This Isn’t Your Father’s Video Advertising Business

Video advertising is no longer just a pop-up ad that appears when looking at a YouTube video. It has quickly evolved into a large and profitable industry.

Advertisers will spend nearly $2 billion on video ads this year and $5.7 billion by 2014, according to eMarketer, and venture investors are also pouring hundreds of millions into startups in the space.

My company, San Francisco-based Sharethrough, raised a $5 million Series A round late last year. Others, such as TubeMogul and BrightRoll, have raised about $15 million to date, while companies such as SocialVibe, Adap.tv, YuMe and TidalTV have all raised in excess of $40 million.

We’ve also seen some sizable exits, including Tremor Media’s $65 million purchase of streaming ad placement service ScanScout; AOL’s $97 million acquisition of video distribution firm GoViral; Undertone’s acquisition of video ad network Jambo Media; Specific Media’s $55 million purchase of video ad network BBE; and most recently in April, Blinkx’s acquisition of Burst Media for $30 million.

However, the vast majority of the VC investment and M&A activity to date has chased after one particular segment of the online video ad space: technology that enables streaming of TV commercials on the Web via pre-roll, overlay or video banners.

These video ad units are based on the “traditional” model of online advertising: putting ads on websites and paying for impressions and views. But as the Internet has evolved from a web of sites to a web of people, this model doesn’t match up with the way we now find, consume and share content. The challenge is to produce video content—not ads—that can create connections between people.

Advertisers understand this shift and are moving from an “interrupter” mindset to an “entertainment” mindset, investing more resources into creating branded video content that entertains and engages audiences. We’ve seen that branded video works to drive purchase intent; a recent Vizu study of the effectiveness of viral video in promoting the launch of a major new video game showed a 110% lift in consumers’ intent to purchase the game after discovering and watching the branded videos.

But creating branded video content is only half of the challenge, and that’s why new distribution approaches and success metrics are emerging that are designed to maximize the social reach and impact of this kind of creative content. These “social video” technologies enable brands to get their videos seen and shared by social audiences.

Meanwhile, advertisers are flocking to these new social video distribution methods, investing an average of 250% more in social video media buys in 2010 than they did a year earlier.

So if brands and agencies are moving towards entertainment and social distribution, why is so much money still chasing the old “interruption” model of video advertising?

Part of the problem has been a lack of understanding about what social video is. While everyone knows that video is social by nature, and that advertisers are eager to create branded content that resonates with consumers and “goes viral,” there haven’t been many large-scale technological solutions that make social video a measurable advertising medium. The missing piece of the social video industry has been a technology platform that gets brand videos seen and shared in a repeatable, scalable and transparent way.

Companies that create an automated process for distributing branded video at scale; use tools to activate sharing of this content; and measure the reach and bottom-line ROI impact of video sharing are able to transform social video into a massive mainstream advertising market. As this technology matures, the social video advertising market could potentially bring in many billions of dollars of investment on top of the current video advertising industry predictions.

Millions have flowed into “video 1.0 technologies,” but the potential for returns from social video will far eclipse what we’ve seen today. The future is about monetizing the “share” instead of the “view.” Video companies that ensure marketers’ videos are seen by millions of socially connected consumers have a new industry awaiting them.

Dan Greenberg is co-founder and CEO of Sharethrough. Reach him at dan@sharethrough.com.