Advertisers favor video pre-roll ads, but viewers find them annoying. Overlay ads are less intrusive, but have not caught on with marketers. Now technology startup Keystream is introducing a video ad alternative that it believes will prove superior to pre-rolls and overlay ads placed at the bottom of the screen.

Its system scans video content for "blank" spaces--such as a bare wall or a grass field--and sticks an overlay ad there, without interrupting the programming. Instead of covering the lower portion of the screen like the current crop of overlays, Keystream's SmartAds are intended to pop up anywhere that won't block the action.

The ads, which typically play for 10 seconds every one to two minutes, can be targeted contextually and by audience demographics. Web publishers also have the ability to limit how often and where ads appear within content.

In testing across 6,000 videos of varying lengths and types of content, the SmartAds have generated click-through rates in the high single digits and overall interaction rates of better than 20%, according to company executives. The trial includes 1,500 videos shown on the local programming site of British broadcaster ITV, Keystream's initial client.

"We have not had any negative comment or feedback," said CEO Schuyler Cullen, who co-founded the Mountain View, Calif.-based company in 2004 with Edward Ratner, president of research and development. Keystream's platform uses Flash and Microsoft's Silverlight software to power interactive features such as roll-overs, animation and links.

The ads are sold on a CPM basis and come in three varieties: a static logo, a round clickable unit that lips around to allow messaging on both sides, and a rectangular one that expands when rolled over. The first type might show an Adidas logo against an unoccupied expanse of infield during a baseball game.

A "flip" ad highlighted in a Keystream presentation showed the unit in a video for a cheesecake recipe appearing next to a slice of cake with "Hungry?" on one side and the Pillsbury logo on the other. A conventional overlay would have blocked out recipe instructions at the bottom. Another, for Snapple, popped up in the background near David Letterman's head during the monologue on his show.

The roll-over format showed a banner overlay in the right corner of a baseball game video that expands in the upper left of the screen without blocking any of the infield action. Unlike the "virtual" ads seen during television sports broadcasts, however, the Keystream ads do not appear as actual billboards or on-site branding to the viewer.

Still, the ads represent another option for monetizing Web video that may offer advantages over pre-rolls, according to Caroline Dangson, research analyst for new media and entertainment at market research firm IDC. "I would think they're a good alternative, if not a perfect solution," said Dangson.

She noted that in a recent IDC survey pre-rolls ranked as the third-least-favorite form of online advertising after pop-ups and page takeovers.

Chris Allen, vice president and director of video innovation at Starcom USA, expressed skepticism about whether consumers and advertisers would embrace the new format. "I'm not so sure they would be a viable alternative," said Allen, who had not yet been formally briefed on the SmartAds.

He added that marketers might be hesitant to employ the ads because of the uncertain reaction from viewers. "For right now, and in the next couple of years, I think you're going to see the pre-roll dominate," said Allen.

But Schuyler is confident that the Keystream ads will catch on. In addition to positive feedback from the dozen advertisers in the ITV trial, he said the company is already getting interest from at least four other major brands interested in trying SmartAds. And while Keystream is presently focusing on broadband video, its ad technology can also be applied to broadcast TV.

Keystream is not the only company exploring new ways to monetize online video. Last week, Silicon Valley startup Auditude announced a partnership in which its platform will insert overlay ads into MTV Networks videos uploaded to MySpace by users. The goal is to offer an alternative to unauthorized clips simply being removed from MySpace or other sites due to copyright violations.
 

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