To Target, or Not to Target (Ads): That is the Question

Over-the-top (OTT) video distribution is now a firmly established means to deliver content to consumers. And one valuable aspect of OTT distribution is that it's unicast - meaning there is a one-to-one relationship ...

To Target, or Not To Target (Ads): That is the Question
To Target, or Not To Target (Ads): That is the Question

Over-the-top (OTT) video distribution is now a firmly established means to deliver content to consumers. And one valuable aspect of OTT distribution is that it's unicast - meaning there is a one-to-one relationship between the client and the service provider, enabling ads inserted into video content to be targeted to specific viewers. Ad targeting holds great promise for service providers, arming them with the potential to increase revenue per impression and create new monetization opportunities.

Consider a hypothetical service provider, called VSP, that has 1,000 viewers. Factoring in some overlap, VSP's viewership can be broken down into three groups of 400 bird, cat and dog owners. Bird, cat and dog advertisers want to market their products to VSP's customers and are willing to pay to reach their respective potential customers. But cat advertisers don't care about advertising to dog owners that don't own cats, and so on.

VSP currently runs three ads in its morning show without employing targeted ad insertion, so all 1,000 viewers receive the same ads at the same time. VSP sequentially runs one bird product ad, one cat product ad and one dog product ad, charging the respective companies $20 CPM (cost per 1,000 views), earning a total of $60.

After some consideration, VSP decides to employ targeted insertion. They explain to their advertisers that they can reach their respective desired targeted audience and pay the same $20 fee. With a targeted campaign, the pet ads are sent only to the respective pet owners. The CPMs rise to $50, because for the $20, each advertiser only sends ads to 400 viewers. During the three ad opportunities in the morning show, the pet advertisers only use up 1,200 of VSP's 3000 impressions, creating 1,800 ad opportunities that were not available without targeted advertising.

In a universe of only dog, cat and bird advertisers, there is no more advertising money to be had, and VSP still earns only $60 for the three ad slots in their morning show. In this scenario, the extra impressions could be used for promotions or public service announcements. Or the extra 1,800 impressions could be sold to advertisers that currently publish ads in print, radio or on the web. And even if they are sold at low CPMs, say $10, VSP can add another $18 of revenue, which is a significant increase. However, if VSP can lure other advertisers to their audience, such as car advertisers willing to pay an untargeted rate of $20 CPM, they can potentially generate really significant revenue increases.

In the real world of broadcast advertising, a few things differ from our fictitious model. First, dog advertisers may not mind having their ads go to cat owners - they may be building a brand or plan to add cat products in the future. So they might not be willing to pay the same overall amount to reach a smaller audience, even if they reach the same core target audience. It's more likely that an advertiser would be willing to pay a little less to reach just its core audience. That's a business driver for adoption of targeted advertising, and the reduction in spend is not a problem for service providers because they are compensated by the extra ad opportunities created.

But this only works if the extra opportunities can be monetized, and that depends on either cannibalising another service provider's ad spend or bringing in new revenue. Where can this new revenue come from? In the long run, advertising budgets may increase if advertising is shown to be more effective. Or advertising spent in another media, say print, may be repurposed. Either way, targeted advertising is a necessary and defensive measure for service providers that need to ensure that the revenue they are generating isn't repurposed to a service provider that is offering targeted advertising at a reduced overall expense (though with higher CPMs).

So, targeted ad insertion does several things:

  • Brings customers ads that are relevant and likely to be more effective
  • Raises CPMs on a smaller set of ad opportunity inventory
  • Creates new ad opportunity inventory, raising video service providers' overall revenue
  • Potentially reduces the overall spend per campaign for advertisers, as they reach smaller audiences that still contain their target audience
  • Drives its own adoption by creating market pressure on service providers to retain their revenue

The answer to the question of, "To target, or not to target?" That's an easy one: Target!

Yuval Fisher is CTO MVPD at Imagine Communications.

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