The Rise of Online Video and the Fall of TV

I’ve been predicting for a while that the TV advertising house of cards would collapse, and McKinsey just huffed and puffed and predicted (to its big Fortune 100 advertiser clients) that “by 2010, traditional TV advertising will be one-third as effective as it was in 1990″ (from AdAge):

That shocking statistic, delivered to the company’s Fortune 100 clients in a report on media proliferation, assumes a 15% decrease in buying power driving by cost-per-thousand rate increases; a 23% decline in ads viewed due to switching off; a 9% loss of attention to ads due to increased multitasking and a 37% decrease in message impact due to saturation.

“You’ve also got pronounced changes in consumer behavior while they’re consuming media,” said Tom French, director at McKinsey. “And ad spending is decreasingly reflecting consumer behavior.”

According to the report, real ad spending on prime-time broadcast TV has increased over last decade by about 40% even as viewers have dropped almost 50%. Paying more for less translates into a much higher cost-per-viewer-reached — a trend also true in radio and print.

Wow, you’ve got to love those numbers — almost the inverse of what’s happening online, e.g. the announcement of Google’s deal with Viacom/MTV:

Viacom Inc.’s MTV Networks has agreed to distribute clips from its cable networks over Google Inc.’s advertising network, in a test of what could become a new economic model for Web-based video delivery, the companies said on Sunday.

The project, a year in the making, marks the first time Google will distribute ad-supported videos across its AdSense network from a major programming provider. The ad-supported video distribution project will begin testing later in August.

Google’s AdSense network currently handles primarily text and graphical-oriented brand advertising. The MTV trial, if successful, would highlight the progress Google is making in evolving beyond its reliance on delivering Web-based text ads from which it derives most of its revenue and profit.

It’s undeniable now that TV is falling and online video is rising — the real question is how fast and how messy will the transition be:

“Should everybody shift 30% of their dollars to the web?” asked Amy Guggenheim Shenkan, senior practice knowledge specialist in McKinsey’s San Francisco office. “No. There wouldn’t be room today if everybody wanted to shift online. Last year [online media] was $12.5 billion, by end of 2007 digital advertising will be $18 to $25 billion. … So we’re seeing a lot of growth, but if you want to match up share of attention and share of dollars it couldn’t happen for that reason.” The TV ad industry is a $68 billion one.

Google has an infrastructure set up to receive those dollars — but will advertisers want to buy that way? Everyone is learning online video from scratch, so while infrastructure has some advantages, measuring the ROI of online video ads is still a brand new “science.”

While traditional video content providers like MTV still have strong brands, the meteoric rise of YouTube shows that the playing field is a lot flatter.

Of course, there’s another option besides “shifting” all of those TV ad dollars to online video — spend them on other forms of advertising with higher ROI — just as soon as it becomes clear what those are.