I came across the following excellent post by on MediaPost's Video Insider Column. Tod is the CEO and Founder of Brightroll.com which powers video advertising aggregation. This is a great post and goes through great detail to explain the concerns that many ad buyers have with pricing for Pre-Roll Video Ads. Many feel that it is overly expensive and as a result, there is slow adoption. However, Tod explains how this has a lot to do with incorrect perceptions and that the facts suggest that pre-roll advertising costs are accurate and not overpriced.
Below is the post:
Traditional broadcast buyers continue to express concern that pre-roll inventory is overpriced, particularly when compared to television. This perception impacts the online video market by slowing adoption and reducing budget allocations. However, the facts suggest that pre-roll inventory is accurately priced and much of the perception is based on an apples to oranges impression comparison, or what I call the M&M Problem.
While the dynamics of supply and demand exist in all online ad markets, most categories are demand-driven because of enormous amounts of inventory oversupply. However, pre-roll video is different. On the demand side, pre-roll video is rapidly emerging as the single most desired and highest performing online branded ad unit on the Internet. On the supply side, publishers have been slow to integrate pre-roll and to drive traffic to their video sections, and high quality inventory continues to be fundamentally limited.
Pre-roll demand is primarily driven by the strong general interest in video and the units specific strengths with regards to high volume distribution, guaranteed impression capabilities and burgeoning publisher support. Further increasing demand is the fact that pre-roll is outperforming other video units on most performance metrics. For clients targeting commercial views, pre-roll is by far the best value on a cost-per-view basis. In fact, in-banner video is often 10 times or more expensive on a cost-per-view basis, unless of course it is auto-played which comprises the comparison. For clients targeting clicks, pre-roll delivers five to 20 times the click-through rate of comparable banner or sponsorship units. Lastly, multiple studies of online video have further demonstrated that pre-roll scores strongly in measurements of brand recall and brand lift.
On the supply side, high quality pre-roll video inventory is fundamentally limited. Publishers are getting much more savvy in regards to highlighting video content and driving traffic to the video section of their site, but it is simply not driving enough impressions. Lower tier or high volume user-generated publishers are trying to repackage their inventory in hopes it will be perceived as high quality, but the market is simply not valuing this inventory in the same way. The supply problem will likely be solved, but it will take time.
So, is pre-roll inventory cheap or expensive at its current price? Supply and demand would suggest it is correctly priced but it is more interesting to consider pre-roll pricing on a relative basis, such as compared to television. Here is where disconnect occurs. The standard argument would suggest that prime-time television inventory is priced around a $15 CPM and high quality pre-roll inventory is priced at around a $30 CPM, so online is clearly overpriced. However, the "M" in the CPMs of television and pre-roll are fundamentally different, thus creating the M&M problem.
First, television impressions are based on overall viewing statistics — but a significant percentage of viewers skip the ads, are out of the room or simply don't watch them. Pre-roll impressions are user-initiated, so the actual view-per-impression ratio is much higher. Second, online video impressions include companion banners that stay on the page during the play of the subsequent video. This additional impression is not counted as an impression in the pre-roll CPM calculation and, if so, would decrease the CPM price of pre-roll. Lastly, online video ads are delivered to active viewers who are awaiting a piece of content that they personally selected. No study has quantified the difference, but the value of this impression is clearly higher than a passive viewer.
When pre-roll CPMs are adjusted to address the M&M problem, pre-roll and television pricing appear comparable. These facts, along with the high performance metrics of pre-roll and increased support from publishers, suggest that the pre-roll unit is going to continue to gain traction. In fact, I predict advertiser demand will grow faster than inventory supply in some categories and we will find pockets of pre-roll inventory that actually go up in price significantly over the next twelve months. If that happens, pre-roll pricing may end up being overpriced after all.