Yahoo! (NASDAQ:YHOO) forayed into the mobile video space with the launch of Yahoo Screen for iOS in the month of September last year. The company expanded these services to Android-based devices at the end of April this year. If recent news can be believed, then Yahoo is all set to launch a new video service that will compete with Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube. Due to the launch this summer, the new video site will focus on attracting user generated content through a greater potential to earn money. In this article, we will explore the video ads industry, and how Yahoo’s offering plans to leverage the growing popularity of online videos.
The Advancing World Of Online Videos
On the supply side, user generated video content is on the rise due to a number of factors, including the proliferation of low cost but high quality video equipment, the increase in Internet penetration and bandwidth, and the low storage costs of online content. Additionally, premium video content is also growing because many traditional media companies are boosting their online presence to capture a shift of viewers moving online for streaming digital content. On the demand side, online video content is becoming increasingly popular due to broader Internet access and the advent of smart connected devices (which include tablets, smartphones and notebook PCs). Furthermore, newer video formats are coming to fore that allow easy roll-out of pre-roll and interstitial video ads. As online video content empowers users to choose what, when and over which medium to watch content, viewers are spending more time viewing videos online rather than on traditional TV. We expect these trends will continue to drive demand and supply for online video content in the future.
Trends In Video Ad Spending
The change in consumer behavior is prompting the migration of TV ad budgets to online spending. As a result, the video advertising industry has become fragmented, primarily due to the growing popularity of online video streaming. Advertisers now have to manage their ad budgets across different media and screen sizes. While TV ad spending was at $75 billion in 2013, online video ad spending was close to $2.8 billion during the year, according to Interactive Advertising Bureau (IAB). Furthermore, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices.
However, online video ads cost per impression (CPM) still lags TV CPM. While a Turns study estimates that cost per impression (eCPM) for online video is in the $8-$12 range, TVB estimates this at $25 for TV. We expect TV and digital video advertising spend to converge as multi-platform and multi-screen video advertising get integrated.
Yahoo’s Foray Into Online Video
Yahoo is launching its own platform of video services that will directly compete with YouTube. According to Adage, the service was all set to be released in April this year. However, the service release had to be pushed back due to some contractual issues. The proposed new service from Yahoo plans to attract producers by offering better revenue split. Furthermore, Yahoo plans to make it easy to embed videos on other sites across the web and host clips on all of its other web properties such as Yahoo.com, Tumblr and Yahoo Finance.
According to our estimates, YouTube made around $3.7 billion in net revenues in 2013, and will rake in around $4.7 billion this year. If Yahoo’s planned service can even make 10% of this estimated value, its top line can increase by $500 million. However, since Yahoo plans to lower its take in the revenue split, chances of price war loom large, which might erode the earnings potential for both the companies.
We currently have a $34.83 price estimate for Yahoo!, which is in line with its current market price.
Disclosure: No positions.