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I posted last week about why I though that Google’s new overlay advertising product would be good for the whole industry; Gootube has both the volume of inventory and the advertiser relationships to make the overlay a standard ad unit.

The other notable thing about Google’s new ad product is how the ads are being targeted, or rather how they are NOT being targeted. The New York Times quotes Eileen Norton, Google’s Director for Media Platforms:

Ms. Naughton also said advertisers would be able to take aim at specific channels and genres, as well as demographic profiles, geography and hour of the day.

What is notably missing from this list, especially from Google, is contextual targeting. I wonder if this suggests that contextual targeting is not as important for online video ads as it is for text link ads.

Online, Google’s adsense has been the premier form of contextual targeting, and it is primarily about direct response.

Television advertising is primarily about branding. Direct Response TV (infomercials) make up a very small fraction of TV advertising and they typically run in latenight and overnight time segments when both ratings and ad prices are low.

The question is whether online video advertising will look more like online, or more like TV.

For long form video online, it seems less likely that contextual advertising will be a good match. Long form video is more of a “lean back” experience, where the viewer is less likely to click on any ad, even a highly contextual one. That makes it hard for direct response advertising to work.

Short form video online may be more promising as viewers may be more willing to click away. People from online video analytics comapnies tell me that less than 50% of online video streams are watched to the end, with the bulk of the drop off occurring in the first 20% of the stream.

When you combine this with the fact that both Youtube and VideoEgg are seeing click through rates on their overlay ad unit 5-10x higher than typical online banner ad click through rates (according to the NY Times article), it seems more possible that direct response advertising will work for short form video online.

But two factors complicate this situation. The first is that neither Youtube nor VideoEgg are actually using contextual targeting today. The second is that the current advertiser base for VideoEgg appears to skew heavily towards “cool” entertainment ads (gaming, movies, TV and music), or at least so it appears from their sample advertisers. The same is true of the few Youtube ads that I have seen “in the wild”.

These early adopters may have more compelling video ads that are not as representative of the mass market – it may be easier to get someone to click away to watch a Superbad trailer than an ad for Tide, even a good one.

If indeed it is true that targeting against channels, genres and demographics is sufficient for video advertising, then this is great news for online video startups. Google accuracy at contextual targeting its text ads benefits greatly from the vast volume of ads that it serves, and from its very low cost compute infrastructure. Targeting against channels, genres and demographics requires a lot less volume and a lot less computation, which levels the playing field substantially.

I’d be interested to hear what readers think about whether contextual targeting will be the way forward for online video advertising.