MSN Gets Strong Start
In Race to Win Web Video Ads

By JULIA ANGWIN
August 2, 2006; Page B1

When it comes to Web searches and advertising revenue, Microsoft Corp.'s MSN has long been an also-ran behind Google and Yahoo. But in video, it is a different story.

In recent years, aided by Microsoft's deep pockets, MSN has spent heavily to accumulate Web rights to an array of programming from major TV networks, from Fox's "Arrested Development" to CBS's "Rock Star Supernova" to NBC's "Today" show. The result: MSN has emerged as a top video site in terms of traffic, behind Yahoo, and the first choice for many online video advertisers.

Second in a series

• Big TV's Broadband Blitz¹
08/01/06

MSN's early success positions the portal to benefit from the explosion in online video advertising now under way. It also raises questions about Google Inc.'s ability to maintain its stranglehold on Internet advertising. Google, preferring to develop a search offering rather than license video from content owners, has even fallen behind Time Warner Inc.'s AOL and YouTube Inc., the amateur-video site.

Still, it's early in the Web-video battle. MSN's success in video, like that of both Yahoo Inc. and AOL, has come from licensing content from big entertainment companies. How much longer those companies will agree to license their content isn't clear: Film studios and TV networks are both plunging into the Web more directly, eager to stop Web video from being dominated by the portals. At the same time, Google remains a force to be reckoned with, while newer entrants like YouTube are also making waves.

At stake is a share of online video ad dollars, now growing faster than any other type of Internet advertising. While it accounts for only 2.3% of total Web ad spending now -- an estimated $385 million in 2006 -- it is expected to grow at double the rate of the overall ad market in the next four years, rising to $2.35 billion by 2010, according to eMarketer Inc.

Demand is so strong for video ads -- typically 15- or 30-second spots that run before or during an online video -- that prices are now on a par with TV. The average cost of reaching 1,000 Web viewers, the standard TV-ad-pricing measure, is about $25 to $30, about the same as a 30-second ad on ABC's hit show "Desperate Housewives" for the fall season, according to a media buyer.

Advertisers say there aren't enough ad spots to go around. A June study by McKinsey & Co. estimates that 80% of video inventory was soaked up in 2005 and that demand is likely to rise five-fold next year, outstripping current supplies. "Whenever we create more inventory, the sales force can sell it instantly," says Rob Bennett, general manager of MSN Video. "There's a tremendous demand."

Whether that demand will continue long term will probably depend on the content the portals offer. MSN's strength, for instance, is in news clips, thanks to a deal Microsoft struck with General Electric Co.'s NBC in 1995, when the two companies agreed to be partners on the MSNBC cable channel. As part of that joint venture, MSNBC.com has the exclusive online rights to NBC news content for 99 years.

Since then, Microsoft has continued to pour money into content-licensing deals, including entertainment shows. Last week, for instance, MSN announced a deal to license episodes of the Fox comedy "Arrested Development" for the next three years.

But despite paying big bucks, MSN hasn't snared the most popular programs from major networks. "Arrested Development," for instance, is no longer on the air. And while it developed a following when it was on Fox's schedule, its audience was never big enough to make it a surefire hit.

Yahoo, for its part, built its video strength on the back of its popular music site. It has since broadened its offerings to include TV programming, but with a heavy emphasis on original content. Yahoo hired a former top ABC network executive to oversee its original-content production.

AOL tapped archives of its Time Warner sibling division Warner Bros. for reruns of vintage TV shows when it launched its In2TV video service earlier this year. In2TV drew 1.8 million unique visitors in April alone, enough to help make AOL the fourth most popular video site on the Internet. Earlier this week, AOL unveiled more offerings, including additional content from cable channels such as Nickelodeon and the History Channel.

Even as the portals search for Hollywood content they can license, YouTube's popularity has forced them to add sections where Web surfers can post their own videos. The problem for the portals is that it's not clear yet how to attract advertising to these areas, which are filled with videos ranging from the benign to the extremely gross. YouTube currently doesn't run ads, though it plans to start selling them soon.

Jason Zajac, general manager of social media at Yahoo, says Yahoo currently runs banner ads only on the home page of video.yahoo.com, Yahoo's page for homemade videos, which are vetted by Yahoo editors. Mr. Zajac says that Yahoo hopes to be able to offer 15- to 30-second ads inside user-created videos soon.

At the same time, portals are keeping an eye on Google. The search giant stumbled in an effort to move into video early last year. Some television studios complained that Google was violating copyrights by publishing still images and transcripts without permission. Google backed down and began discussing ways to work with the studios, including offering programs on a pay-per-download basis. Google has begun testing offering free videos that contain ads, but it still isn't likely to pay licensing fees for content, according to Jennifer Feikin, director of video and search partnerships at Google.

Holding back Google is the rudimentary nature of video-search technology, a result of the difficulty computers have in identifying video content. But all the major portals are investing heavily in search technology. "We think search is going to become as important to video as it has been to text," says Kevin Conroy, executive vice president at AOL. He says AOL hopes that by the end of this year, its video-search results will be as good as its text-search results.

AOL has acquired a couple of different video-search companies. Its latest video-search portal includes an "electronic program guide" that lets users search for videos the same way they navigate through channels on their television sets.

To boost its video-search results, Yahoo has set up a way for content owners to submit text descriptions of their videos to Yahoo automatically so it can perform better searches of the videos. Yahoo says Walt Disney Co.'s Buena Vista and Discovery Communications Inc. are among the participants.

Eventually, the portals hope to create businesses as powerful as the search advertising business, where advertisers sell ads alongside relevant search results. "That exact same model can and will apply to video," says Mr. Zajac of Yahoo.