Video Advertising: A Gateway Advertising Enabler?

Written by David Stern

Thursday, June 7. 2007 at 02:20 PM EDT 4 comments

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If you sit around the coffee shops on Sand Hill Road where there are a seemingly infinite number of venture capitalists (I’m among them), you hear a lot of talk about video these days. One of the consistent themes you hear is that we’re still years away from video being able to capture major brand dollars online.

Simply put, major brands are still scared stiff to associate their brands with most of the content readily available on the Web, mostly because much of it is ripped off, or distasteful… or both.

In order for the major brand dollars to be brought online and away from television and radio in a meaningful way, the thinking goes, advertisers are going to need premium content to proliferate. Only then will the promise of video content on the Web as a monetizeable asset be realized. I wrote about this in an earlier blog post, and I still believe we’re only in the second inning of a nine-inning game here. But there is something else happening with video that I’m pretty excited about. And it has nothing to do with brand dollars being captured.

There are two major developments that I certainly haven’t heard much about on Sand Hill Road, developments that I think are going to be very important in fueling some very large-scale venture returns over the next few years: 1.) Video ads are driving much higher click thru rates than their text ad counterparts for actionable ads, not branded ads; and 2.) Video ads are an effective "gateway" advertising vehicle.

Over the past two years, we've seen a ridiculous increase in keyword prices for commercial keywords. On Google. (Does anyone even track commercial keyword prices on the others?) While Google democratized keywords, its new policies have had the effect of pricing many of those that helped build its network, right back out of the market and searching for alternatives.

I play around with a few lead-gen sites that drive traffic to lawyers and certain insurance industry players. My margins have been destroyed by this 2-3x increase, because the quality of the leads hasn't changed, nor has the price the market will pay for them. For those really scoring at home, what that has meant is that I’m now forced to use display much more frequently and leverage the CPA ad networks after testing my keyword advertising on Google. But, that's not necessarily the point unless you are going to start your next lead-gen arb play.

The point is that video advertising -- and actionable video advertising as opposed to brand messaging advertising -- is actually working much better than anticipated and has many in the arb and affiliate game, very excited. And where the affiliate and lead-gen players go, so go the dollars. And company valuations, I’m sure.  (Just head to the affiliate summit if you want some great insight into this market).

Even though we consistently hear how wonderful Google is for the SMB market, the lion’s share of the SMB advertising spend isn’t online. For them, Google is still a mysterious black box. For them, online marketing still isn't tangible enough to adopt right now as a compliment for or replacement for their current more traditional spend.

This is an emotional objection, not a rational one, clearly. But it is real nonetheless. This class of advertiser does already advertise in the Yellow Pages and many of them have done a local television ad or two. But for them, it is more important to be able to SEE their ad run, or certainly see their ad run on something that is accessible and known to them or something like it. It is an emotional response, full of vanity, and fear. Having something tangible is important and it is the gating factor for many in determining whether to advertise online.  (OK… I’m getting to the point here.)

I believe video advertising has the promise of being able to lure not only the early adopters of online advertising, but also and more importantly, the largest portions of local SMB advertising dollars, the portion that has resisted text-based online advertising, online.  

I also believe that this is the next big trend in advertising that has the potential to produce venture scale returns for investors. And while you could just say that Google will be the prime beneficiary of this, with their small business base of advertisers and their massive inventory of user-generated video through their YouTube acquisition, that market is just a smidgen of the overall SMB advertising spend that will be and is up for grabs, especially for those that already have their tentacles in the SMB market.

If you are an entrepreneur that has some thoughts on the subject, I’d love to hear from you. I’ll pay for the call. Or email me at dstern@clearstone.com.