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What Does Net Neutrality Mean for Video Advertising?

  |  August 26, 2014   |  Comments

During the ongoing discussions about the future of net neutrality, one important aspect needs to be addressed: How will changes to the status quo affect the video advertising market?

As the FCC prepares to host a series of Open Internet Round Tables next month on the controversial topic of net neutrality, I hope a so-far-overlooked angle rises to the surface before any decisions are made.

That is, how will any change to the net neutrality status quo affect the video ad market? The bulk of the present debate, of which there's been no shortage since changes to the system were first proposed earlier this year, has focused on content. Mainly, how content will be delivered to consumers over the Internet if so-called "fast lanes" are provided to publishers for an extra fee.

But video ads take up a good share of bandwidth themselves, and the speed at which they are delivered has just as much impact on the market for online video as the content against which they are placed. The same Internet pipes used to deliver entertainment content are used to deliver ads, often at the same time, and that has huge implications. They include...

Cost

Will the cost of video advertising increase if a multi-tiered distribution system is created? And if so, how will those increases roll out? Larger content publishers already have an advantage in their sheer size of distribution, which allows them to charge lower per-view rates that they make up on scale. Smaller publishers could find themselves in a position of charging even higher rates just to cover the increased cost of gaining access to higher-speed lanes.

Facilitation

Will ads even be subject to the different delivery tiers, or will that remain a level field? If not, could some ad networks get higher-speed access than others? Could publishers choose to pay for higher-speed ad delivery, but not the content (and vise-versa)? Delivering ads, particularly video ads, takes time, and a slowed-down ad delivery impacts the speed of the content the viewer wants (particularly with pre-roll video). Could ISP charge different rates for facilitating delivery of content over delivery of ads?

Model

Will the revenue models of online video shift? If more ads means more bandwidth costs, do publishers shift to a more subscription-based model instead? And if so, how does that affect unique viewers, view rates, and the overall video market? Will we see fewer ads, or more? Will there be a combination of ads and subscriptions? How will customers respond to that? Will viewing rates go up or down?

Effectiveness

What's the impact on ad targeting? Ads are ads are ads, but targeted ads based on user data and behavior are more valuable. The same entities given the opportunity to charge more for bandwidth tiers (i.e.: the ISPs) have access to some of the best user data needed for such targeting. Do they become the new ad-broker in a world with weakened net neutrality rules, and if so how does that affect existing ad networks?

These are important questions to ask because the level playing field of the existing Internet is precisely the reason why newer start-ups have been able to challenge the incumbent networks. Would Maker Studios, Twitch, or Hulu ever have reached the scale they have today if they had to pay for the same bandwidth speeds as Time Warner, NBC, or Viacom? Not just for the entertainment they deliver, but for the ads they support?

Of course it's impossible to answer these questions without knowing what the rules will be. But for a clue of what might occur, we can observe what's happening on mobile networks, where there is no net neutrality today. Mobile operators are free to strike any deal they wish with any content provider. Recently, we've seen the emergence of what's called "zero-rate" deals. Essentially, the content provider eats the cost of the data plan, so the end-user doesn't have to.

For example, T-Mobile is giving sweetheart deals to select music service providers under which music streamed from those services won't impact a subscriber's mobile data usage. Services like iTunes Radio, Spotify, and Pandora are benefitting from the deal, while competitors like Beats Music and Rdio are not. A similar deal was introduced by Facebook and Virgin Mobile, who joined forces to market a Facebook-only phone sold through Walmart. For a low monthly fee, users can get limited talk time, but virtually unlimited messaging and other social features, so long as that activity takes place via the Facebook app and not others.

It's a great deal for the customer, but it means only services with the pockets to cover this fee get to play. By definition, smaller services with shallow pockets are left out, and could be forced off the radar as a result.

Considering the rapid growth of entertainment video consumption on mobile, these developments are very much the canary in the coal mine. A recent study by Vdopia found a 28 percent increase in the number of people reporting viewing entertainment on their smartphones in the last year. They were also twice as likely to view entertainment ads on their smartphone than on other devices. And 84 percent of the entertainment-related mobile ads used video or other types of bandwidth-dependent rich media.

If this kind of content - and let there be no doubt...video ads are content - will soon require an extra fee to deliver, then the online mobile video ad ecosystem as we know it will change forever. Apps are the new "channel," as it relates to video consumption. It is because of the net neutrality protections in place historically that we have the wide, diverse range of apps we see today. But if extra payment becomes necessary to compete with the big dogs, the small players may never see the light of day to even have that chance. The gatekeepers will return and will keep their doors closed to anyone but the highest bidders. The popular become more popular, and the emerging will have a steeper hill to climb.

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ABOUT THE AUTHOR

Frank Sinton

Frank Sinton is the CEO of Beachfront Media, a video solutions platform for publishers, advertisers, and enterprises. Previously, he worked for Sony Pictures Entertainment as Executive Director of Architecture. Beachfront Media is the everywhere video company that provides solutions for video discovery, video syndication, and video app development for managing and monetizing video applications across screens and devices. For More information, please visit www.beachfrontmedia.com.

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