• by Dave Morgan , Featured Contributor, December 19, 2013

I like to stay current on the research reports of the top equity analysts in media, marketing and technology. It’s part of my job as a venture-based entrepreneur. You always need to know how Wall Street views your sector and the players in it. You need to know where they think the trends are going and what assumptions they are operating on. Like it or not, those are what drives ultimate exit values, whether it is by eventually going public or joining a larger player in a trade sale.

Most importantly, reading the reports of top analysts makes you smarter.

A great example is the very thought-provoking research piece published earlier this week by Dan Salmon, a highly respected equity research analyst for media and Internet marketing at BMO Capital Markets. I think that his piece is one of the best I have ever read on how the digital video currency market is likely to play out.

While many are convinced that online video advertising will grow significantly in the future, likely converging with the television advertising market over time, it’s not so certain that the currency market for digital video will develop similarly. In his coverage of Nielsen, Salmon issued a downgrade to Market Perform, citing his concerns that the emerging ad currency market in online video might not be operate the same way -- or be as lucrative for Nielsen -- as the current television market, where the company has a strong position. Essentially, he believes that the digital video market might not support the same winner-take-all scenario that Nielsen enjoys in TV ratings currency, which returns currency fees to the company representing approximately 2% of total market revenues.

This is based, in part, on the belief of Google’s Neal Mohan that the currency in the digital video market will be established and owned more by industry-participant agreed-upon standards and practices, and less by third-party currency providers like Nielsen. Part of this thinking is that if online video moves to closed-loop, results-based reporting like search has, there won’t be as much need for neutral third-party measurements.

Now, Salmon caveated all of this in his note with a general reluctance to downgrade the stock, since he’s a big believer in Nielsen’s story and the long-term trends driving the company performance. For my part, while I think that Salmon raises a lot of great issues -- and ones that will certainly drive the economics of the emerging digital and eventual converged video ad markets -- I actually believe the opposite. I believe that the digital video currency market will be much bigger than the TV currency market, and that a market leader like Nielsen is likely to be able to extract more from the digital video market than the company does from TV today. Though, as with every firm operating in dynamic digital markets, it depends on Nielsen's execution. So it could also extract less in digital than TV.

Here’s why I believe this:

Standards in media businesses favor large players, even if not winner-take-all. Digital video may not end up with the same winner-take-all structure of TV, but the entire notion of providing a trusted “gold standard” to underpin the expenditures of tens of billions of dollars among thousands of market participants certainly favors a single large player per media. Just look at all other media markets in the U.S. (and outside the U.S.). The market may support more than one “core” currency, but probably one will dominate.

Digital video currency marketplace should capture more than the 2% of spend that TV currency gets. The TV ad sale -- and product -- is pretty simple. Virtually all TV advertising is transacted on gross rating points (GRPs) and sex/age demographics. There are not a lot of data points involved. However, that's not how digital video advertising operates today, or is likely to operate in the future. As audience-based, addressable and programmatic techniques enter the TV market at scale, campaigns will become much more complex and transactions will be based on many data points beyond those currently used. In fact, much of the value of individual ad spots will be about the data, not just the contextual content. Thus, we should expect that the core currency -- and “secondary” currencies -- would represent significantly more than just 2% of campaign spend. Most likely, the market will look more like the online world, where it’s not unusual for data provisioning and verification to represent more like 5%-50% of the cost of a spot.

Secondary currencies will need validation. Just as in online, where media owners sell against secondary currencies -- “in-market car buyers,” for example  -- buyers and their clients will want someone to verify the “post”-campaign report that they actually had ads delivered as promised to real people with those actual characteristics.

Large TV players will have initial advantages. Just as online video companies are beginning to adopt additional TV-born metrics like GRPs and demos, it’s likely that a converged market of digital video and TV ads will also be denominated by TV metrics in addition to native digital ad metrics. This will give TV currency incumbents the advantage.

Of course, I have an interest in how all of this plays out. My company has taken Web-like, data-driven, ad targeting approaches on TV -- because I believe that the digital currency marketplace will be bigger than TV, but built first in TV.

What do you think?