includes both heavy and light users” and that “other measurement companies create their panels from people who answer online solicitation and who tend to be heavy users.” For their part, comScore highlights that their panel is composed of 1 million users for the U.S. market, and that it has been “validated by several leading industry bodies and the use of independent third-party data sources.”

In any case looking at the measurements available for the past two years for the U.S. online video audience it seems that the firms are arriving at more common assessment.

However in terms of total video streams, there seems to be a larger and widening gap.

This larger difference, relating to the amount of video watched rather than audience size, indicates that the panels probably weigh differently in terms of heavy video users. This doesn’t solve the problem however since it is impossible for me to say which panel is too heavy, or too light. Nielsen and comScore are probably comparing these figures to the server data and arriving at different perspectives of what the correct market weight is.

Since comScore breaks out minutes of video consumption per user for Hulu, YouTube and MySpace tomorrow I will be looking at those figures and posting up a comparison.

Yesterday an article in The New York times highlighted the results of a media industry report from the private equity firm Veronis Suhler Stevenson (VSS):

An interesting shift occurred in 2008, the report said. For the first time, consumers spent more time with media they paid for, like books or cable television, than with primarily ad-supported media, like newspapers and magazines.

The VSS report also forecast internet media and subscription television to be sectors of strong growth during the next four years. These trends echoes the results mentioned in another report released a few weeks ago by Strategic Analytics (SA), which forecast that the global paid online video segment will surpass the ad-based online video segment in 2009. The SA report also forecast stronger growth for the paid segment during the next four years.

Both studies partly attribute the shift in balance towards paid content to the recession, which has stifled advertising budgets in both traditional and online media. In any case it is still surprising is to hear that paid video content will be a bigger moneymaker than ad-based content. While some companies like Apple and Netflix have made headway in the paid video segment a lot of studies have indicated that consumers prefer ad-supported models; an IBM study in November 2008 indicated that 70% of consumers prefer ad-supported models over consumer-paid models. Another study by Deloitte yielded similar results, indicating that 67% of US consumers aged between 25 and 34 would “be willing to be exposed to online ads in exchange for free content.

Although the majority of consumers would opt for ad-based video models, perhaps the smaller pay-to-watch segment is willing to outspend advertisers as a whole, in return for the following benefits:

• Zero or less advertising
• Access to a wider range of content (recent movies, old TV episodes, etc.)
• Ownership of the material or a longer viewing window
• Option to watch across more types of hardware (computers, DVR, mobile, etc.)
• Higher viewing quality

Given these trends in these reports during next two years the online community will see an expansion in paid video content. The ‘TV Everywhere’ partnership was recently launched by Time Warner and Comcast, allowing Comcast subscribers to view video online from TBS, TNT, CBS and HBO. I am also wondering if ad-based sites like Hulu will add paid content options; perhaps a subscription service similar to Netflix for accessing all the episodes for a series. Will hybrid sites emerge, offering both ad-based and pay-to-watch options? It is probably to early to guess which models will win (Hulu was launched only 17 months ago; see graphic above) but it is probable that a greater variety of options will emerge, resulting in a more choices and a very dynamic market.

About two months ago there was a little brouhaha concerning Hulu’s traffic, since the unique visitors reported by comScore were triple Nielsen’s figures. This incident is well analyzed in this posting by Greg Sterling at SearchEngineLand which concludes that “one has to look broadly at all the numbers and use the consensus and directional trends.”

Neither comScore nor Nielsen have issued press releases with new traffic information for Hulu so I’ve compiled charts based on previous releases. Comparing the measurements for visitors over this longer term reveals that the two firms have differed for some time. Nielsen reported 6.32 million unique viewers for Hulu in September 2008, and 10.11 million in May; an increase of 60%. For its part, comScore rerported 25 million viewers in December and 40 million in April; a parallel growth of 60%. Since both firms report very different absolute figures but closely similar growth rates it is more rational to follow Greg Sterling’s afforementioned advice and pay more attention to the similarities and trends between the Nielsen and comScore.

The difference between Nielsen and comScore measurements was much less, looking at the total video streams served per month. Both companies indicate that Hulu has had a steady growth in video streams since its launch in March 2008.

Both Nielsen and comSocre are indicating a strong growth for Hulu in 2009, which can be mostly attributed to the ad campaign launched by the Superbowl spot with Alec Baldwin (inexplicably currently unavailable at Hulu). Given this greater brand awareness it will be very interesting to see how Hulu continues to perform during this summer, especially since it should be a golden opportunity to attract more viewers as the summer TV season has been somewhat slow.