Blip.tv
How To Make Money In Online Video
Feb 7th
Editor’s note: This is the fourth in a series of posts by guest writer Ashkan Karbasfrooshan
.Previously, he wrote about the State of Online Video, 12 Surprising Things Holding Back Online Video Advertising, and Context is King: How Videos Are Found And Consumed Online. In part 4 today, he examines where he thinks the sweet spot is for making money in onljne video. Karbasfrooshan is the founder and CEO of WatchMojo.
In Search of Profits
Ten years ago, web companies didn’t generate much revenue. These days, web companies are some of the most profitable around. Online video is where the Web was ten years ago: in investment mode as video companies that are generating high revenue are not necessarily the most profitable.
Are those companies suffering low margins because they’re investing in the future or are they fundamentally lower-margin businesses?
Ad Networks Are Low Margin Businesses
This week, video ad network Brightroll raised $10 million from Scale Venture Partners. Ad networks aggregate audiences and sell ads to marketers, sharing the proceeds with publishers/producers. Scale’s Rob Theis’ argues: “the most strategic Internet investments are those that compete not with other Internet businesses, but with the much larger amount of money still being spent offline.”
Brightroll’s CEO Tod Sacerdoti added: “I think by this time next year the majority of the top five to ten video properties by any measure will be aggregator networks. The best example for this is display advertising.” Indeed, networks have an unmatched ability to scale but can also crash to the ground awfully fast.
The low margin is the least of their problems; differentiation and defensibility are. Blue Lithium and Right Media hit jackpots by selling to Yahoo! But those who didn’t sell (Tribal Fusion, Valueclick) suddenly found themselves under pressure from search advertising on performance and video on branding.
Content Networks Have Little Differentiation
Similarly, aggregators gather videos from content providers, sharing ad revenues. iFilm (sold to Viacom, renamed Spike), Guba, Grouper (sold to SONY, renamed Crackle), Revver, YouTube (sold to Google), Veoh, DailyMotion, Metacafe, Viddler, blip.tv, are all vying for content, audiences and dollars.
YouTube is master of this domain. Hulu is giving YouTube a run for its money, but the business model is anything but certain and its long term exit strategy is murky (Disney, News Corp. and NBC Universal/Comcast are shareholders but also competitors).
Ultimately, ad and content networks operate in a high-risk, winner-take-all game. For publishers, it’s a lower risk world. Consider the two acquisitions News Corp. made in 2005: Rupert Murdoch paid more for IGN ($650M) than for MySpace ($580 million), but MySpace’s subsequent growth made him look like a genius (for a while). Today, MySpace is searching for its raison d’etre while IGN treks along as an unstoppable force in its sphere.
The Myth of Hyper Distribution?
In online video, producers are agnostic to distribution channel or platform. To reduce risk, they diversify distribution, but the jury’s out on whether hyper distribution bears fruit. Hyper distribution refers to syndicating one’s content as broadly as possible with little or no restrictions.
When it comes to generating revenues, is hyper-distribution wise? Not according to Chris Pirillo, a prosumer video producer who leverages video to promote his empire but only counts YouTube as a commercial platform: “YouTube offers the largest audiences and generates most the revenue. If you’re not YouTube, you have challenges in creating value for content producers”. If that changes, look out for Freewheel, which according to CEO Doug Knopper allows “media companies and content owners to be able to monetize their video libraries across multiple channels and devices”.
Advertisers Follow Audiences…
Ex-Disney CEO Michael Eisner doesn’t pretend to know how the industry is going to play out, but he’s got no doubts what the end result will be: “I don’t know if the growth in content made for the Internet will be evolutionary or revolutionary, but it can’t not happen: a death march has been going on for other media who are in trouble because there is a more efficient way to share content around the world with the Internet.”
Business Models Take Time to Develop
Eisner made his fortune in television. One VC who’s made his online has another opinion. In Fred Wilson’s influential 2005 post “The Future of Media (aka Please Take My RSS Feed)”, he suggests to:
1 – Microchunk it – Reduce the content to its simplest form.
2 – Free it – Put it out there without walls around it or strings on it.
3 – Syndicate it – Let anyone take it and run with it.
4 – Monetize it – Put the monetization and tracking systems into the microchunk.
In theory, in the future when video streams monetize the way search queries have (whereby a search query is always associated with some kind of paid listing) then perhaps Wilson’s thesis will prove right. But in practice, at least in the five years that have passed since the post, it’s been a recipe for financial disaster.
Hyper distribution is great for promotional purposes but not necessarily for commercial purposes. Marketers do pay more attention as an audience grows, but they also pay a premium for scarcity and exclusivity.
This is the fundamental conundrum facing new media producers who rely on hyper-distribution to build brands and audiences but who weaken their pricing power and ability to secure guaranteed dollars by giving away their videos. This can work if you can build ad-supported businesses, but that takes time and money.
Today, a few new media producers have managed to build ad-supported businesses, namely Revision3 and Next New Networks. But between the two, they have raised over $30 million in venture capital. Most producers don’t have that luxury. For those others, I recommend creating content that other media companies will pay for, to buy them enough time to build a syndication business and eventually, a fully ad-supported business which commands the large ad dollars.
An imperfect but useful analogy I use is the banking model, where retail, corporate and investment banking fees can create a large business.
This diversified strategy provides:
- a safe income stream: licensing, like retail banking, provides a recurring and non-volatile revenue base.
- a growth business: syndication, like corporate banking, requires other companies in the ecosystem to do well. This can provide higher CPM rates by placing content in the right context.
- a wildly lucrative stream: advertising, like investment banking, takes time to develop, is speculative and seasonal, and risks drying up abruptly. Notice how advertising revenue spikes each fourth quarter, for example.
The reason why I place content producers in the highest Profitability circle over time in the first chart above is because only they can build such a business. (The Profitability Index represented in the chart takes into account operating margins and total return on investment, including likelihood of a liquidity event). And, yes, I am completely biased, since this is the kind of business I am trying to build with WatchMojo. Aggregators and networks are solely advertising based businesses; just ask YouTube who generated $10,000 in a paid model test, even though it can generate billions in simpler ways. Video advertising will be a bigger business, but not necessarily a higher-margin business.
Video will be Everywhere: on all Websites
Video on the Web is no longer just about entertainment. It is also about marketing, instruction, and conveying information of all kinds.
- Content bellwether Wikipedia announced it will be rolling out videos soon enough.
- e-Commerce leader Zappos encourages users to submit their video experiences which increase sales 6% to 30%. In 2010, it will create 50,000 videos.
- It won’t be long before organizations feature their accountants, lawyers, management, VCs in videos too.
Video will be Everywhere: in Ads
Videos won’t simply be on all websites; video ads will converge with rich media and display banners. Publishers and ad networks will swap out low yield ad placements for videos that sell at a premium. Rupert Murdoch is right to say that there isn’t enough advertising to make all publishing online profitable, but if you insert a video-enabled ad where a display banner exists today, maybe it will become more profitable, as video rates tend to generate a tenfold premium over display banners. Of course, the flip side of that argument is that if video ad inventory lost all scarcity as display banners have, then it rates would also see a steep drop.
Video is the Anti-Search
Google’s dominance of the Web today stems from a perfect storm. Search benefitted from low expectations. Whereas Google’s competitors threw in the towel to focus on portaldom (or outright handed them the business), online video companies’ war chests seemingly have no bottom as they wage the war for the online audience.
With YouTube being a unit of Google, it’s hard to compete being a pure video aggregator. Those who have tried are flailing badly. Yet video’s expectations have always been high and will only get higher.
History Repeats Itself
Video will follow search in two ways though.
Search is software and Google is the only successful ad-supported technology company. Video is media, which has a natural disposition to embrace ad-supported models. As such, advertising will monetize video streams. In fact, as large ad agencies and marketers shift online, they’ll embrace branding campaigns and push video advertising could eventually top search advertising. Once that starts, online advertising will surpass television, it’s already happened in the UK.
Search for The Leading Ad Format
Everyone agrees that video advertising will be huge but what will the prevailing ad format be?
Stakeholders are obsessed with finding the ad format likely to follow television’s 30-second ad spot and search’s paid listings.
What might lead the way?
Pre-rolls are the equivalent of pop-ups (and mid/post rolls the equivalent of pop-unders) in that users hate them, but unlike pop-ups, I actually think pre-rolls won’t disappear, mainly because
- They’re the most in-demand ad format (according to Brightroll CEO Tod Sacerdoti)
- It is easier to include a pre-roll when you’re syndicating to other websites and platforms (says blip.tv co-founder Dina Kaplan)
- But largely because they’ll get more user-friendly: the 30-second ad will make way for 5-10 second interactive pre-rolls (SpotXchange CEO Michael Shehan).
However, there will always be properties which will forego pre-roll revenue to improve the user experience in order to build audiences, and all else being equal users will migrate to those sites. So I’m not sure the pre-roll will remain all that ubiquitous. The other problem with pre-rolls is lack of attention. When a pre-roll starts, I tune out and look for my headphones or go grab a coffee.
That’s why I like the contextual display banner (and not necessarily the companion banner). A companion banner comes bundled with the video pre-roll, but sits alongside the video A contextual banner comes without the pre-roll. Whereas most banners disappear quickly next to text with one downward scroll of the mouse, alongside a video player, that banner becomes quite valuable and top-of-mind since people are just staring at the video.
We’ve also seen the rise (and fall) of overlays, which is basically an expanded Picture-in-Picture (PIP) format; we know how that fared.
Of course, content producers are also salivating over branded content (more than product integration and product placement, the brand becomes central to the story) or outright sponsorships.
Finally, there’s the Web’s favorite offspring: the viral video. Viral video is not an ad format, of course, but it is not quite branded content nor is it supported by ads. As these become more common, achieving success with content alone becomes a sure-fire recipe for failure. All content will need to be supported by a media buy or some kind of promotional push. After all, on TV you spend millions creating an ad but you need to buy media spots to promote it. It’s not going to be that different online. Yes, it’s a meritocracy, but it’s a loud, cluttered one.
KISS: Keep It Simple Stupid
There won’t be a single dominant ad format but the holy grail will prove simpler than expected. It always does.
Remember Don Lapre’s infomercials? He would go on and on about placing “Tiny Classified Ads” in newspapers. I never thought much of those ads until Google’s adoption of (essentially) little text ads next to search results led to their explosive growth.
Sometimes in business, the solution is simpler than you can imagine.
Context is King: How Videos Are Found And Consumed Online
Jan 30th
Editor’s note: This is the third in a series of posts by guest writer Ashkan Karbasfrooshan. Previously, he wrote about the State of Online Video, and 12 Surprising Things Holding Back Online Video Advertising. In part 3 today, he examines how videos are found and consumed online. Karbasfrooshan is the founder and CEO of WatchMojo , a producer of premium, informative and entertaining video content. The company’s catalog of 5,000 videos has generated over 110 million streams since 2006.
To try to understand—let alone guess—the future of video advertising, one needs to start by looking at the biggest trend in media over the past few decades. In November 2006, Bear Stearns Cable and Satellite analyst Spencer Wang published a study called “Why Aggregation & Context and Not (Necessarily) Content are King in Entertainment”. While Bear Stearns has since been acquired by JP Morgan and is now a mere footnote in business books, the study’s findings are more relevant than ever. Let’s examine 8 key factors behind online video consumption
Factor 1: Media is Fragmenting
According to a recent NY Times article, in the 1952-53 season, more than 30% of American households watched NBC during prime time, according to Nielsen. In fact, up until twenty years ago, you could buy a 30-second spot on CBS, NBC or ABC and reach “everyone.” Today, NBC’s prime time reach is 5%. Sure, NBC is lagging CBS and ABC, but neither the Tiffany network nor Disney’s counterpart is faring much better. The secret’s out: fewer people watch TV and teenagers spend every waking minute connected to the Internet, increasingly through the mobile web.
Factor 2: Deportalization is Here to Stay
As the media world becomes fragmented and consumers move online, the Web is following a similar path, known as deportalization: the move away from the dominant portals of old, as social networks gain huge followings and vertical niche sites gain smaller, but more loyal, followings.
Ten years ago, you could buy a banner on MSN, AOL or Yahoo and reach “everyone” on the Web. Five years ago, you could get the same result by buying a text link through AdWords and reach consumers who were either searching directly on Google.com, or surfing on the countless number of websites that were part of Google’s publisher network through AdSense.
Suffice to say, times have changed. In fact, less and less often do consumers even seek out content by actually going to a given site. To paraphrase Jeff Jarvis, if something is important, it will find me, be it via newsletter, Facebook, Twitter or a shared link in an email. In fact, Facebook might very well be the last giant Web property and when it launched Facebook Connect, it too began to extend its tentacles across the Web. Twitter’s growth has maintained thanks to its off-site (API) growth, while YouTube exploded due to its open embeddable nature from the get-go.
However, after YouTube sold to Google for $1.65 billion and the site’s aggregate traffic soared, some video producers tried to find a way to generate an audience—and revenues—outside of YouTube in order to build a legitimate business. In other words, media is becoming fragmented, the Web is becoming deportalized, and the front line of it all is online video.
Factor 3: Content is Not a Zero-Sum Game
If we return for a second to television, it’s worth noting that with the advent of cable television, as the number of channels rose, so did overall content consumption.
Analogously, as the number of content producers and distribution points increases online, consumption increases exponentially. For proof, look no further than the recent comScore figures touting over 31 billion videos were viewed in November 2009.
Factor 4: Content is King?
Indeed, to paraphrase Viacom’s Chairman Sumner Redstone: content becomes more important than distribution mechanisms; as new channels of distribution creep up, it is the content that is always going to be necessary, hence the adage “content is king”. If you fast forward to 2010, it’s true that with all of these social media aggregation and distribution tools, you are seeing media rise to the surface. No one, after all, cares about the pipes; it’s what flows through the pipes that matters. The context—Facebook, Twitter, email—in which people are introduced to media and consume it is becoming more important than the content itself. Content is no longer king, context is.
Factor 5: Demand for Content is Elastic, Supply of Funds is Not
The problem, as you can imagine, is that while it’s perfectly plausible for global advertising to grow, it will not grow fast enough to feed all of the mouths at the creative table. As “consumer touch points” increase, the number of people that each piece of content reaches becomes smaller at the time of publishing/broadcast but can grow over time. That’s the theory, anyway.
This is a double-whammy trend. It is negative because the audience for something (and corresponding revenue) will be less than what the most popular event on television will be, which partially explains the cachet television still has over its online brethren.
But it is also a positive trend in that as a content owner you will be able to derive more revenue over the course of the content’s shelf life. Don’t get me wrong, syndication on television is an enormous revenue stream, but that is not an option for all programming, whereas online, technically, anything has both a shot at building an audience and having some kind of residual revenue stream. The problem is that there is no vetting process per se online so the lowest common denominator can be zero.
Factor 6: Chasing Hits Has Proven Futile
Ultimately, overall consumption of media will increase but hits become less frequent and each hit will become more niche. The stats support this hypothesis, despite YouTube’s aggregate size and macro-level success, each clip’s average viewership shows that regardless of whether the video is user-generated, premium or super-premium (for a definition of the differences click here), on average:
- It will garner 500 views over time
- 25% of those views will come in the first four days and
- by and large, only the first 30 to 60 seconds will be watched.
How can you build a business on that?
Factor 7: Discovery vs. Recovery
Exasperating matters is how content is actually unearthed. To borrow from John Battelle’s breakdown of search: videos are found via recovery and discovery.
Statistics show that:
- 45% of views come from direct navigation where a user goes to YouTube and searches to “recover” something they have already seen or are actively looking for. Of course, YouTube is the world’s second largest search engine and most of those searches are now conducted on YouTube.com, which reinforces the argument that YouTube is now the best Internet M&A of all time.
- The other 55% of the time, users stumble upon a video and “discover” it. That is right, over half of the time, users land on something randomly.
In other words, while traditional media views the web as a place where pirates turn to to rip off their copyright, the truth is, only half of all of the content consumed is actually searched for, the other half is stumbled upon, meaning you actually have to distribute it widely enough to increase the likelihood that people even notice it, let alone give a damn!
This is why you need both lots of content and a diversity of it. Indeed, Time.com former Managing Editor Josh Tyrangiel admitted that “long form journalism, a staple of magazines like Time, is not working” online. The same applies to long form video online, and by extension, on mobile.
Factor 8: Size Matters
So what works? To gain more insight into that (and to avoid an overly biased outlook), I reached out to Dina Kaplan, who is the COO of blip.tv. (We use blip.tv’s video player on our web property). According to Kaplan, a Pyramid of Content is emerging on the Web.
I tend to agree. Back in February 2007, I wrote an article called “The Commoditization of Distribution and the Scalability of Content”. In it, I alluded to a rudimentary pyramid with super premium on top, premium in the middle and UGC at the bottom:
It’s certainly not rocket science, and Kaplan and I are not alone in having that view. She continues: “Hulu is the best-known platform sitting at the top of the pyramid, in terms of hosting and distributing network content. YouTube, which has long been known for hosting great viral and one-off videos, has owned the bottom of the pyramid.”
The question remains: who will own the middle. A couple of years ago, YouTube made a move towards “torso content”. Kaplan’s blip.tv is obviously making a play for the middle, “blip.tv [wants to own] the middle of the content pyramid: the best original shows produced for the Web. These shows are produced by talented individuals and production companies who are building up loyal audiences for their shows, just as the producers of a traditional TV show would.”
With things like Apple launching the iPad and IPTV gathering steam, Kaplan is confident that “shows will move around from screen to screen and you’ll choose to watch content on whatever screen is most convenient for you at that moment.”
Of course, with Boxee’s struggles to get traditional media on-board, one wonders if new media producers have a golden opportunity to win traditional ad dollars, which dwarf new media dollars by a wide margin. For all the talk and excitement about online advertising and online video advertising, TV advertising in the US remains a $75 billion industry.
When you realize the dichotomy between the existing business that is Television and the potential that might be Online Video, you realize why the stakes are so high. Come back next week when we update our Pyramid of Content to reflect the reality of 2010 and look at how videos will be monetized online. Also read:
Part 1: State of Online Video
Part 2: 12 Surprising Things Holding Back Online Video Advertising
Next Week – Part 4: How Will Videos Be Monetized