Why the Online Video Business Is a Joke

I’ve become reluctant to post much on online video, because invariably if I am not talking about a partner or competitor (of WatchMojo.com’s), it seems as if I am talking to a partner or competitor. Truth is I never am, but it’s hard for the post not to be read in such a manner.

But, the feedback I get is that people like the angle of an insider’s take on online video, so here goes nothing.

Here’s a simple post called “How to totally own the video market.”

The Hypothesis

Google (GOOG) was the first really successful ad-supported technology company. By now it should be obvious the money will not be made via CDN, platforms or that kind of crap, but in ad supported video. Google won’t really win, because it too will suffer from innovator’s dilemma. It’s nothing against YouTube… but YouTube needs to be a separate unit from Google and not a spoiled child within Google. Google did $17B in revenues in 2007; in 2008, YouTube might do $200M. Before you know it, Google will sit on YouTube and suffocate it.

Anyway, given YouTube’s massive exit - from $10 for a URL to $1.65B in two years - VCs have sought to emulate it and failed furiously, frankly.

The Problem

The problem right now in online video is that unless you are a traditional media company with a sales force selling to big advertisers and a big audience, you are not really generating much by way of online video advertising dollars. YouTube, for example, owns 70% of the streams with 35% market share and does $200M in total revenues (with about $65M coming from actual video ads by my count). Total ad revenues from online video in the US market in 2008 are clocking in at $1.35B. Not bad, but when you realize that online ads are a $20B business… $1.35B is rather girlish. No disrespect intended to the ladies in the house.

The Methodology

Anyway, how can you own the business market?

Well, from my vantage point, I can tell you the problem from online video ad revenues [OVAR] is simple:

• Not enough good content online; YouTube - the barometer of online video - has 96% non-monetizable content
• Not enough frequency of new premium content
• Even if the content is made and out there, it’s lost in the clutter, I just covered this point yesterday. Go find it. Hyperlinking back to my own posts is so 2007.

So… what would I do? Simple. I would borrow a page from Hulu - who raised $100M on a $1B valuation to license only professional content (hum… pardon me, but it’s worth noting that WatchMojo.com is a content provider to Hulu) - and sign exclusive deals for content.

Get Into A Media Planner’s Shoes

An ad buyer wants to know why he is going to make you rich.

Rule #1 - You have to be unique. If your content is everywhere, it might be a good thing, but it also sucks. Why should he call you, when he can call YouTube, for example, and get placement next to it? Obviously he can’t, because YouTube sells categories and not partner channels, but YouTube is still searching for the sweet spot (don’t hold your breath).

Rule #2 - You can’t live in the ghetto.

If right next to your content is a link to junk, advertisers will walk. It’s that simple.

Rule #3 - Ad buyers are not VCs, social media gurus, etc., they’re smarter.

Trust me, when ad revenues are bountiful, people are resistant to exclusive deals… but the truth is, unless you are Disney (DIS), CBS (CBS), News Corp. (NWS), etc., you are not really generating much OVAR. And even if you are those guys, it’s puny relative to your offline ad revenues, so YOUR strategy has to be different than theirs. But, your strategy must understand why TV became a $70B ad industry, which means 10x larger than online video. Sure, online video is less than a decade old, but at this rate, it won’t ever become as big as TV if the arrogance does not dissipate.

In fact, when ad revenues are scarce, people will give up exclusive rights for guaranteed revenue. Again, not everyone would, particularly the media companies who make much more offline to begin with.

But, the bulk of traditional media’s content is actually abysmal for OVAR anyway. I would get into all of the ways but that’s for a separate post (or a consulting mandate, frankly). Talking about “made-for-web content producers,” they will gladly give up exclusivity for revenue.

The Game Plan

If a company comes around and secures a large financing round - say $100M - it can basically take $50M and secure rights to content, exclusive content. I know conventional thinking is that exclusive is bad and no one will accept it, but that is not true. Trust me. We own one - if not the - largest library of high quality made for web content, and we’d consider variations of an exclusive deal. We would. It’s very uncool to say that online, but cool is passe. Substance is the new cool and will be over the next two years as the American economy continues to tank.

So with a war chest of $50M set aside just for content, you can create an environment with a lot of monetizable content. As crazy as it sounds, apparently (I won’t comment as a partner, but I am using SAI’s figure) Hulu will make $40-90M in revenues in its first year, and while the content on its site is good, I reiterate, it’s not formatted for the Web and not optimal for web advertisers anyway.

That hits at the core of another problem: 99% of the aggregators in the video space have raised billions (in aggregate) but have not earmarked anything for content licensing. Their business plans call to obtain free content but yet spend billions (in aggregate) spent on hardware, hosting, bandwidth, etc. So what happens is that the masses line up, upload crappy content but rightsholders of quality content sit back, knowing that speculative revenue share deals won’t lead to meaningful revenue.

I know much of what I say seems counter intuitive… after all, the Web is all about open, but trust me, the OVAR aren’t crappy because there’s an abundance of high quality, premium, professional content all over the place… OVAR figures are crappy because the content out there is largely crappy.

Conclusion

I’m not writing this for someone to come along and sign me a check for exclusive rights to WatchMojo.com’s content (though I’d listen, frankly, so go ahead and email us at [e-mail]). But, since News Corp. and NBC are in bed backing Hulu, maybe the powers that be at CBS or Viacom (VIA) or Disney or Time Warner (TWX) or the big private equity firms, or frankly, a European or Asian media company looking West, might be interested in ponying up $100M and helping me help them build a real video business.

Hello… I think my phone line is not working properly. Is my email down, too? Yeah… thought so.

Comments

[User 227842]

nice article...

have a look at blinkx...they seem to do a great job lately...they are the big name in online video search now...

[tedstr]

So complicated.

The simple reality is that TV advertising, that is the real big money in TV advertising, is all about brand and image. It is not about Google, lead generation, DR marketing (though there is some of that on the low end), targeting etc and the other parlour tricks of the web business. Video is about big time brand building.

When you are in that business you must have quality trusted environments and engaged users and reliable technology. Online video has none of that. Except for a few young demographic brands, the real money will not be playing with YouTube or any of the other user generated (READ: free and low cost) stuff.

Add to that that, video just doesn't fit well with the online experience. Online is forward leaning, TV is lean back. How many online video screens have you clicked away from because you just don't want to wait for the load up?

Add to that Google is not about branding. It's not in their DNA.

Online video will take a couple of billion away from traditional TV, enough to make them very nervous for the next few years, but ultimately it will be a side show.

[tyneham]

Tedstr has made a number of valid point. Ash's analysis make sense, but would like to assess his detailed US $100m proposal to see how WatchMojo.com can help build a real monitize online video business. $100m equity implies a valuation of over $1.5 billion, and that remains hard to justify in terms of Tedstr's technical drawbacks, etc.

[master1980]

I agree the youtube is pretty much cluttered with no real segmentation and hard to monetize. By being acquired by Google they have become big corporate and the creativity has probably decreased. We've just launched jippidy.com a video yelllow pages startup and we're only focused on content we think the average consumer need.