Genuity research: "time has come for online video"

Here is the exec summary and the conclusion of a great research piece put out by Genuity Capital Markets earlier today:

“Online video: Its time has come

Exec Summary

• Last week, we attended an industry conference in San Francisco entitled NewTeeVee Live, which brought together content creators, distributors, carriers, hardware vendors, along with VC players to discuss what the future of online video will be in a post YouTube-Google world.

• The various panels explored questions about the business of online video, and expounded on where the opportunities were for content creators, communities, and distributors. Among the panels at this one-day event:

• Crossover hits – Web video meets TV

• Is there money in Long Tail Video? – Advertising tries to wrap its mind around web video

• Cash for content? – Online video funders from top VC firms sound off

• Search and discovery face off – Finding what you’re looking for, or what you aren’t

• The Network makeover – The real power behind web video

• New media platforms – What’s the future of media consumption?

• Forrester Research estimates online video ad spending is expected to grow 72% over the next five years, to US$7.1 billion, building on total spending of US$471 million this year. However, the current lack of a standardized ad format appears to be holding back the growth.

• Here in Canada, the evolution of online video is constrained somewhat by the thorny issue of acquiring digital licencing rights. The problem the Canadian industry faces is getting the rights to broadcast something on not just television, but also on the Internet and on cell phones.

• So, have Canadian broadcasters lost their enthusiasm for digital? Not necessarily… Rather, the spending in online video is not currently financially efficient for TV companies in Canada. They would need 20-30% EBITDA margins for it not to dilute profit from their old media operations, and most companies are not willing to currently make that sacrifice in light of the fact that they do not have free rein on their most compelling content (U.S. series).

• Web-delivered video is clearly expanding from user-provided content to encompass more professionally authored (and legally licenced) material. Add up the venture capital dollars currently funding online video start-ups and the willingness of established players like ABC, MTV, and NBC to try new distribution models, and it is clear that the online video market is at an inflection point in its history.

Conclusion

Currently, online garners 6% of advertising expenditures in the U.S., materially below the 23% of time an average person spends with the medium. We expect the gap will converge to virtual parity over the long term.

While activity-based online marketing attracts a lot of attention, display advertising and other rich media (notably online video) represents roughly a third of total online advertising spending and the category is growing rapidly.

Here in Canada, the evolution of online video is constrained somewhat by the thorny issue of acquiring digital licencing rights. As in the U.S., Canadian broadcasters have to contend with increasingly fragmented viewers. But while CTV and Global have both been screening a number of Canadian programs on the Internet over the past year (Canadian Idol, Corner Gas, and Entertainment Tonight Canada), they do not have free rein to monetize their most sought-after programming, most of which originates from their program supply deals with U.S. studios. The problem the Canadian industry faces is getting the rights to broadcast something on not just television, but also on the Internet and on cell phones.

At the end of 2006, Global became the first Canadian broadcaster to negotiate streaming rights to U.S. programs, including Survivor and Deal or No Deal. At around the same time, CTV signed a digital deal with Warner Bros. to acquire the Canadian broadband rights to The O.C., Smith, and Studio 60 on the Sunset Strip. Each 44-minute show contained five commercial breaks: one pre-roll, one post-roll, and three in the body of the show. Unfortunately, all three shows were subsequently cancelled…

Over the course of last summer, CTV inked a deal with Warner Bros for multi-platform rights to the popular celebrity gossip and news TMZ.com brand – and a new daily entertainment series. The deal gives CTV Canadian broadcast rights for the TMZ series, along with exclusive use of any TMZ.com content which the net plans to make available on CTV.ca.

As for CanWest Global, the company says that they are “actively” working with U.S. suppliers in terms of streaming rights for a number of their popular shows. But we have seen little in the way of progress since the Survivor announcement.

With the Americans forging ahead and Canadians lamenting the lack of available content thru iPods and mobisodes, how long can creators and rights holders here afford to delay sorting out rights issues and what exposure on these new platforms is worth?

Web-delivered video is clearly expanding from user-provided content to encompass more professionally authored (and legally licenced) material. Add up the venture capital dollars currently funding online video start-ups, and the willingness of established players like ABC, MTV, and NBC to try new distribution models, and it is clear that the online video market is at an inflection point in its history.”

MRM