In early August, Foster’s Beer announced two changes. First, they’ll no longer try to be “Australian for Beer” and, second, they’re moving all their television ad spending online.

Although the decision only affects a $5 million ad budget, it’s a bellwether: Companies are flocking to online video ads as the way to reach customers.

Recent reports claim advertisers will spend $74 billion to buy airtime on TV in the U.S. for 2006. The online ad spend is set to reach $26 billion or 9% of the total US market.

“This [online video ads] could very well become the dominant form of online advertising … probably within the next 18 to 24 months,” says Bob Hanna, senior vice president of sales at Burst Media, which offers a network of publishers for advertisers.

A recent local online advertising report by market researcher Borrell Associates expects local video advertising to become a trackable category in 2007. And the biggest online ad opportunities currently revolve around real estate and automotive. Combined, these two categories comprise slightly more than one-third of all local online advertising, which is expected to grow 31.6 percent to a $7.7 billion category in 2007.

For its new online video ad push, Foster’s Beer is on Heavy.com, the online video site geared toward young males. Prior to Heavy content, which ranges from videos of scantily clad young women to spoofs on America’s Funniest Home Videos, you can find video ads for candy, beer and cars. But the edgier and more risque videos run without pre-roll ads.

Online Is Not TV

Heavy’s motto, “Because TV Sucks,” is instructive. For five years, it has been said that online content is constitutionally different from television: Advertisers will have to change their approach to creating video ads. A panel of online advertising, media and Web executives at the OMMA conference in New York in September agreed the most effective online video ads should be 15 seconds in length or less. The panel also promoted the idea of creating spots specifically for the Internet and digital media rather than repurposing existing television advertisements. That way the ads can be developed to enable consumers to click through to gain additional product information.

Advertisers may also have to be more open about where these ads end up as demand increases.

McKinsey Quarterly, an online business journal from consultant group McKinsey & Co., recently determined that in 2005, 80 percent of online video ad inventory was being used.

“The maximum supply of video ads is currently about $600 million a year – far less than future demand, which we expect to reach $1.4 billion to $3.2 billion in 2007,” the article “A Reality Check for Online Advertising” states.

Still, Randy Kilgore, chief revenue officer for Tremor Network, says, “The juggernaut called online video advertising is here to stay.”

And content providers are rising to the challenge. In August, Google, Viacom and YouTube made announcements about video advertising solutions. Two months later, Google purchased the less-than-two-year-old YouTube for a whopping $1.65 billion.

YouTube, which shows about 100 million videos daily, won’t disclose its advertising fees for visible ad spots. Google, at the end of June, also started testing an advertising model that features some video ads in a sponsored section. Google would also not disclose the fee for those video ads.

Not only are publishers opening up space, but technology solutions are also increasing; for example, Burst Media is now facilitating streaming video within banner ads, and Klipmart, a video ad solution heralded for interesting innovations in video ads for movies, was acquired by DoubleClick in June. DoubleClick is also the parent company of affiliate network Performics. EyeWonder and e-line Technologies are also in the space.

Despite television screens getting larger and flatter, viewers are enticed by the flexibility of on-demand viewing that the Internet enables.

One source for online video placement is on television network sites. Fox is streaming more than 40 episodes of prime-time shows online, with Toyota as the sole sponsor, and other networks are following suit.

That’s because most Internet users have watched online video; 25 percent watch regularly, at least once a week. Users regularly see online video ads and, according to the Online Publishers Association, 44 percent have taken some action after viewing an online video ad. Much of this reach comes during times when people wouldn’t normally be watching TV, given online video’s growing domination of the day-part audience.

And broadening the marketing window into daytime hours can be put to profound use. Thursday-night TV is no longer the last, best opportunity to influence consumers going into the weekend – that title is now held by the Internet on Friday mornings and afternoons.

Within these online shows, pre-roll, mid-roll and post-roll advertising is offered: just like on television. For instance, Heavy.com runs a static ad for Virgin Mobile for five seconds before one of their “Behind The Music That Sucks” shorts. There are also longer, more elaborate ads for Nike and Coors with production quality that is indistinguishable from television ads – and these ads are arguably as good as the content they precede.

Viewers are sometimes unable to fast-forward through “pre-roll” ads. Mid-roll ads crop up in the middle of a video. This format of advertisement would not be practical in a video short but makes sense in a streamed TV show. And, because content is limited, some companies offer ads at the end of videos – post-roll.

New Opportunities

One benefit of streaming prime-time shows and live sporting events is ad opportunities go to marketers who would traditionally advertise with these shows as well as new advertisers who could not afford network television ads. But online video, except in cases like Fox’s shows or news shows like Evening News with Katie Couric (which is being streamed online), doesn’t look like television and should not be treated like television by advertisers.

The bread and butter of sites like AtomFilms, Heavy and Yahoo Video is short video. Most video online is less than five minutes long, and advertisers can’t run one-minute commercials they’ve shot for television.

Companies who have a difficult time understanding that are “trying to apply an old media solution to new media,” says Forrester senior analyst Brian Haven. “In the long run, that’s just not going to be a very successful way to approach online advertising.”

DoubleClick’s vice president of rich media, Ari Paparo, notes that for online video ads, less is more. “You aren’t going to be able to repurpose TV ads – a 30-second ad doesn’t work online. Fifteen seconds is the maximum for a single ad unit.” Paparo suggests a new model: a short preroll spot of three seconds and then the content, then a long post-roll spot. He also believes interactive video ads show real promise, where you can telescope when it’s over to find out more – like for a high-involvement product like a car.

But companies who have strong-roots advertising on television, direct marketing companies, may have other challenges. Edith Bellinghausen, vice president of new media of Razor & Tie, an entertainment company that includes a record label and direct marketing operations, is watching where online video advertising is going but says the company is not ready to rush in.

Razor & Tie will try online video marketing soon “because we have to, but we’ll never move away from TV altogether.” The placement of their spots depends on the product; their children’s music CDs might, for instance, be advertised on Nickelodeon. The documentary Biggie and Tupac was advertised on MTV and VH1, among other cable stations. But sometimes a television campaign is more cost-effective and focused when it’s run on local cable stations.

Potentially, online video advertising could work in a similar way, for fo

cused campaigns for companies with lower marketing budgets.

Bellinghausen notes that YouTube already has videos posted by parents at shows for Razor & Tie’s Club KIDZ BOP. But when considering their children’s CD products, she points out another question facing advertisers who are looking to jump on the user-generated content bandwagon: Are advertisers protected from ad placement next to undesirable content?

“We’re intensely focused on them not ending up somewhere they don’t want to be,” insists Tacoda’s CEO Curt Viebranz. Tacoda sells ad networks based on behavioral segments and YouTube is now in their network. But Viebranz notes, “If you begin to drill down into YouTube’s site, we’re not there. We’re where you enter the site.” Because advertisers are sensitive to being placed near questionable content, Tacoda errs on the side of caution by placing ads near the home page, rather than in the murky underbelly of YouTube’s offerings.

The anarchic nature of user-generated video sites means that brands will have to deal with some uncertainty about placement. “Brands have to think a little more openly about what they’re associated with,” urges Haven. He also believes that online video advertising will cause a philosophical shift in marketers’ approaches: “What YouTube is really doing is issuing a challenge to marketers. You’re not going to just put an ad up on our site, you’re going to have to participate in our community and you’re going to have to be creative about how you do this.”

The shift will force marketers to think more like content providers and will ultimately result in more entertaining creative. The interactive, participatory aspect of the Internet was long held as the reason that television-like ads would not work online. But consumer-generated sites have enabled the ultimate level of participation: consumer-generated ads.

Get Users Involved

While the Coca-Cola/Mentos viral ad on Revver is a great example of a user-generated video that was eventually purchased by Mentos and accepted into their advertising arsenal, companies can go one step further thanks to CurrentTV. CurrentTV, the Al Gore-backed San Francisco-based company that allows users to submit content online for possible broadcast on television, also offers consumers the opportunity to create ads for L’Oreal, Sony Electronics and Toyota.

The first ad to be accepted for television was created by a 16- year-old and sanctioned by Sony. Viewers can rate the ads, which are posted on the site after being thoroughly screened. If the ad makes it to the network, the creator gets $1,000 and is given a licensing agreement. And if the ad makes it to cable or satellite television, the viewer makes $5,000 – for network television it goes up to $10,000.

CurrentTV’s president of sales and marketing, Anne Zehren, says it seems counterintuitive that major brands are the ones participating in this experiment. “At first, people thought the larger brands would have the most resistance because they’d have to give up control as brand guardians. But their marketing departments are now brand hosts; they’re craving innovation and the smart ones want to take a risk, as long as it’s not a free-for-all.” Zehren emphasizes CurrentTV’s commitment to making quality content, with greater control than one finds on other user-produced video sites.

Of course, users have been creating (unsolicited) video ads for companies and posting them on YouTube but most have yet to be formally embraced by the marketing departments of those companies. At the same time, it is certain that brands participating on YouTube’s brand channels will host their own contests to create video ads now that YouTube has announced the creation of brand channels as a way to monetize the site. Initially, sites like YouTube attracted movie advertisements – streaming trailers on such sites makes sense.

And short-content format is ideal for music videos: Warner Bros. has announced that they will promote Paris Hilton’s music debut on YouTube. But YouTube also seems to be a draw for small businesses, companies that would never have the budget for a television campaign.

Several months ago, Allison Margolin, an attractive, young, Beverly Hills-based criminal defense attorney, posted a video advertising her services on YouTube which voiced her disagreement with marijuana laws. The question is, how many people watched the ad before a Los Angeles Times article about her in August mentioned it?

Viral video is also a big deal. Lured by the prospect of reaching millions of consumers without also spending millions of dollars for television airtime or space in print media, companies have shifted more ad dollars to the Net. Video viral marketing has expanded from a negligible piece of the advertising pie to a $100 million to $150 million industry, researchers estimate.

“We’ve recently engaged top talent to help us build viral videos for brand awareness during the off-season, produce training videos to help our online partners to sell our product and to create product videos that sell the features and benefits of TaxBrain. All of these videos are intended primarily for online consumption,” Todd Taylor, manager of business development for TaxBrain, says.

Measuring Up

Right now one can only guess how many people are watching online, especially compared with the number of customers reached with television ads. There are two unresolved issues: online video advertising’s reach and the ability to track it.

“What’s missing right now is what is the return on investment and all the technology surrounding this. How are we sure it’s been placed contextually?” asks Forrester’s Haven.

But Tremor’s Kilgore, the former vice president for Dow Jones Online, disagrees and says, “Audience accountability is a significant advantage for marketers when they consider online video advertising.”

He claims that advertisers can count actual viewers of video when they are actively watching – not getting up for a snack. The other advantages are the ability to track completion rates and geographic data, frequency and targeting based on historical behavior and optimization of spots based on real-time effectiveness – where there’s no need to wait for the focus group. Also, with companion units, online video advertising can offer immediate user interaction. Advertisers can choose geotargeting, demo targeting, behavioral targeting, day-parting, etc.

Hotspotting

Five years ago, there was speculation that hotspotting would be the way to monetize online video advertisements. That is, brands would partner with content creators for product placement in online videos. Viewers could click on items on a counter or an actor’s sweater and be whisked off to a site to purchase it. Hotspotting is finally here, but not widely adopted yet. But if a viewer were watching some cartoons online, would he really click on the Coors ad to get a six-pack of beer delivered to his house? Hotspotting only works for particular products.

Hotspotting did make sense, however, to French clothing company Shai. Their online porn video ads have caused a minor sensation, but not necessarily more customers. Viewers can click on the clothes the actors are wearing as part of an interactive catalog. Before they take them off, that is.

With improved measurement capabilities, big brands jumping on the bandwagon and cheaper costs, video and video advertising are becoming a staple of doing business.

DIANE ANDERSON is a senior editor at Yoga Journal. She previously worked for the Industry Standard, Brandweek, HotWired and Wired News. She lives in San Francisco.

KATHI BLACK is a professor of philosophy (ethics) at The University of San Francisco. She was previously an online entertainment reporter and senior researcher at the Industry Standard.