Where Does Online Video Go From Here?

Google’s acquisition of YouTube in October 2006 was supposed to usher in a new era of opportunity for video creation, distribution and monetization that leveraged the power of the internet. Now, three and a half years later, the biggest benefactors of the boom in online video consumption have primarily been YouTube’s founders and investors as profitability still eludes YouTube and revenues are scant in comparison for most others in the online video ecosystem. With webisode creators closing up shop or changing business models, television networks removing or withholding their content from partners and distribution channels, and well-funded online video aggregators Joost and Veoh shuttering their businesses, what role will the internet play in the video content experience going forward?

Here are today’s realities:

  • Television will not go the way of the newspaper industry. Clay Shirky, an internet and media consultant and professor at NYU, recently suggested that the television industry faced the same disruption in its business models as newspapers are experiencing today. What he failed to acknowledge was that the production value of video content creation cannot be commoditized in the same manner written content can (Avatar didn’t become the highest grossing movie of all-time by cutting corners on cost). In fact the cable industry seems to be strengthening its position with consumers- delivering record audiences for sports leagues, including the largest audience for a single cable network event (last year’s Vikings vs. Packers game on ESPN) and the signing of Conan O’Brien to host his new later night show on TBS. This performance is leading advertisers to commit an even greater share of their television ad budgets to cable networks in the coming upfront season.
  • There are no free lunches for online video consumers. Cord-cutting is somewhat of a fallacy. While a lot has been written about the growing minority of consumers who have given up their cable subscriptions in favor of accessing video content over the web from the likes of Hulu and Netflix, the fact of the matter is that consumers are still paying their cable or phone company to access this video content over their networks. Though monthly internet access can cost a quarter of the price of a monthly cable subscription bill, as they say, you get what you pay for. Without the ability to watch live events (American Idol, Super Bowl, etc.), or specific content from cable networks (Mad Men on AMC, It’s Always Sunny in Philadelphia on FX, etc.), in addition to no quality of service considerations for video playback on the web (when was the last time you experienced buffering while watching television through your cable service provider?), we are starting to see stories about consumers who have given up on the internet-only video experience.
  • The internet will be one of several distribution channels, not a panacea. While many consumers expect to find all content online, and for free, these people tend to forget that television’s economics continue to drive the decision-making process for broadcasters. It’s for this reason I’ve previously suggested companies such as Blip.tv should look to traditional television networks to extend the distribution and reach for their clients’ webisodic content. With the launch of the iPad and associated apps from video providers, and discussions around broadcasters working together to build a mobile television network, the number of ways consumers will be able to access movies and TV shows will continue to proliferate. While this should drive additional content consumption opportunities for consumers, it will be done so on the television industry’s terms.

And tomorrow’s opportunities:

  • Delivering “DVR economics” will bring more premium video online. For television networks to get comfortable with making more of their content available online after its original broadcast, the revenue opportunity needs to be comparable to what broadcasters are generating from their DVR-viewing audience. This makes sense since watching video online and via DVR are both non-linear viewing experiences intended for consumers to catch-up on missed shows. This will be an important metric for online video services to achieve in order to be considered distribution partners for broadcasters and networks going forward. With online consumers showing a willingness to sit through additional advertisements and both Hulu and TV Everywhere expected to charge for certain content, achieving parity with DVR economics seems to be an achievable goal as the dual revenue model  employed by the television industry (users paying for access to programming in addition to being presented with commercials while watching that programming) proliferates into new channels. This could become a recipe for enabling virtual MSOs like Apple TV and others to gain access to television shows that haven’t been previously made available online. Over time a bifurcated business model could emerge between real-time and time-shifted viewing with different price points for each experience.
  • Social TV will be the key to enhancing the video viewing experiences. Because the internet is a proactive, lean-forward experience most of the time, it is best leveraged as a companion to live event broadcasts to create a social television experience. With more and more people spending time online while watching television there’s an opportunity for programmers to engage audiences by allowing viewers to share their experience with friends or other fans in a meaningful way, creating larger and more loyal audiences. Events such as the Grammys and Oscars have benefited greatly by combining the social features of Facebook and Twitter with live broadcasts. Apps such as Hot Potato and Miso have been launched to aggregate these types of experiences on behalf of viewers, though broadcasters are now developing these services on their own as well. Regardless of the social network or app being leveraged, these services should be incorporated into devices such as mobile phones and tablets, and not necessarily directly into the television set via TV widget platforms, to not inhibit either experience individually and allow any service to compete for audience attention.
  • Unified audience measurement will be paramount. While video ad networks have probably been the greatest benefactors of the growing online video ecosystem, with over $90 million invested between BrightRoll, TidalTV and YuMe in Q1 of this year and Tremor Media earlier this week, until there is a way to merge audiences across different platforms (television, laptop, mobile phone, etc.) online video revenues will remain insignificant in comparison to broadcast television. Nielsen announced a solution to address this problem earlier this year that is expected to be rolled out for the fall television season. Looking to make buying video inventory online comparable to traditional television, two different online video ad networks have partnered with third-parties to create  an online equivalent to Gross Rating Points, called iGRP, which is used to sell prime-time ad inventory, to match online audiences with that of traditional television. As agencies and advertisers get more comfortable with quantifying users online in a similar manner as is currently being done through traditional television broadcasting more ad dollars will continue to flow to online video. This will allow online ad networks to compete for even more upfront ad dollars during TV’s traditional outlay season.
  • Opportunities exist for online video technology providers- to an extent. Brightcove, founded before YouTube ever existed, is arguably the most well know enterprise technology provider to the online video industry. In raising a fourth round of funding recently, the company disclosed it expected worldwide revenues of $50 million this year. Considering the company already works with most major media companies, what does this tell us about the market opportunity for the most important component of the online video ecosystem? If you concur with Frost & Sullivan analyst Dan Rayburn’s estimate of $300 million in total revenues for online video platforms this year, then it’s not that significant. It doesn’t mean that Brightcove won’t have a successful IPO, it’s just that for the amount of capital the company has raised ($100 million) the revenue potential ought to be 10 times Frost & Sullivan’s estimates. That being said, companies that can automate content encoding (i.e. Elemental Technologies) and distribution (i.e. TubeMogul) across disparate platforms and formats, provide rights management (i.e. Widevine) across access points and deliver aggregated audiences and reporting for advertisers will have the best chance for success, though primarily through acquisition. Companies such as Akamai will be the biggest benefactors as they can leverage their public currency to add these services to their CDN delivery business, allowing them to move further up the value chain with clients.

Add it all together and where do we end up? Most consumers don’t differentiate between what content they are accessing, broadcast network television (ABC, CBS, Fox and NBC) or cable networks (Discovery, ESPN, MTV, etc.), since in today’s digital environment you need a set-top box from a cable, satellite or telecom company to access any television programming. The same will hold true for how consumers access programming tomorrow, be it over dedicated coaxial cables, wireless carrier networks or over the public internet. As such, consumers will have tiered pricing (as either a bundle, how monthly subscriptions are currently provided, or a la carte as Apple is attempting to do) that incorporates how content is being accessed (real-time or on-demand) and from where (television, laptop or mobile phone). Whatever the model, viewers will be able to interact with audiences around the content, creating a more fulfilling experience. Advertisers will benefit from better audience targeting capabilities already being used on the web today across all these viewing outlets with the added value of unified reporting.

While the nirvana of free access to all video content over the internet will probably never be realized (except for one-off cases like YouTube’s wildly successful live streaming of a cricket tournament) the internet will play a major role in improving the online video experience from both a consumption and monetization perspective.

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What’s the Next Act for Webisodes?

PoltergeistAs the online video market has evolved so has the content being made available on the web. Faster internet connection speeds and increased broadband penetration has opened up the ability for us to watch high-quality, full length movies over the internet. Combined with better, cheaper video recording and editing equipment, the type of content being created has also evolved from repurposing of Funniest Home Videos to the creation of original scripted video programming online- more popularly known as webisodes.

In 2007 there were three catalysts that brought attention to web series as a viable business opportunity (1) the popularity of Lonelygirl15 on YouTube (2) the launch of Vuguru by former Disney CEO Michael Eisner and (3) the airing of Quarterlife by NBC on network television. These events showed that industry newbies could gain notoriety and success from creating original video programming online (Lonelygirl15), Hollywood believed in the potential of the medium (Vuguru) and web series could make the lucrative transition to television (Quarterlife).

The result was a number of high-profile production companies receiving funding in 2007/08 to capitalize on the opportunity. The likes of Funny or Die, Katalyst Media and 60Frames were launched in conjunction with Hollywood elites Will Ferrell, Ashton Kutcher and United Talent Agency (respectively) while others such as Agility Studios, DECA and EQAL (creators of Lonelygirl15) were founded by Hollywood outsiders.

Fast forward to the present where some have already started questioning the long-term viability of webisodes, as the likes of ManiaTV (an early entrant in the space) and the aforementioned 60Frames have already shut down this year while other production companies have been sold or changed focus. While the economy is the easy excuse for what is troubling the webisode market, it has only served to expose the deficiencies in the business model faster.

The basic problem has been one of customer acquisition and retention. Actual show content and quality aside, without a sizeable enough audience to target, advertisers won’t spend the time or money sponsoring a web series. Thus, online video producers have two options for acquiring the necessary reach for advertisers:

Direct- spend money to promote a web series’ website to a potential audience. This can quickly get expensive, especially when you factor in that almost 2/3rds of a show’s audience does not return for subsequent episodes. That means additional dollars need to be spent on marketing to acquire a new audience and/or remind current viewers to return for future episodes. Without advertiser dollars to fund this acquisition or a portfolio of shows through which to cross-promote a new web series, additional funding is needed to build a sustainable audience.

Indirect- rely on YouTube and other video aggregators to drive their audiences to the web series content being uploaded onto their websites as well as provide the associated monetization. While this instantly provides a solution for both needs, audience traffic is greatly affected by site design changes and content owners only receive a portion (YouTube’s standard payout is 55%) of the associated ad revenues. Looking at data from the top 100 mid-tail video publishers on YouTube (many of which produce webisodes), on average they earn less than $50,000 per month from the site (assuming YouTube’s standard 55% revenue share and daily video views of 140,000, plus a generous 100% sell-through and $20 CPM on the ad inventory)- not a big enough business for most investors.

While there are plenty of webisodes that use a hybrid approach in combining these options, longer term this approach is inefficient. This is because the indirect channel undermines the goal, and dollars spent marketing, of the direct channel by turning a scarcely available product (with theoretically high economic value) into one that is widely available, thus reducing the economic value of each distribution point where the content is being consumed. Simple supply and demand is why ABC, Fox and NBC only make their videos available on their respective websites and Hulu.

So where does the webisode market go from here? The good news is that the opportunity will only continue to grow as video consumption habits evolve. The potential bad news is that traditional television studios might soak up most of this opportunity as the likes of CBS and NBC have started building out their own original online video presences.

For original web series producers that means they have two options: beat ‘em or join ‘em.

How to beat ‘em. Create a television network- for the online world. One of the main advantages that television studios have over a producer of a single show is the ability to aggregate TV show audiences on their network and spread the cost of customer acquisition and episode marketing Break_Originalsacross the entire content portfolio. Break Media is an example of an online property that has been able to successfully build such a network online. The company produces over a half-dozen webisodes that leverage Break Media’s network of male-focused web properties to deliver an audience to their original online video content. Because the company has built its network around a very targeted audience it has been able to differentiate itself, and thus thrive, in a YouTube-dominated market while providing some of the same video content (user-generated, 3rd-party webisodes and movies) experiences.

Another option is to compete on the networks’ terms by delivering webisodes to TV. Services like Boxee and even Hulu are providing web-based interfaces that are meant to be experienced through traditional television sets.  Blip.tv (the preferred video platform for web series producers, providing hosting, advertising, and distribution solutions) is taking this one step further by actually integrating its video platform into set-top boxes to allow Verizon FiOS users to view web video content through their television sets.

Blip.tvA truly audacious opportunity for Blip.tv, with its producer relationships, is to take the television delivery concept one step further and actually become a traditional cable television network. This would provide Blip.tv’s customers with direct access to the largest potential video audience out there and open up a new revenue stream in the process. This could be a lucrative opportunity while we wait for broader video consumption habits to evolve from today’s television network-centric experience to that of video on-demand over cable and internet.

How to join ‘em. EQAL has taken this approach by leveraging their online experience and success in developing original web series to help traditional television programs extend their TV show presences online. This makes sense, especially as it relates to primetime shows that do not produce year-round programming. Keeping fans engaged during the offseason, like NBC is doing with The Office, is more easily, and less expensively, done via webisodes. In the process of refocusing its business in this manner, EQAL retains its ability to work with multiple television networks while still retaining its ability to create its own webisodes.

Alternately, some networks like SpikeTV have decided to acquire webisodic content instead of creating it themselves and redistributing the videos on their cable channel. Having a show acquired is an all or nothing proposition for webisode producers, as the content needs to match with a network’s programming requirements. With only so many slots to fill in a daily TV schedule there will be many more losers than winners here.

Webisode producers- time to choose your story.

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