IP infrastructure and targeted ad insertion: a lucrative combination

Over-the-top (OTT) distribution, which is of course IP-based, is quickly becoming the preferred video delivery method for millions of consumers, and a state-of-the-art OTT distribution operation is now a business imperative, says Y. Fisher

Most media industry professionals now understand and acknowledge that IP-based, commercial off-the-shelf (COTS) equipment represents the future technology foundation of the media and entertainment industry. Accordingly, broadcasters and media companies are now beginning to turn their attention to transitioning their workflows to more agile and flexible environments, as well as exploring new monetisation opportunities made available through an IP-based infrastructure.

Over-the-top (OTT) distribution, which is of course IP-based, is quickly becoming the preferred video delivery method for millions of consumers, and a state-of-the-art OTT distribution operation is now a business imperative for nearly all segments of the media industry ecosystem. OTT delivery figures to play a big role in bringing some relief to media companies’ most pressing pain points, including the emergence of new competitive threats, eroding revenue growth due to audience fragmentation and unabating cord cutting, which grows more severe each year.

OTT delivery offers media companies both a means to reverse these trends and a mechanism for tapping into new monetisation opportunities, including data-driven or targeted advertising which can be focused on specific regions or even individual consumers. That’s because the one-to-one, bidirectional nature of content delivered as fragments over HTTP-based networks leveraging adaptive bitrate (ABR) technology empowers distributors and content providers, including broadcasters, to significantly improve the efficiency of their video delivery and ad insertion infrastructures.

Distributors and broadcasters that unify their distribution operations by leveraging the next-gen networks they are building to deliver content to internet-connected devices, including PCs, tablets, smartphones and connected TVs, are opening up new opportunities to reduce expenses and increase revenue.

For starters, by transitioning to a single HTTP-based architecture, all transcoding can be implemented in software on a single platform, and media companies would no longer be required to perform multiple transcoding operations within their networks. A reduction in transcoding operations lessens both capital and operational costs, while at the same time improving video quality through the elimination of quality degradations and delays that accompany most processing operations. The adoption of a single HTTP-based architecture would also enable all storage operations to be consolidated into a single workflow for optimal use of disc- and tape-based resources.

But the biggest benefit of moving to an OTT distribution model for many media companies is the ability to significantly expand monetisation opportunities by tapping into the capabilities of dynamic ad insertion (DAI) functionalities. By distributing content over IP-based terrestrial backbones, broadcasters can create ideal conditions for inserting regionally or personally targeted ads wherever the enabling software mechanisms are positioned in their own or affiliates’ facilities. All processes underlying the OTT infrastructure, from transcoding to encryption, packaging and all ad operations, can be controlled by a dynamic ad insertion ecosystem.

DAI enables near on-the-fly substitution of any ad on a per-stream basis. That gives broadcasters and distributors the power to replace generic ads with targeted or more relevant ads based on a number of factors, including geography, the content being viewed or known demographic information about the individual viewer, such as income or interests. In addition to ad replacement, the DAI ecosystem can also provide alternative content replacement or ‘blackout’ content, since technically alternative long-form content can be treated as a long ad.

The Power of OTT

The ability of OTT distribution to support ad targeting holds the greatest promise for service providers, arming them with the potential to increase revenue per impression and create new monetisation opportunities.

Let’s use the example of 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 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 companies $20 CPM (cost per 1,000 views), earning a total of $60.

After some consideration, VSP decides to employ targeted-ad insertion. They explain to their advertisers that they can reach their desired targeted audience and pay the same $20 fee. With a targeted campaign, the pet ads are sent only to the appropriate 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 3,000 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, a significant increase. However, if VSP can lure other advertisers to its audience, such as car advertisers willing to pay an untargeted rate of $20 CPM, it can potentially generate really significant revenue increases.

In the real world of broadcast advertising, a few things differ from this fictitious model. First, dog advertisers may not mind having their ads go to cat owners – they may be building a brand or planning 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 monetised, 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.

In conclusion, targeted ad insertion puts ads that are relevant and likely to be more effective in front of customers. It raises CPMs on a smaller set of ad opportunity inventory and creates new ad opportunity inventory, raising video service providers’ overall revenue. It also potentially reduces the overall spend per campaign for advertisers, as they reach smaller audiences that still contain their target audience. Finally, it drives its own adoption by creating market pressure on service providers to retain their revenue.

The transition of workflows to IP-based, HTTP infrastructures and the related rise in the prominence of OTT delivery are providing media companies with the ability to offer new services and to put in place new monetisation models, including targeted advertising. This newfound agility and flexibility will be a catalyst for the continued transition of traditional media operations to IP-based environments.

Y. Fisher is CTO MVPD (Multichannel Video Programming Distributor) at Imagine Communications.