By Colin Knudsen and Chris Ensley

U.S. online ad spending in 2010 is projected to have reached a record $25.8 billion, up nearly 14 percent from 2009. This is the first year that more money was spent on online advertising than in newspapers and leaves the online industry second to television in terms of annual ad spend.

Advertising growth online is fueled by audience trends and ROI, and the statistics show that consumers are spending an increasing amount of time online and using mobile devices.

Consumption of media
According to a recently released analysis by eMarketer, in 2010 the average U.S. consumer spent 11 hours each day – 660 minutes – interacting with major media including some double-counting due to multi-tasking and simultaneous usage, up from 10.6 hours in 2008.

Television and video viewing – not including online video – captured the largest share at 40 percent of time spent in 2010 – the same as 2008 – with the Internet representing the second largest share of media time at 23.5 percent in 2010, up from 21.5 percent in 2008.

Mobile’s share grew as well, from a 5 percent share in 2008 to a 7.5 percent share in 2010, and time spent with mobile devices is growing faster than all other media.

The three screens – TV, Internet and mobile – represented 71 percent of media consumption in 2010.

These media offer reach – more progress is required in mobile – and opportunity for frequency.

As the digital world has expanded beyond the TV and desktop, consumers can now choose from an array of devices capable of satisfying all or some of their need for anytime-anywhere access to friends, news, entertainment and information.

The balance of this report reviews the key audience statistics and trends for each of the three screens.

Television rules
There are approximately 116 million TV households today in the United States and an associated population of 294.7 million individuals over two years of age.

TV penetration in the U.S. is nearly ubiquitous and more consumers watch TV for more time than any other medium.

HD and time-shifting appear to be bolstering TV consumption.

More than half of U.S. TV households now own an HD television and receive HD signals, while approximately 38 percent of U.S. TV households own a DVR, allowing for more time-shifting and further diminishing the stickiness of traditional appointment TV.

Interestingly, the 18-34 age demographic nows watches live TV only 35 percent of the time, while the 50-plus demographic watches live TV 55-plus percent of the time.

The Television Bureau of Advertising (TVB) noted recently in a presentation to media investors that traditional live TV still counts for approximately 93 percent of all video consumption.

We are excited about business opportunities related to video consumption on the Internet and on mobile devices, though traditional live TV will remain the king of video for quite some time.

Consulting firm Deloitte believes that “push beats pull in the battle for the TV viewer” and that in the near term, pushed content will remain the predominant mechanism in which viewers receive video content, arguing that picking and choosing what to watch on TV on an a la carte basis “can be a chore.”

Looking further ahead, The Diffusion Group, a market strategy firm focused on emerging digital media, predicts that by 2020, the consumption of Internet video will eclipse the consumption of broadcast TV programming.

Online is dynamic and growing – The Facebook phenom
Seventy-six percent of Americans own either a desktop or laptop computer, with laptop ownership having grown dramatically from 30 percent in 2006 to 52 percent in 2010.

While the Internet is widely penetrated, broadband penetration approximates two-thirds of TV households today and two-thirds of that is provided through a wireless subscription.

Also, approximately 20 percent of U.S. adults report that they do not use the Internet, with the substantial majority of these aged 65-plus.

Based on comScore and Nielsen Online data, there were about 200 million unique users in the U.S. online audience in July 2010.

Depending on which data source one uses, online consumers spent an average of 30.5 hours (comScore) or 23 hours (Nielsen) online during the month of July 2010.

Americans spend nearly one-quarter of their time on the Internet social networking, with online games and email consuming 10.2 percent and 8.3 percent of time, respectively.

As has been widely reported, Facebook and its phenomenal growth around the world is the story of 2010.

In November 2010, Facebook accounted for 1 in 10 Internet visits in the U.S. and in March 2010 the market share of visits to Facebook.com surpassed Google.com for the first time.

In October 2010 comScore reported that Facebook had 61.3 billion page views, 63 million average daily visitors and 7.9 average minutes spent per visit.

Facebook has become so popular that it accounts for 23.1 percent of online display ads in the U.S. – nearly one in four.

While Facebook is a clear driver of online media consumption, so too is increased consumption of online video.

Both the number of videos online and the length of time consumers spend viewing videos is increasing.

According to comScore, the total minutes of online viewing increased by 162 percent between April 2009 and December 2010, as entertainment companies increasingly made long-form TV content available online.

According to comScore’s recent State of Online Video report, the number of videos on the Internet has increased by 600 percent between 2006 and 2010.

Viewing content online is also growing due to the increasing number of “Over-the-Top” video providers.

Over the Top TV typically refers to video delivered over the Internet but not as a part of a cable or telecommunications carrier’s own video service.

Over the top TV is delivered via a broadband connection and bypasses the traditional providers of TV services.

Indeed, Over the top TV represents the evolution of TV viewing from a linear TV mode, in which consumers watch a scheduled TV program at the particular time it is offered, to a personalization of TV viewing mode in which consumers watch what they want, when they want.

Companies competing in this space include Google TV, Apple TV, Netflix, Boxee, Roku, Walmart-owned Vudu, Xbox Live and PlayStation.

With so many companies providing online video solutions to consumers, it appears inevitable that online video consumption will continue its upward trajectory.

Mobile: The pieces are falling in place
Finally, there are approximately 230 million consumers 13 years or older using a mobile phone, representing a penetration rate of approximately 90 percent, with the 18-29 age group penetrated at 96 percent.

The mobile market is experiencing a dramatic shift in usage and growth in data consumption as older wireless phone devices are replaced with smartphones, which represent 27 percent of the device market today growing to 50-plus percent by the end of 2011.

Approximately 38 percent of mobile phone owners browse the Internet, use apps or download content.

Smartphone owners already account for 50 percent of mobile browsing activity and 54 percent of mobile social networking.

In fact, in 2010, the typical smartphone generated 24 times more mobile data traffic than the typical basic-feature mobile phone and tablets generated five times more data traffic than smartphones.

One of the top stories of 2010 was the introduction and success of Apple’s iPad.

With more than 17 million unit sales, the iPad is on pace to become the most rapidly adopted consumer electronic device in history.

The iPad has re-energized the tablet market, currently only 4 percent penetrated, such that eMarketer is now predicting total tablet unit sales of 81 million in 2012. Forrester has predicted that tablet sales will surpass desktop sales in 2015.

This has potentially far-reaching implications for advertisers and marketers.

Apple iPad users frequent the Internet nearly as much as traditional PCs, spend more time with their content and, due to the larger screen, access digital publications and videos more frequently.

Thus far, iPad users are mostly male – 65 percent – and largely under the age of 35 (63 percent).

We expect video to continue to spur increased usage of mobile devices, as it did last year, growing 43.8 percent between second-quarter 2009 and second-quarter 2010.

Finally, perhaps no commentary on mobile video can be complete without discussing the broadcast industry’s entrance into this arena.

Broadcasters formed the Open Mobile Video Coalition (OMVC) as an alliance of commercial and public broadcasters to accelerate the development and rollout of mobile DTV products and services.

The OMVC launched a consumer test in the Washington, DC, market in early 2010 to demonstrate the capabilities of a multichannel mobile DTV service.

More than 360 individuals in the Washington area were exposed to Mobile DTV on a variety of devices and provided firsthand feedback on the benefits and limitations of the technology.

Subsequently, two separate entities have been created by broadcasters to begin delivering and eventually monetizing mobile DTV.

One, the Mobile Content Venture, which was formed by 12 large TV station groups, has announced it will launch mobile DTV channels in 20 markets this year.

The other, the Mobile 500 Alliance, whose station groups reach 92 percent of the country, is also committed to launching a mobile DTV service.

Broadcasters are in discussions with carriers, device manufacturers and content providers to develop the revenue model and business plan for mobile DTV.

Given the ubiquity of wireless, the increasing functionality and speed of connected devices and networks, and continued innovation in advertising technology for mobile, it seems inevitable that consumption of media on mobile will grow relentlessly with advertising spend continuing to migrate in hot pursuit.

Looking ahead
We have covered a lot of ground in this report with the express purpose of setting the stage for periodic reviews of some of the trends that we have highlighted.

Digital devices and their convergence are rapidly and profoundly changing the way that we consume content and conduct commerce.

Further, the data generated by our consumptive behavior while using these devices increasingly affords media companies, advertisers and marketers opportunities to effectively target content, ads and offers to specific individuals at specific times, locations and even after certain behavior.

This year promises to be a period of continued shifts in consumer behavior, device and content innovation with real opportunities for growth.

Colin Knudsen is managing director and Chris Ensley is director at Coady Diemar Partners, a New York-based investment banking firm. Reach them at [email protected] and [email protected].