Newspapers Continue to Ignore Online Video Opportunities

Includes: CBS, DIS, NWS, NYT
by: Ashkan Karbasfrooshan

I came across this 2008-era study on why online video presents a major opportunity for newspapers which concludes:

While still a small percentage of total and local online advertising, online video represents an enormous opportunity for newspapers to grow revenue and audience.

As the CEO of an online video content producer, this begs the questions:

Who is most likely to invest in and acquire online video startups: TV media companies or print ones?

Both have their reason to go long on web video, but when you start to look at what is actually happening in the marketplace, you realize that we’re seeing a case of

1- those who don’t learn from history are doomed to repeat mistakes,

2- people tend to react to ensure their short term survival, which can be explained by the fact that professional managers who run companies don’t share the long term views of investors and founders.

Survival - To Some: Avoid Getting Murdered; to Others: Fear of Cannibalization

Here’s how I read it:

A - Newspapers

The “supposedly clueless” folks running newspapers seem get it, and as a result, are starting to adjust their product to offer more video. McClatchy features some of our content across their websites. I am sure they’re not alone (in either supplying video or supplying their reader our content).

B - Magazines

The magazine guys are being reluctant, because magazines might very well survive - albeit in a radically leaner and smaller existence - the digital revolution, whereas newspapers won’t unless they drop the papers from their monikers and reinvent themselves as simply news - or rather, content - companies. And to do so, naturally, the Web must be central to their strategy and online video can be the savior. For more in this, read “who’s more doomed: newspapers or magazines?

Incidentally, before I started, I was the VP of Ad Sales for an online men’s lifestyle magazine and I think magazines would do very well diving into video content, but they’re set in their ways. The upside for magazines is probably even bigger, because unlike news, magazines can produce evergreen content which has a longer shelflife, and thus, higher ROI. I speak to magazine executives about partnerships, investments, and yes, full on acquisitions… and it’s like they get it but don’t want to hear it. Or, maybe it’s just me. Probably both. Maybe they’re just too focused on the ever-shrinking size of their magazine. Who knows.

After all, do you really think that publisher of Maxim and Blender Alpha Media Group’s EBITDA would have fallen from $28M to $8M in one year if they would have focused on video? Probably not. Video inventory would more than make up the falling print sales. But again, don’t listen to me people.

C - Television

TV executives view online video much the same way that the print (both magazine and newspaper) executives saw the web early on: as a threat. Over the past few years, we’ve seen some exercises that seem to serve as tactics to shut up the critics who question the lack of digital strategies, but they are not strategies at all. Ultimately, television executives know that down the road the future of television might suffer from the same fate that print media did at the behest of the Web, but since this is a few years, even a decade away, current executives cannot be bothered.

Digital Dimes vs. Analog Dollars

Yes, online video fetches a premium relative to text content online, but relative to traditional television revenue, online video is a joke. To a disruptor company like ours that seeks to create high quality content and distributes it online, the income is incremental and welcome. To an established company, it is not. This is why this comment from Doug Poretz caught my attention:

Content Is More Important Than Distribution Channel.

I’ve been engaged in this business long enough to know one thing: content is king. Compelling presentation is important, as is selection of the right distribution channel, but if the audience doesn’t immediately sense value in the content they are seeing, they will move on to the next site. That means a provider of high quality content can virtually come from nowhere to capture the attention of an audience and dethrone an industry leader. Bloomberg versus Dow Jones is an early example. More recently, the simple graphic presentation of Google is more than trumped by the value of the content it provides, and because of that, Google changed the way people use the Internet.

It makes sense therefore for investors to consider which entrenched leaders might not be as entrenched as once thought, especially when smaller, hungrier, more innovative and more aggressive competitors develop new ways of providing high value content.

No, I don’t wake up every day and try to put CBS (NYSE:CBS), News Corp. (NASDAQ:NWS), Disney (NYSE:DIS), ABC, etc. out of business. I don’t even think it’s possible (or maybe I am being coy and diplomatic, who knows)… but I do think that we can build a library that will be worth a bundle and a business that boasts the industry leading return on equity, whereas all of those companies will see a loss of revenues, profits and value in years to come.

The problem, of course, is time. The guy currently running a traditional media company can’t be concerned with the mess he will leave behind for the guy running the ship in 10 years, so too bad.

Strategy is Relative

In this context, while it makes a lot of sense for the TV based media companies to invest and acquire in new media studios, I don’t think they will.

If one were to play the conspiracy theory card, one would wonder: Did CBS acquire Wallstrip for a mere $4M specifically to shut it down? Probably not. But all of a sudden, it’s not that crazy of a thought. If Wallstrip was creating a video product that would compete with CBS’ television offerings, it would almost make sense. I don’t actually believe this, by the way; we’re just trying to make a point.

Yet for the print guys, particularly the newspapers (McClatchy, Tribune, NY Times (NYSE:NYT), etc.), online video makes a lot of sense. It’s a matter of both economics and survival. The problem for these companies is the massive debt they carry, and the losses they’re seeing. In Canada, Canwest is on the verge of missing a second consecutive interest payment. Not sure if this allows them to pull the trigger on a big online video deal even though the prevailing logic is considerable.

As I’ve argued before, while digital sales are not enough to make up for losses in traditional revenue streams, they just might if you embrace video content, since video can fetch up to ten times the rates that text content garners. Cost per thousand (CPM - more on online lingo here) prices for text content ranges from $1 to $20 but for video content can go from $10 to $100.

This is why 2009 will mark the year that traditional display banner ad inventory will make way for all sorts of rich media placements featuring video.

Social Media Inventory = Warm Bucket of Spit

We’re not talking about social media pages, which get about $0.01 to $1 for text and $1 to $10 for video. We’re talking about professional content. As far as advertising revenue potential goes: user-generated content (UGC) is dead on arrival, though in terms of publishing in general, UGC is growing more powerful than ever. The problem with UGC’s “value proposition” is that direct marketers (who might not mind UGC’s low quality and raciness) don’t like the low performance whereas branded advertisers (who care less about the ROI in the short term) cannot take the risk to market alongside it.

Those Who Can Won’t and Those Who Want Can’t

Newspapers, on the other hand, have another problem. They lack the DNA to tackle video, and therein lies the irony of online video: “those who can won’t and who who want can’t“.

Add it all up, and I think you see where the buyers will be found. Hint: not in tinseltown.