NEW YORK (TheStreet) -- The movement of advertising dollars to online video may be reaching a tipping point.
Even as the country's broadcast networks, led by CBS (CBS) , continue to profit handsomely from a business based on advertising and so-called retransmission fees from local station owners, the future is clear: advertisers are accelerating their move to online video.
The reasons are simple. The current generation of young people, known in marketing jargon as millennials, are watching cable-TV much less than previous generations. MoffettNathanson analyst Michael Nathanson called summer television ratings "terrible" in a note Tuesday, pointing to aggregate prime time ratings down 5.1% in broadcast and 9.8% on cable over August.
Millennials have all but migrated to Internet-based services such as Netflix (NFLX) and a host of digital sources for news and entertainment. For young people addicted to their handheld devices, online media allows for an interaction television can't match.
And marketers are increasingly following millennials. Over the second quarter, advertising at broadcast networks including Fox, ABC and The CW fell 7.2%, according to media monitoring group Kantar Media. Meanwhile, online spending for just desktop display climbed 10% during the first six months of the year, Kantar said. Looking ahead, media research firm Magna Global says digital media -- video, display, mobile -- will be the largest advertising category in the U.S. within three years, amassing $72 billion compared to a forecast $70.5 billion for television.
Spending for cable and broadcast advertising is being trimmed to free up money for digital video, says Toby Gabringer, head of AOL's (AOL) , video platform Adap.TV. AOL, which has invested nearly $600 million in online ad technology over the past year, said that 40% of respondents in a recent survey of advertising agencies and brands said they plan to increase digital spending at the expense of their broadcast budget. Another 35% are moving cable-TV money to online video, AOL said.
"This is the first year where we really saw an inflection point in the data," Gabringer said in a phone interview. "In the last six to nine months, we've really started to see more momentum. Video is now a real player in terms of sights, sounds and motion from the view of the brands. [Advertisers] don't see it as ancillary to television or an add-on."
As total advertising spending is expected to soar 113% to $12.7 billion by 2018, according to eMarketer, digital video will nearly match television dollar for dollar for increases in ad spending, said the Internet research firm
The shifting of television ad spending to online video certainly doesn't portend the demise of television even though overall broadcast TV viewing is in decline. At present, networks continue to generate the bulk of their revenue from retransmission fees paid by pay-TV providers and local television-station owners.
Even as digital video chips away at television, the biggest losers in the ad industry's reallocation are print, outdoor and online banner ads, David Hallerman, an analyst at the Internet research firm eMarketer, said in a phone interview.
Still, digital video is expected to accelerate as more consumers embrace a multi-device mode of media consumption.
A weakening picture for television advertising became apparent during the spring "upfronts" when networks showcase their fall lineups in hopes of locking in advertisers. This time around marketers didn't spend as they have in years past. Dollar volume toppled 6.1% to $18.1 billion, according to industry publication AdWeek. CBS, which typically sells 79% of its advertising inventory during the upfronts, managed between 74% to 75%, the company said.
The networks, though, are downplaying any signs of vulnerability. CBS CEO Les Moonves, speaking last week at Goldman Sachs' annual media conference, said that advertising "softness" over the spring and summer was a temporary symptom of the sluggish economic recovery. Walt Disney (DIS) Chief Financial Officer Jay Rasulo also asserted at the conference that while ad spending has been uneven, ESPN is seeing increases above 2013, and he expects that ABC's numbers to revert to normal.
"Advertisers have, over the last few years, been holding on to their dollars longer into the year," Rasulo said. The good news is that by year end they will have still spent those dollars."
That's news broadcasters and their investors would love to hear.
--Written by Keris Alison Lahiff in New York.