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AOL cues up free video

ISP foresees broadband bonanza and plans to offer on-demand video in coming weeks, News.com has learned.

America Online is set to introduce a free, ad-supported video service, CNET News.com has learned, in a move to diversify its business and seize on a burgeoning sector of online advertising.

The Internet service provider, a unit of Time Warner, will open AOL Video to the public in the coming weeks, Tom Bosco, AOL's director of broadband sales development, said in an interview Thursday. It also will debut Netscape Video, an on-demand video entertainment service, before the end of the year. The moves will follow last month's launch of video programming on AOL Instant Messenger.

News.context

What's new:
America Online plans to introduce a free, ad-supported video service in the coming weeks.

Bottom line:
The Net provider foresees a broadband bonanza and is girding for more demand from consumers and advertisers for a TV-like experience on the Internet.

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The new services will feature on-demand video entertainment, with advertising spots similar to those on broadcast television. Some clips will be freely accessible over the Web, while others will be available only to AOL members. Bosco said AOL expects to create an audience of 100 million or more per month for all three video services together.

"Content is king," said Bosco, who six months ago left Microsoft's MSN video unit for AOL. "AOL has access to programming, and that is the name of the game right now."

AOL's video play comes as the Net giant is struggling to evolve from its roots as a dial-up Internet access provider. It is also trying to offset subscriber losses by building a free advertising-supported Web destination, much like rival Yahoo. Key to that strategy is playing up the content and programming ties it has to a media conglomerate parent, as well as its links to Hollywood, so that it can attract an audience large enough to draw in big advertising dollars.

Yahoo and MSN are eager to do the same. The Web portals, among others, are girding for more demand from consumers and advertisers for a TV-like experience on the Internet by lining up content partnerships and promoting new programming.

Call it a perfect storm for Internet publishers: With greater availability of high-speed pipes, consumers are growing accustomed to watching video of news, movies, music, games and original programming on the Internet, either at home or in the office. That, in turn, has opened the opportunity for commercials to come online, and give TV advertisers a new way to spend their money in the face of threats such as ad-skipping devices.

TV-like commercials make up only a sliver of the online advertising pie for now. But that could change as big media companies, such as pharmaceuticals giant Pfizer, begin to allot more of their budgets to services like MSN Video. Daytime TV advertising behemoth Procter & Gamble also has jumped in, advertising on AOL's Video service.

"This is a tipping-point year, in terms of the interest of advertisers starting to move traditional budgets online, and video is an important piece of that," said Mark McLaughlin, an ad sales director for Yahoo's broadband strategy. "The tipping point is also in terms of the scale of people using video."

AOL and many others are placing a bet that TV-like ads will take off as the overall ad market has rebounded. Online ad sales are expected to grow annually from about $9 billion in 2004 to more than $11 billion next year, according to research firm eMarketer. Many Internet executives and investors expect video advertising to be a big area of growth in 2005, but to date it has been less than stellar.

So-called rich media advertising, which includes video and streaming advertising, accounted for only 8 percent, or $370 million, of online advertising sales in the first half of this year. That was a rise of 24 percent compared with the first six months of 2003, and in contrast to the booming search sector's growth of 93 percent year over year.

"Rich media has been hiccupping along because of the cost involved in developing the (ads) and testing" their effectiveness, said Pete Petrusky, a media analyst at PricewaterhouseCoopers. "That's changing because broadband is reaching critical mass (in the United States), at 30 million households, and that's going to be a key threshold because it offers brand advertisers the ability to provide a rich experience."

Danny Fischman, director of ad sales for online video site iFilm, said that already in the fourth quarter the company has seen a dramatic jump in demand for video ads. The company had a record 2.3 million people view a clip of Jon Stewart's contentious appearance on "Crossfire."

Many online publishers are producing new or additional video to capitalize on demand. The Wall Street Journal Online this week introduced a video center to feature all of its multimedia news and give advertisers a new sponsorship opportunity. Amazon.com even recently started producing original video programming for the holidays. Items available for sale on Amazon have product placements in the films and appear in the credits.

A huge piece of the video equation has been in the viral nature of original clips like the Bush-Kerry parody cartoon from JibJab, which drew 80 million streams for partner AtomShockwave's Web site. Previously, AtomShockwave's highest-performing video, Aardman Animations' "Angry Kid," was viewed by 20 million people. It had such a spike that it couldn't sell enough ads to keep up.

AtomShockwave began selling video ads in 2000. It was an uphill battle to woo advertisers at the time because the company often didn't have actors or music rights to transplant TV commercials to the Web. Now agencies and advertisers secure rights with the Internet in mind, and have started filming several different versions of ads for Internet and TV audiences.

In another sign that the online industry is reaching out to TV buyers, AOL sold online video advertising to TV media buyers during the time frame of "upfronts," or the period when TV networks presell placement for their shows. Others, including ABC and CBS, sold online advertising during the upfronts as they sold their TV time.

Costs for video advertising range from $10 to $50 per thousand ads shown, depending how targeted the ad is and the property. Consumer response is healthy. Publishers see anywhere from two to 50 people out of 100 responding to video ads in some way. But more than anything, early research has shown that the effect of streaming video is the same as TV commercials in terms of helping to imprint a brand message on consumers.

AOL Video, whose launch follows the debut of a revamped AOL.com site, will ramp up slowly with programming and advertising. The company plans to feature original music and concerts, such as Rod Stewart live, sports shows, news and original programming. The ads will largely be 15-second spots that run before every other program or clip, but the company will allow 30-second spots as well through 2005.

Yahoo is busy inking partnerships and selling ads for Yahoo Launch, its music video service. And of all the online companies, AOL and Yahoo at least are vying to make ties in Hollywood for original online programming that will compete with television and cable. Yahoo recently hired former ABC executive Lloyd Braun, and AOL is courting the industry, too.

In only 10 months, MSN Video has started serving an average of a million streams a day, with about 5 million visitors a month. The company has been careful about opening up the service fully to advertisers yet, selecting only a handful of top TV advertisers to ensure the experience is good for consumers and advertisers. It has only been selling the video ads more broadly since August.

"We're quickly building a small, cable-sized TV audience," said Steve Moss, general manager for North American ad sales for MSN.