Last week I made the claim that a new ad market that specialized in video on demand (VOD) and internet protocol television (IPTV) could surpass Internet advertising in dollar volume inside of 7 years. Then I went on vacation. When I returned, the two most popular questions in my email inbox were: "how did you come up with this claim" followed by "what type of advertising would that be?"

I will defer the "what type" question for another posting. This posting explores the "how does it get that large" question. A picture is worth a thousand words, so let's plot some established data points below. I am using the phrase "VOD Ad Market" to encompass all non-linear television inventory -- that is, video on demand streams, internet protocol television, and digital video recorders.


I looked up the first 10 years of actual dollars spent on Online Advertising as published at the IAB. You will see those numbers reflected in the blue line. Notice that Internet advertising grew from a paultry $55 Million in 1995 to a whooping $9.6 Billion in 2004. Very Impressive. You can also clearly see the Internet bubble that burst in 2000.

Next, I looked up projections about the growth of Online Advertising. The best source I found was JupiterResearch. They believe that Online Advertising will grow to over $16.1 Billion in 2009. I plotted it as a straight line in green continuing from where the IAB actuals numbers ended. Notice that the JupiterResearch projection appears realistic in part because it pretty much shows no increase in the IAB line's slope. Very reasonable.

Finally, I plotted the expected erosion in value of traditional television advertising. You can read more about this at VODscape. Basically, it boils down to this: as DVR/PVR penetration expands throughout America's television households, you can expect that at least 50% of the people will skip all of the ads. The ad buyers will discount (erode) what they are willing to pay for a commercial because of this. DVR penetration numbers are fairly well known. By plotting this ad-skipping effect against the existing $56 Billion television ad market, we can calculate how much traditional television advertising will eroded. I overlaid that with the red line. I believe that this is the pot of money that will leave linear television and go looking for more effective venues.

Observation: television's erosion is larger than the Internet! And that is comparing only the US television market versus the Global Internet market. This phenomenon exists because advertising on american television is still over 7X larger than the world wide web today.

Summary

The analysis indicates that the erosion of traditional television advertising will surpass all the advertising money spent on Internet by 2009.

That displaced money will find its way into all sorts of advertising venues. However, a well constructed ad market for non-linear television (that is, VOD/IPTV/DVR) is a natural place for it to go.

If just 70% of that agency money found its way into a VOD ad network, it would be about $15 Billion in size by 2009.

Play with the numbers yourself. If you think that the VOD advertising is too aggressive, or if you think the Internet will grow faster -- OK. But no matter how you slice it, a VOD ad market's first 5 years will be impressive.

And if you don't believe that this ad market will get off the ground: wake up and smell the deals. Just in the last 6 months, Tandberg Television bought N2Broadband for $130 Million. CCOR purchased NCUBE for $90 Million. I see that Pixelworks acquired Equator Technologies for $109 Million. All of these are VOD and IPTV plays.

Comcast, Time Warner, and other cable MSO's are experimenting with VOD ads. TiVo and Comcast are experimenting with telescopic ads. Alcatel is researching how to do IPTV ads. The Madison Avenue agencies are noticing television's diminished effectiveness and asking questions. You know that when this much money is sloshing around, companies will rise up to take advantage of it.

This is a new arena for venture capitalists, start up companies, Wall Street IPO's, telco's, and established media companies to play in for year to come. There will be winners and losers but most important: it will be new!