The digital video market, being nascent, promising and hot, is the equivalent of a precocious young celebrity. They both attract a lot of attention, press coverage, and debate concerning which projects and relationships are worth pursuing. Of course, I have my own opinion, but just about digital video and not celebrities.

If you divide the digital video market by delivery methods (streaming or downloaded) and business models (consumer paid or ad supported), four sectors emerge.

Companies within the ad-supported streamed quadrant (upper left-hand corner) have received a lot of criticism lately for basically giving away for their content. Although YouTube attracts between 40 to 60% of total internet video streams the company places ads in only about 9% of these streams. Hulu has been somewhat more successful since it’s selling about 60% of its ad inventory, but the site has much less traffic, and runs only two minutes of spots per 22 minute program (a quarter of the standard amount on television). Hulu’s annual sales are running at about $120 million, a third less than estimates at the beginning of the year.

Unsurprisingly, there is much speculation about Hulu beginning a subscription service option, which would extend its presence towards the lower left-hand quadrant, along with the likes of Netflix and the “TV Everywhere” project currently being developed by Time Warner and Comcast. Such a business model might offer Hulu a greater revenue per viewer than what advertising currently yields, even at a high $50 CPM. Interestingly Amazon’s versatile Unbox service offers both paid streaming and downloaded options, placing it across both the lower left-hand and right-hand quadrants. Just within the paid downloaded quadrant iTunes is probably the biggest player.

Most of these companies do not yet have mobile video platforms. The only options seem to be YouTube, iTunes and Podcasts. Hulu may have an iPhone App in the works, but it seems to be on hold until their subscription service launches. This would leave Podcasts as the only mobile ad-supported downloaded service. It seems to me that this is an opportunity worth exploring.

Mobile video content has a strong value proposition. It offers portable viewing of video, anywhere and at anytime, and doesn’t require a network connection which can very unreliable or inaccessible in many situations. Mobile video also offers a higher level of viewer engagement than with television or computers where consumers can change channels or application windows. The only catch is that in order to make the most of this, you would have to “pause” or disable the fast-forward button during commercial breaks. Of course, the downloaded content would also have to an “expiration date,” as is the case with any video content, but this could be easily implemented with mobile devices just as Apple has restricted the length of time for viewing rented movies from its iTunes store.

I posted my idea for an ad-supported downloaded video on a recent article by Dan Rayburn concerning Hulu’s possible iPhone app, and how Hulu could opt for this route . His response:

Sure, it’s possible, but I don’t think likely as the consumer experience would suffer and the content would not be available instantly.

I respectfully disagree since consumers do want to be able to watch video content without relying on AT&T’s 3G network. Perhaps in the long term when mobile networks switch to 4G downloadable content would not offer the same value, but it remains to be seen how quickly mobile networks upgrade, and how data pricing plans also evolve. I also believe that consumers would be willing to temporarily cede their FF button in return for the right to see the latest episode of their favorite TV show anytime and anywhere. Viewers don’t mind sitting through the unskippable commercial breaks in Hulu and this proposition would be fairly similar.

The most important thing to remember is the immense market potential of mobile video. According to Nielsen, consumers currently spend about 3.5 hours per month watching video on a mobile device; that’s only 1.8% of the total time they spend watching video. Everybody is expecting this market to explode and the sooner or later a diversity of video options will be offered to satisfy a range of demands. Perhaps the downloaded ad-supported models won’t be the majority, but they will certainly be available. The only question is which companies will offer the service.

Yesterday an article in The New York times highlighted the results of a media industry report from the private equity firm Veronis Suhler Stevenson (VSS):

An interesting shift occurred in 2008, the report said. For the first time, consumers spent more time with media they paid for, like books or cable television, than with primarily ad-supported media, like newspapers and magazines.

The VSS report also forecast internet media and subscription television to be sectors of strong growth during the next four years. These trends echoes the results mentioned in another report released a few weeks ago by Strategic Analytics (SA), which forecast that the global paid online video segment will surpass the ad-based online video segment in 2009. The SA report also forecast stronger growth for the paid segment during the next four years.

Both studies partly attribute the shift in balance towards paid content to the recession, which has stifled advertising budgets in both traditional and online media. In any case it is still surprising is to hear that paid video content will be a bigger moneymaker than ad-based content. While some companies like Apple and Netflix have made headway in the paid video segment a lot of studies have indicated that consumers prefer ad-supported models; an IBM study in November 2008 indicated that 70% of consumers prefer ad-supported models over consumer-paid models. Another study by Deloitte yielded similar results, indicating that 67% of US consumers aged between 25 and 34 would “be willing to be exposed to online ads in exchange for free content.

Although the majority of consumers would opt for ad-based video models, perhaps the smaller pay-to-watch segment is willing to outspend advertisers as a whole, in return for the following benefits:

• Zero or less advertising
• Access to a wider range of content (recent movies, old TV episodes, etc.)
• Ownership of the material or a longer viewing window
• Option to watch across more types of hardware (computers, DVR, mobile, etc.)
• Higher viewing quality

Given these trends in these reports during next two years the online community will see an expansion in paid video content. The ‘TV Everywhere’ partnership was recently launched by Time Warner and Comcast, allowing Comcast subscribers to view video online from TBS, TNT, CBS and HBO. I am also wondering if ad-based sites like Hulu will add paid content options; perhaps a subscription service similar to Netflix for accessing all the episodes for a series. Will hybrid sites emerge, offering both ad-based and pay-to-watch options? It is probably to early to guess which models will win (Hulu was launched only 17 months ago; see graphic above) but it is probable that a greater variety of options will emerge, resulting in a more choices and a very dynamic market.