To wrap up the year, we will bring you a 2008 review / 2009 preview for each segment of the new media economy. In today’s Part 1, we look at Video.
I’ve now spent three years trying to develop a business around professionally-produced video content, publishing online, and syndicated across a plethora of destinations. Let me be the first to tell you: it ain’t easy. I was fortunate to burst out of the gates with my own capital, not being distracted by fundraising efforts. I got sidetracked with a frivolous lawsuit, prevailed and then continued to scale video content production, distribution and monetization. I’d 2008 marked the year that WatchMojo.com went from being an expensive hobby to an actual media business. I am actually quite bullish about 2009, let’s see how many unanswered questions will fare.
- Lack of Definitions Hurt Development of Video Advertising Market
This year was not eMarketer’s finest.
First, they come out and admit that their estimates for online video have been outright wrong, and cut them by half.
Then, they revise their figures in a manner that makes no economic sense.
Lastly, it turns out that their definition of online video advertising is in fact incomplete, and as a result, they tend to under-report estimates altogether.
At least, they try. I will give them that.
One of the reasons why online video advertising is a clown industry right now is the lack of consistent definitions and measures. This is why the estimates by the various think-tanks are do wildly different:
- Search vs. Video Similarities
Frequently throughout the year, we’ve heard that video (in 2008) was where search was in the early 2000’s. In other words: a major part of the online media ecosystem looking for a business model. In fact, in February 2008, former Google and CBS executive Patrick Keane said video is where search was in 2002.
I was leaning towards saying that after everything we’ve endured this year, the more accurate statement will be video in 2008 is where search was in 2000. That year, the Nasdaq peaked at 5,000 and within a few months stood at 1,800… going all the way down to 1,200. The dot com bubble burst and search - which was starting to develop a business model with players like GoTo.com pioneering the pay-per-click (aka cost per click, or CPC) - faced a setback, but ultimately it was a mere bump in the grand scheme of things. Look, after all, at the actual, historical growth of online search advertising, wihch charged ahead and grow rapidly during the nuclear winter of 2000-03. The 2003-04 growth in particular is amazing:
The graph above is dated April 2007, the one below November 2008, which takes us deeper into the future.
But, the numbers suggest that Mr. Keane is right, after all, this year, for all intents and purposes, video advertising did what search did in 2002… It took the economy and companies a couple of years to slash costs and get operations back on track. While dark clouds remain in the near future, it can be argued that by Q2/Q3 of 2009, things will start to look fairly better for the broader economy and I’d venture to say that by January 20, 2009, when a new administration is sworn into office, the outlook for the Web in general and online video in particular will be considerably bullish.
- In Search for a Metric: The Yield
However, as the lack of clear definition and precise estimates demonstrate, the video market is considerably embryonic. Moreover, the idea that video will have a precise business model as the search market did is becoming impossible. Search is by nature a very one-dimensional form of advertising: one searches for something and a text ad appears next to organic results. After a year or two, Google acquired Applied Semantics technology and Sprinks’ reach and launched AdSense. The rest is history, as they say, but history will show that search has not changed for at least five years since that product launch.
- Licensing Models
I also see the need to move away from strict advertising revenue share deals and towards licensing deals. I doubt this will necessarily happen next year, but the value of video content is more than simply the revenue generated thereof. When a distribution ingests video from a content site and builds an audience around that, the branding alone and revenue share might not be worthwhile. The challenge for content owners is developing libraries that are worthy of licensing deals. Most, frankly, are not. I’ve listed the reasons why on this blog before.
- Differences
Unlike search, video, conversely, is a wild animal; a multidimensional rich media that offers
- instream ad opportunities: pre/mid/post roll, overlay
- companion display banner ads
- contextual text ads
- sponsorships
- product integration and placement.
How, on earth, can we expect to marry all of these revenue streams into one metric? Well, we must try. I think the new year will eventually bring a new metric, the yield, which will capture all of the revenue that a video generates across the Web.
In fact, much the same way that the IAB standardized ad sizes, I think we will need to standardize a lot in video. Did you know, for example, that some distribution sites only share instream ads while others don’t? These need not be universally standardized across the board, but right now, it is chaotic and serving an impediment to video syndication.
Search and video advertising are very different: the former captures intent, the latter captures interest. This plays out very differently with the kind of advertising that each one draws.
But the greatest difference, really, is the expectations level between search and video. With search, we really didn’t have much expectations. We knew it would be important from a navigation perspective: 7 sites out of 10 are found via search. But the lack of business models pushed search engines towards portaldom, which created the opening - and perfect storm - for Google. Which takes us to the elephant in the room: GooTube.
- Exercise in Domination: YouTube vs. Google
YouTube was launched in 2005, by 2008 it has nearly 40% of the eyeballs in its market. This is a pace of domination that eclipses even Google’s domination in search. What is more impressive is the”stickiness” of the site: on average, a YouTube user will watch 51 videos per site, 5x more than the runner-ups.
YouTube’s origins might have been in UGC, but it has leveraged its “first to scale” status to build a business in premium videos, too.
- Impending Shakedown in UGC File Sharing Video Space
Which takes us to the next point: absolutely expect a shakedown amongst the runner-ups in 2009. In good times, some VCs would have seen a reason to continue to fund these money-losers, but in 2009 - when a VC’s limited partners won’t be returning calls and some VCs will liquidate portfolio companies - don’t expect many to have the stomach to keep covering the losses in the UGC file sharing sites.
- Web to TV
As consumers begin to adjust to the new reality of having to save money and forego conspicuous consumption, they will be drawn to stay at home. Having bought jumbo-sized digital television sets but drawn increasingly to the on-demand nature of the Web, expect a major push from Web to TV, which create the need for professional content.
- Professional Content
NBC Universal’s CEO Jeff Zucker and Discovery Networks David Zaslav have been two of the more vocal doubters of the online media marketplace. Mr. Zucker has been frequently quoted for his “we cannot trade analog dollars for digital pennies” comment and Mr. Zaslav is on record as saying that you won’t be seeing “long form content” from Discovery online because the economic model does not make sense”.
Both men are right, and this is why TV executives suffer from angst and envy. They have seen what happened to their print brethren and for TV it just might be worst because broadband media is a far more dynamic beast than text content. Once the genie is out of the bottle, getting it back in is impossible.
The economic model is scary: TV generates far more revenue than the Web [probably] will.
Why probably? Sure, it’s possible that as media becomes digital and consumers move online, the online advertising market will surpass TV?
Venerable private equity firm VSS says it will by 2011. I projected it to potentially surpass TV by 2021, but the truth is, all this suggests is that I can run some numbers to suggest that. The threat - explaining the angst and envy - is that the Web shrinks the media market and over time all traditional media companies will be looking at smaller businesses. Why else have media moguls fared so poorly this year
Our estimates forecast online advertising to surpass TV advertising by 2021.
Venerable private equity bank Veronis Suhler Stevenson (VSS) projects that to occur by 2011.
Yes, I was being conservative, by the looks of it. But until this happens, no media company will be crazy to fully embrace the Web. This opens a major opportunity for disruptors who create made-for-web programming. The truth is: the vast majority of TV content isn’t good. Over time, the made-for-web producers will share the same kind of hit and miss ratio, with some projects garnering enough backing to up the quality ante. Until then, video consumers online are pleased with the ever-increasing-quality found online.
To estimate the value potential of video content, consider the following pyramid:
In other words,
- the vast volume of video content will be user-generated, so while impressions and streams will be high, the CPM rates will be too low to create meaningful revenues.
- TV companies will have little incentive to publish online, limiting their offerings to promotional material and snippets; so while the CPM rates will be high, the streams will not be high enough to create massive aggregate revenue.
- Made-for-web producers will end up yielding the most revenue, because the CPM rates and the volume of publishing will be high enough.
As such, the winners in the online video space, over time, will not be TV companies, because like print media firms, these will seek to protect their offline business. There is little economic inventive to do so.
- Will VCs Back Video Content?
For two years now, I’ve been saying that VCs would be looking at investing in video content.
- Next Wave of VC Interest in Online Video: Content - August 2007
- Digital media content investments gain momentum - March 2008
- Rise of digital media content funds - April 2008
It failed to materialize to the extent I expected. Meanwhile, online video ads reduced in projections when eMarketer revised downwards its figures for 2008 online video advertising revenues down from $1.35B to a paltry $550M.
Do you see any connection? You should. After all, if UGC was working with marketers, AOL and Yahoo! would not be shutting down their respective UGC service, would they?
Of course, apart from a few exceptions, VCs have taken themselves out of the contest in 2009 because VCs are risk-averse types and 2009 will certainly be too volatile for most VCs to weather.
But those who venture out there will certainly gain.
Here are Predictions for 2009. Enjoy the rest of our series in the days to come:
Tuesday December 23 2008 - Online Advertising
Wednesday December 24 2008 - Social Networking
Thursday December 25 2008 - Venture Capital
Friday December 26 2008 - Mergers & Acquisitions
Saturday December 27 2008 - Search
Sunday December 28 2008 - Digital Music
Monday December 29 2008 - Wireless
Tuesday December 30 2008 - The Economy
Wednesday December 31 2008 - WatchMojo.com 2008 Year in Review and 2009 Preview.
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