Today’s column is written by Ashley Swartz, co-founder and CEO of Furious Corp.
Despite being the fastest-growing advertising medium, digital video remains a seriously difficult business for premium publishers.
The costs of producing premium content remain high, it’s a constant battle to grow and maintain audience and subscribers across channels, and the value chain gets more complicated each day. The situation will only get worse: In 2018, for the first time ever, video consumption is projected to flatten, putting even greater pressure on margins.
The result? Even with the high CPMs that premium video inventory commands, many leading publishers are struggling to make digital video a profitable, standalone business unit.
One of the primary drivers behind the struggle for profitability is that the number of hands in the digital video pot keeps growing, taking off the top and from the bottom. As technology improves, the operational costs of video have actually become more expensive, not less.
Publishers must now be present on a growing number of platforms to deliver meaningful reach, which means additional ad server costs and investments in systems that enable the creation and maintenance of private marketplaces and connections to any number of supply-side platforms (SSPs) and exchanges. Publishers foot the bill for anti-fraud and viewability verification measures, as well as for third-party data licenses that are table stakes for delivering the targeting that most marketers require.
While the consolidation of the ad tech industry might seem a welcome acknowledgment that the digital video value chain is overpopulated, for publishers, it’s actually another cause for concern. As sector leaders buy up smaller players, publishers will face even greater margin pressure because they will have fewer options and less room to negotiate prices.
So the question is, what comes next? How do we evolve to enable publishers to build sustainable video businesses?
In short, we need to start sharing risk across the video value chain. We need a new business model that is based on economic value delivered, not just a percentage of whatever flows through the platform.
Publishers should start now, while they still have leverage, to reexamine their relationships with vendors. And vendors – including data providers, SSPs and demand-side platforms, to name a few – need to begin to see the bigger picture. If publishers fail, we all fail. Publishers are getting squeezed to a point where they will start doing everything possible to avoid reliance on ad tech vendors to fulfill revenue goals.
Vendors must act as partners, raising their hands to reevaluate their business models and being receptive to new ones. Publishers must also take a leadership role by being open to incentivizing partners to deliver economic value and compensating vendors accordingly. A new value-based model would align goals along the entire video value chain and create more upside for each vendor involved. This can be done by setting expectations and targets based on measurable business outcomes, which include net revenue metrics for publishers and not only volume of transactions, as is the dominant ad tech business model today.
The traditional ad tech business model of “percentage that flows through the pipes” was designed in a display and search world where supply was unconstrained. There was always more volume available, and tonnage was the norm. That is simply not the case for premium video; despite exponential growth, it is still in short supply. So even if vendors don’t reevaluate their models for the right reason, such as potential partnerships, they will have to do so to ensure long-term viability, and waiting will only make the problem worse.
The entire video value chain is facing hard times. We are commencing an era where not only transparency but also collaboration and partnership, driven by shared goals and measurable outcomes, are required to set a new course for the industry. The only way to thrive is to share both the risks and the rewards of online video – and take ownership of turning the ship around.