What will the economic downturn mean for the online video market?

With the past few weeks of news cluttered with bank failures, bailout talks and budget crunches, I've heard a lot of muttering and guesswork about what the next year holds for online video in light of the economic conditions. Ask most CEO's of online video firms about the next year, and they'll remain cautiously optimistic and maintain that their company is still poised for success despite a credit crunch and probable stagnant or receding '09 ad spends.

As the editorial staff debated the Fierce 15 Top Movers and Shakers in Online Video, I started to consider which companies could benefit from the current situation, and which might be hurt. I had a good talk with James McQuivey, vice president and principal analyst for Forrester Research, and gained some interesting insight into online video's prognosis.

One interesting angle is the oft-documented trend for people to spend more money on entertainment, especially low-priced entertainment, during economic downturns. With the proliferation of free online video sites like Hulu, Joost, Veoh, and, of course, YouTube, these aggregators could see a significant uptick in business during tough times. McQuivey agreed that the low or no-cost online video inventory offered a great and likely substitute to other entertainment that might prove to be unaffordable in lean times. Also, since these sites also offer exclusive partnerships that provide high-quality cable and premium network content, subscribers to cable may think twice about that bill and opt to view their TV and video content online.

I initially thought that any site with heavy-dependence on advertising for revenue (which is many) would probably see income slack or even decline, as companies ad budgets dwindle and they opt for more traditional ad forms seen as safer bets. McQuivey took the opposite approach, however. He posited that the recession, as long as it is not too profound or prolonged, could drive ad buyers away from mass media spends, in favor of the much more quantifiable and targeted advertising over specific, professional online video content.

"A recession is really going to hurt the up-and-comers more than the established players," McQuivey said. "It's going to hurt fringe projects, as the extra money that fueled experimentation just isn't available any more."

Companies who offer white-label solutions could come out OK, as the value proposition for SMB video integration becomes more evident. Reasonably priced models that can demonstrate ROI should continue to grow throughout any recession period. Companies that provide tools or services, such as steaming support or content delivery, may find a pinch as prices get slashed in a highly-competitive market.

Overall, the growth prognosis still looks strong for online video firms, especially for companies with proven revenue channels and low overhead. McQuivey still offers a bullish projection of $1.7 billion in online video ad spending in 2009, using surveys of advertisers projected budgets to account for all revenue generated, including product placement and companion banners. Online video companies may not thrive during this gloomy economic period, but most should emerge intact and poised to capitalize on the inevitable upswing, since most offer innovative products and fresh takes on tired models. 

- Pete