mermigas on media

Firms eye cash back from online revenue

The 2007 budgeting process at many media companies is being strained by a quirky dilemma.

Senior managers are waking up to the reality that online advertising and the Internet's exploding video-driven applications are the most substantial and sustainable future source of revenue growth, but precious few can claim to have a clear view on just how much, where and when that revenue will show up on balance sheets.

The financial promise of nascent online and digital broadband advertising ? which is critical to offsetting stagnant and declining traditional core ad spending ? is steeped in unknowns in a domestic marketplace that is 58% dominated by Google and Yahoo! and their Web site affiliates and partners. Increasingly, the answers and revenue lie beyond the pursuit of existing online ad opportunities to investing in such untested ground as user-generated, noncommercial content; pay-per-click ads; and fee-based interactive transactional services.

New forms of advertising and paid sponsorship are being developed for digital wireless phones and other universal mobile communications and entertainment devices, the popularity of which will be dramatically heightened by Apple's anticipated first-quarter launch of an iPod-branded cell phone and content player.

Wireless digital cell phones ? far outnumbering all other critical-mass tech devices globally, including computers ? are about to be elevated by a new generation of oversized screens, more sophisticated software interface with in-home and out-of-home gadgets and an influx of fee- and ad-supported video games, films, TV programs and user-generated fare.

Even Google CEO Eric Schmidt says he considers digital cell phones to be the definitive media frontier ? so much so that Google's mobile phone advertising revenue eventually will match the $10 billion in computer-based ad revenue it generates annually, he said.

The financial ramifications will be huge for a broad array of so-called new and old commercial media players. And the cell phone tech boom is a happy coincidence for consolidating telephone companies such as Sprint Nextel and Verizon Wireless seeking to rival cable, satellite and Internet operators with bundled video, voice and data that are bound as much by advertising dollars as by subscription fees.

Content companies like the Walt Disney Co. clearly have more new places to sell online and interactive ads. The revenue generated by Disney's TV program and film downloads to Apple iTunes' 200 million-plus users will double to $333 million by 2008, according to Washington, D.C.-based consultants Emerging Media Dynamics.

Although that is less than 1% of Disney's overall $34 billion in annual revenue and less than half the projected $700 million the company says will be generated in fiscal 2007 from all download fees and ad time sold in streaming content at record-high unit prices, it is one of any media company's few assured double-digit growth lines.

Apple's iPods and iTunes generate more than $16 billion in revenue from video and audio downloads, comprising nearly an 80% share of a content-downloading market that will easily match or surpass broadcast and cable television as the ad-supported platform standard. There are early signs that the impending tidal wave of content downloading will irreversibly alter the economics of DVD sales and video retailing, boxoffice film returns and scheduled TV program networks. It will bring with it newly developed forms and pricing of advertising that have begun to surface in

the shape of bookend sponsorship identification, interactive inserts and even renewable product and service offers that defy consumers' ever-expanding storage capacity.

While all of this is good news for media companies that are economically dependent upon ad-related revenue, Bear Stearns analyst Spencer Wang argues in a new report that the biggest beneficiaries of exploding digital content and online advertising options will be "the middle men," or the supply-chain aggregators on the Internet, PC, mobile devices and telephones (e.g., Google/YouTube, Yahoo!, AOL, MySpace and their rivals).

Targeted, personalized and even user-generated online and interactive content will migrate through the same evolutionary process as niche cable television offerings once did by becoming economically viable enough through a cumulative growth that handily offsets the decline of broad-based general interest networks or distribution platforms. Even now, ad-supported targeted cable averages only 1% share of viewing per channel but collectively represents nearly half of all TV viewing on a total-day basis, Wang points out, a pattern that already is taking hold across digital broadband platforms.

Not only media companies' 2007 budgets but also their long-term financial credibility depend on their ability to embrace and develop the only sure source of new robust revenue that already appears to be challenging established new-media players.

For instance, Time Warner's latest attempt to revive and redefine AOL with the old-fashioned sale of goods and services is something on which its new executive officer Randy Falco made his name during his 30 years at NBC. However, it is unlikely that the fundamentals and dynamics of advertising value, pricing, placement and creation in a static television world and the Internet's fluid interactive platform will be fully relevant ? especially in the coming 6-12 months, during which AOL's fate will be decided.

Even News Corp. faces formidable challenges in developing its brilliantly acquired MySpace into a major advertising-supported hub of commercial video and user- generated content on the hopes it will command premium rates because of the highly targeted audience it can deliver.

Other traditional content-rich players such as Disney and Viacom remain challenged in simply hammering out a clear, detailed digital strategy. Even established Internet players like Yahoo! are vexed by the under-monetization of their assets and traffic base (which Merrill Lynch forecasts will begin to be reversed next year by the infusion of $185 million in incremental revenue, largely ad-related).

As the full spectrum of new- and old-media companies struggle to take their converging transformation to the next level in 2007, nothing will influence or challenge them more than the accelerated shift of ad dollars from traditional to emerging digital interactive platforms that could see the digital-spending share of many advertising budgets double from 10% in the next two years, according to Bear Stearns' Wang.

Gurus Bob Coen of Universal McCann and Steve King, CEO of ZenithOptimedia, issued sobering predictions Monday that include declines in local and network TV ad spending next year, while spending on online is project to increase at seven times the rate of the overall domestic ad market.

Merrill Lynch advertising analyst Lauren Rich Fine recently raised her projection for online advertising growth from 31% to 34% for all of 2006 and has upped her online advertising growth projections next year to 23.3% on the expectation that the boom in social networking, online video and search will boost online ad spending over the next 12 months. By 2010, social networks will account for $2.2 billion, or 0.5% of the $25.2 billion U.S. online ad market, which will be matched by an additional $2.8 billion in global social-networking ad spend, Fine said. Online video ad spending could likewise reach $3 billion, or 11.5% of total online ad spending, by 2010.

Of course, if Google has its way, by then it will have emerged the gatekeeper for all forms of advertising and mobile-device marketing. Just try figuring that into next year's budget.

Diane Mermigas can be reached at