Advertising in Distributed Content Markets. Topics I.Online advertising and video growing dramatically II.Big Flies in the Ointment III.Advertising Models.

Advertising inDistributed Content Markets

Topics

I. Online advertising and video growing dramatically

II. Big Flies in the Ointment

III. Advertising Models in P2P

IV. Where has all the content gone?

I. The future of online advertising

• Advertising will grow at 4.8% CAGR, outpacing GDP growth of 3.5%

• Internet will grow at 20%• Web eclipses radio in 2008, according to

eMarketer• Internet will eclipse newspapers in US by

2011 according to Veronis & Schuler• Search and video advertising will propel

internet ad growth

Internet (Red) Surpasses Radio in '08

$-

$50

$100

$150

$200

$250

2005 2006 2007 2008 2009

Newspapers Magazines TelevisionRadio Cinema OutdoorInternet

Ad Media 2005 2006 2007 2008 2009Newspapers $119 $124 $125 $129 $132

Magazines 53 55 56 58 61Television 151 162 170 183 192

Radio 34 35 36 38 39Cinema 2 2 2 2 3Outdoor 22 24 26 28 30Internet 19 26 34 42 48

All Media $399 $427 $448 $478 $505

ZenithOptimedia Oct. 1, 2007

Global Advertising Spending

Web beats Radio!Warning:

Radio Uniform, Internet

fragmented!

US Video Advertising: Expect Huge Growth

• Video advertising to grow to $4.3 billion from today’s $775 million.

• Will become 11% of internet advertising from 2% today

• Taken together video and search will fuel advertising growth

• Video includes all forms, including embedded ads in video content

Compound Growth:

- Advertising 5%

- Internet: 20%

- Video Ads: 56%

Summary: Search &Video Drive Net Ad Growth

Sept. 2007 (Nielsen)

$0.2

$5.1

$0.4

$7.0

$0.8

$8.3

$1.3

$10.2

$2.0

$12.2

$2.9

$14.2

$4.1

$16.2

$0

$3

$6

$9

$12

$15

$18

2005 2006 2007 2008 2009 2010 2011

Video Search

11:1

4:1

Inclination to Experiment in New Media

21% to 40%12%

41% to 60%3%

61% to 100%1%

None10%

1% to 20%74%

Source: eMarketer, AAF, February 2007

% Spend

% Respondents% Ad Budget Targeted to New Media:

Video Ad Click Thru Rates 5x of banners

0.36%

0.39%

0.42%

0.49%

0.53%

0.59%

0.00% 0.10% 0.20% 0.30% 0.40% 0.50% 0.60% 0.70%

Consumer

Automotive

Entertainment

Tourism

Technology

Government

Banner ad CTR average 0.12% run of network

DoubleClick March 2007

II. Big Flies in the OintmentMeasurement• Panels vs. Server Logs• Style.com - server: 1.8 m,

panels: 400k-500k (Comscore, Media Metrics)

• Forbes.com – server: 11.6 m, panels 5.8m-7.5m

• Served ≠ arrived• IAB: No More Panels!• Web 2.0 makes this worse since

page views aren’t refreshed• Data being returned from these

new ad formats is not uniform • Makes return on spending

calculations difficult for media buyers

Formats• Differing formats and

behaviors make it difficult for advertisers to deal with new forms of advertising

• ABC.com, NBC.com, etc. have different formats

• Causes advertisers to reproduce ads for each service, reducing ROI

• Services should agree on formats and behaviors

• STARTUPS: Don’t Invent New FORMATS!

• Still leaves the data uniformity problem

Lack of standards increases buying & settlementfriction, thereby reducing market liquidity

III. Advertising Models in P2P

It’s a two-sided market:• Ad supported P2P services must understand

they are a “two-sided market”• Two-sided markets are not well understood (not

conventional supply and demand)• There is always a platform in the middle that

must ad value (buying, settlement etc.)• The inducements the service provides to

consumers and advertisers must incentivize the right behavior

Ad-Supported vs. Pay

• Predictions for online video are that paid will slightly exceed free, ad supported models.

• Consumers dislike ads, but in general dislike paying more.

• Free ad-supported models allow experimentation in deep catalog.

eMarketer: Internet video audience will grow 45.8 percent from 107.7 million in 2006 to 157 million by 2010.

eMarketer: Internet video audience will grow 45.8 percent from 107.7 million in 2006 to 157 million by 2010.

(FTI believes ad-supported models will perform better than this)

Four ad-supported models in digital content

1.Viral links initiate streaming with ads (YouTube, widgets)

2.Closed P2P with ads (Joost, BBC)• In-stream ads or• Client-side caching

3.Open P2P Teasers – not full content (Media Defender, Intent)

4.Open P2P Advertainment (Comedy Time)

P2P Advertising Pros & Cons

• Pros:– Potential to reach the greatest

audience– Delivers long-form content

cheaply making ad-supported content possible

– Client enables reliable ad measurement

• Cons:– Still largely misunderstood by

content owners and advertisers

– Unlike streaming, requires DRM

– Requires a client

P2P is virtually required under ad-supported models with long-form content….

Client Server P2P

Ad Revenue* $0.60 $0.60Bandwidth Cost ($1.00) ($0.10)

Gross Margin ($0.40) $0.50% -67% 83%

*30 ads at $20 CPM

Movie Download

Where Has All The Content Gone?

Legal P2P networks are plagued with obstacles to good content:

• Suspicions about P2P• Exclusive rights windows and ownership

confusion over digital rights• Networks who want to stream it themselves or

take most of the ad revenue (Joost gets 10%)• DRM virtually excludes Macs in most cases &

18-24 population is 50% Mac• Content owners focused on pay models in the

case of downloads – NBC is the exception

However, Ad Models Beat Some TV Models

Total 30 sec. Ad Spots 30Studios' Share (100%) 30CPM Rate $18.00MyWire Commission -35%Revenue per Viewer $0.35Revenue for 2MM Viewers $702,000

MyWire Revenue To StudiosMyWire Media*

Compares Favorably With Studios’ Barter Cable Model:

Total 30 sec. ad spots 48Studios' Share of Minutes (50%) 24CPM Rate $4.00Internal Sales & Dist. Costs -10%Revenue per Viewer $0.09Revenue for 2MM Viewers $172,800

Barter Economics - 2MM ViewersStudios Barter Syndication Economics

Analysis developed by MGM

Closed P2P

Summary

• Video advertising will grow enormously• P2P most cost effective delivery method for

advertising models• General problems of ad measurement and

format standardization hinder adoption• Content rights also hinder adoption, but

economic incentives will overcome these• Ad-supported P2P could dominate• Will find its way to TV displays in two years

Contact Us:

Bruce BensonSenior Managing DirectorNew York, NY

[email protected]

(646) 453-1289, office(208) 988-1613, fax(203) 606-3854, cellular

Mr. Benson is a senior managing director in FTI’s Economic Consulting practice and is responsible for leading FTI’s work in the entertainment and media industry. He has more than 20 years of professional experience in all aspects of media and technology. He has consulted in a broad range of areas including strategy and market planning, economic analysis, operational effectiveness, intellectual property management and IT preparedness.

Mr. Benson is a recognized expert in media and advertising and has helped some of the world’s leading companies achieve their strategic goals, including Sony Entertainment, Microsoft, Bertelsmann, Viacom, Young & Rubicam, Ogilvy, Harper Collins, NBC and Pearson. Mr. Benson has pioneered various new forms of digital distribution and advertising over the internet, and co-led conferences with key Harvard strategists on intellectual property management and copyright law. He has given over 100 speeches and presentations on digital distribution, the changing economics of media, and intellectual property management. Mr. Benson has submitted various patents on electronic book delivery, the internet delivery of ad-supported video content over peer-to-peer networks, and the anonymous financial settlement of virally distributed content.

Mr. Benson has led over 200 projects with clients and as a media executive both in the US and overseas. These projects have focused on strategic planning, revenue optimization, operational effectiveness and cost containment, internet distribution and large-scale IT project management.

Prior to joining FTI, Mr. Benson managed SAP’s entertainment & media industry where he led the development of their intellectual property management platforms and grew the sector’s revenue over 300%. Prior to SAP, Mr. Benson was CEO of iWeb, a global internet advertising company. Before iWeb he was EVP of Corporate Strategy at Young & Rubicam, SVP at Sony Music and a Partner at Price Waterhouse leading their entertainment & media practice in New York. Mr. Benson has served on the boards of various technology startups helping them devise and execute their go-to-market strategies.

Mr. Benson has his BS in Mathematics from the University of Houston.