Hulu’s growing pains are emblematic of old media’s challenges and symptomatic of its pedigree.
Hulu is the free premium video site that was launched by News Corp. and NBC and today also includes Disney/ABC as a third parent. A bit of a disclaimer: WatchMojo supplies Hulu with a plethora of videos across multiple categories.
Let’s first look at Hulu’s pedigree to understand why this script ending should not have come as a surprise to anyone.
Too Many Cooks in the Kitchen?
According to Mediaweek: “Observers predict that the already complicated arrangement is likely to become more so, particularly given the prospect that NBC Universal may be sold to Comcast—which already operates its own online video site (Fancast) and has a markedly different philosophy regarding just how free TV content should be on the Internet.”
I’ve always feared that what led to Hulu’s quick ascent - access to great content - would in turn mean that its media owners would eventually bicker and have divergent opinions on strategy. After all, while Google’s YouTube is Big Media’s frienemy, over time, Big Media’s biggest enemies are one another as they vie for market share.
That is half of the equation.
Market Timing Never Works, You Have to Stick to Your Guns
Old Media makes decisions based on today’s conditions, which ensure that in a few years time, when the project has taken off, the conditions might no longer be conducive to their strategy and execution.
Case in point: Hulu decided from Day 1 to go free, this helped the company’s traffic take off: Hulu has soared from 12.5 million unique users in September 2008 to 38.7 million this past September, per comScore.
When the site launched, the decision to go free was smart. After all, the challenge was to change consumer behavior and thwart piracy.
To put things into context, in the summer of 2007, Rupert Murdoch’s News Corp. was seeking to acquire Dow Jones and there was talk of making Dow Jones’ Wall Street Journal website - the most successful paid content website in the world - go free to capture more advertising dollars.
At about the same time, Hulu was moving from an idea to beta to launch. Never was there talk of making consumer play, not because Hulu’s media owners (which included Murdoch’s News Corp.) cared about user preference, but because it was an advertising play.
The Economic Meltdown Changed the Script
With the 2008 economic meltdown came a slowdown in advertising. This slowdown affected traditional media and advertising more than online. As a result, the downward pressure on media companies’ share prices accelerated and this forced them to reconsider the free, ad-supported content model.
Incidentally, there is no more talk of converting WSJ.com into a free site, in fact, Mr. Murdoch today talks of serving less users on his web properties but charging them to access the content.
Yes, times they change.
Hulu is a great partner of ours. We really wish them well. The CPMs they command are so much higher than the industry standard that we wish that they grow as a site so we grow with them. But the story twists we read in the press should come as no surprise because media companies are impatient and desperate.
Have We Seen This Movie?
What they fail to realize, ironically, is that no matter what plan they hatch today to get users to pay, by the time these plans are implemented, the advertising market will return and they will find themselves on the inside of the pay wall looking out, once again finding themselves going against the grain.
On March 12 2009, AOL replaced Randy Falco with Tim Armstrong, who previously ran Google’s North American sales operations. I attended the Media & Money conference yesterday at the Roosevelt Hotel in Midtown Manhattan and heard Tim talk about AOL’s future and past.
First 100 Days: Strategy vs. Cost Structure
Before even accepting the Chairman and CEO role at AOL, Armstrong got a ton of advice from experts and monday morning QBs alike.
Once he joined, his first 100 days were highlighted with an assessment of the company’s assets and position in the marketplace. He received thousands of employees’ suggestions. Subsequently, Armstrong decided to wipe the slate clean and formulate a new company strategy that fit on a single page.
The Strategy: Content, Ads and Communications
On this one-pager, Armstrong formulated AOL’s three pillars:
1 - Content
2 - Ads
3 - Communications.
AOL Time Warner: 50% of Marriages End in Divorce
Of course, to talk about AOL’s future, one must put the January 2000 merger with Time Warner in context:
AOL/Time Warner will be 55 percent owned by AOL and 45 percent owned by Time Warner. The combination will immediately boast a market capitalization of $350 billion and an annual revenue stream topping $30 billion.
That’s right, buoyed by the Nasdaq’s gains and AOL’s growth in the 1990s, AOL acquired Time Warner.
The Nasdaq peaked in March 2000 at over 5,000 and crashed down to 1,200 by the next year. To be fair, while there were macro-level causes for the result, there were also some unique factors at play.
From a 2009 article in TheDeal:
The new economy was never realized, and neither was AOL’s potential as the driver and distributor of Time Warner’s unmatched inventory of content. Not that AOL Time Warner, which dropped the scarlet letters A-O-L from its corporate name in 2003, didn’t keep trying. The efforts have already added two successive AOL heads — Jon Miller and Randy Falco — to the list of those the original deal beheaded.
It didn’t help that, as an Internet service provider, AOL has never been more than dial-up. That meant the transaction in which it figured so prominently (its shareholders received 55% of the combined entity’s equity) had built-in obsolescence. It also meant, arguably, that the promise misplaced in AOL kept its parent company from pursuing the potential of its much faster and technologically advanced cable-driven ISP, Time Warner Road Runner.
Throughout that decline and the increased obsolescence of dial-up technology, Time Warner’s size relative to AOL grew considerably and the AOL/Time Warner merger cost shareholders billions of dollars and after less than a decade, the powers that be at Time Warner decided that AOL had to go.
As a result, the Time Warner brass needed to sell AOL - the new stock - to institutional investors and few have the presence and track record of Tim Armstrong, Google’s former North American VP.
The Story Starts: Use of Funds is Main Divergent Issue
According to Armstrong, the main driver for the spin-off is how differently AOL and Time Warner would use cash. Oddly enough, while merger was doomed due to culture clashes and bad timing, in theory, the case for the merger is as sound today - on paper - as it was then:
“Together, they represent an unprecedented powerhouse,” said Scott Ehrens, a media analyst with Bear Stearns. “If their mantra is content, this alliance is unbeatable. Now they have this great platform they can cross-fertilize with content and redistribute.”
The problem, of course, is that big “transformative” mergers and acquisitions are transformative in good or bad ways. They can radically help grow a company (look at how much revenue eBay generates from Paypal from example) but they can also kill a company.
Let Bygones be Bygones
If content, ads and communications are the focus of the company, then the company’s objectives are:
Objective # 1 - To Become The Largest Producer of Content Online
Armstrong has talked a lot about AOL being the Time of the 21st century with regards to producing content, lots of it.
It’s worth noting that Time.com’s own Managing Editor Josh Tyrangiel admits that “long form journalism, a staple of magazines like Time, is not working online”. As such, maybe emulating Time too well won’t serve Armstrong either. Of course, time will tell.
”You are seeing more and more talk of content and scaling it.” AOL has hired hundreds of reports and is investing in systems to scale the production and distribution thereof. Armstrong said he wanted to bring “Silicon Valley’s platforms and mentality to content,” and echoing something I’ve been saying for a while, he added that “while there has been a lot of investment into technology, not much investment has been made in content.”
He’s right. But AOL’s not alone in investing in content, though companies are going about it differently.
Should be stated that we at WatchMojo are now one of the biggest supplier of premium video content online. We not only supply the usual suspects (YouTube, Hulu, etc.) but also vertical sites. Who else, do you know of, for example, supplies both business videos to Thomson Reuters and video game content to IGN.com?
As I also like to say, unlike technology, content isn’t a zero sum game, and in fact, as a content entrepreneur and executive, I love seeing more and more focus being put on content.
The heavily-funded startup Demand Media is also into producing hoardes of content. What sets AOL apart from Demand Media is that while Demand is intent to play the SEO/Google Ad Sense text advertisement arbitrate card, AOL’s second objective is to leverage the strong display advertisement business Armstrong inherits from previous executives such as Mike Kelly (who encouraged the Advertising.com deal, which we ranked as one of the best Internet M&A deals of all-time in our 2006 list here), Jon Miller and to some extent Randy Falco.
Objective # 2 - To Become the Biggest Seller of Display Advertising
AOL owns Advertising.com, the largest ad network in the world. Of course, AOL also owns Tacoda, Quigo and a barrage of other ad networks that were bundled and branded Platform A but have now been - shocking I know - separated as well.
The problem with AOL’s strategy under Falco was that it became a strictly quantitative approach to sell reach and networks, whereas advertising - and brand advertising in particular - is a different beast.
What is really shocking about Armstrong is that despite his pedigree at Google (a joint run by a bunch of quants, basically) is just how much he thinks like a media / content / advertising guy, which makes sense given his role and success at Google, but still, it’s refreshing to see.
Web’s phases
If Armstrong is singing the “contest is king” mantra, it’s because history suggests the next boom will be in content. Yes, this is also a theme in my ruminations, as the Web now shifts to an era of consumption of information and entertainment.
He broke down the Web’s phases as such:
1) Access: ISP, portals, search engines, etc.
2) Platforms: Facebook, MySpace, Twitter, etc.
3) Content: speaks for itself.
Across all new distribution platforms (TV, radio, print), over time, it’s content that becomes most valuable.
AOL isn’t merely interested in producing the right type of content, it’s also looking at scaling quality content, building systems and platforms to help content creators.
SMO Replaces SEO?
When asked about social media, Armstrong views it as a great way to distribute content.
I agree, I think in video at least, because search engines do a crappy job of indexing videos, SEO has been replaced to some extent by SMO, or social media optimization (I’ve called this SNO, or social networks optimization, in the past). This has been accentuated by the “deportalization of the Web”.
He touched on Bebo, which he suggests is being repositioned on what it did best: sharing media and entertainment amongst friends.
Display and Video to Outperform Search?
The next $50 billion that shift online probably won’t respect the same ratio between search and display. He’s right, here’s a graph to demonstrate that:
Related: can online video advertising can surpass online search advertising; can online advertising outright surpass television advertising?
It’s no secret that Armstrong is repositioning AOL’s ad network business, suggesting that AOL’s extreme focus on Platform A might have been misguided.
To become the #1 in display banner ads, he added: “Display cannot be about ad networks and reach alone, brand advertising could be done differently, it’s about the ‘brand story’”.
Multi Brand Strategy
AOL has 70 properties, ranging from men’s blog Asylum to Spinner, but AOL sells mainly by audience. As Asylum’s quick ascent has shown, AOL doesn’t merely have the traffic and eyeballs to build large properties, but it has data.
As a VP for men’s lifestyle site AskMen, I worked with both MSN.com and AOL.com in the early 2000s, and one thing that AOL had was a lot of information on user’s interests, click through data and what not. As a result, if it decides to focus on an audience, it can move fast… and efficiently.
Of course, that is theory; in practice, it boils down to execution and having the right content.
“More and more advertisers see themselves as content producers,” continues Armstrong. I agree, but we’re also seeing a more sober stance occasionally when marketers decide to stick to what they do best.
He touched on local and video, too.
Local
“All about living lives better locally”, he stressed. He invested in Patch due to a personal frustration over a lack of information at the local level. AOL acquired Patch, who has since expanded into 30 cities and tends to partner with local media, as is the case in New Jersey.
Video
AOL is producing six times more videos than it was a mere 4-5 months ago. The content can be broken down into two main genres:
- very high quality (Beyonce comes in the studio)
- original videos based on their media properties.
I personally break professional videos into two: super premium and premium. Here is my not-so-complicated view of content online:
- At the top, you have ”super premium” representing Hollywood, studios etc. You can command extremely high CPMs but the inventory is usually low etc.
- In the middle, you have “premium” content, basically being where WatchMojo now has built a nice position. If you’re keeping track, CPMs are healthy and inventory is decent, so the overall revenue is highest here.
- At the bottom, you have UGC, which totally changes the rules of engagement of media, news and publishing, but which will fail in ad-supported model.
Echoing by bearishness on scripted entertainment, Armstrong believes that there is an “opportunity” in scripted entertainment, but can’t take a Hollywood approach online. This is why many companies have failed, in fact, in the video content business.
AOL’s Future
The Verdict is obviously still out. Yesterday’s chat is largely about getting the story right and out, as institutional investors will have to buy into the story and the stock once Time Warner completes the divorce less than a decade after the marriage.
Will the Street buy in? Who knows. After all, the Street applauded the TWX/AOL merger when it happened, and then evaporated 90% of the value of the combined entity.
But I do know that Armstrong is saying all of the right things to position AOL as the home of great content and as a home for content producers. And, if content is king and in the end content prevails, then AOL might prove to be a nice long term bet amongst media stocks.
You can read more about Armstrong’s chat yesterday at the Media & Money conference on Business Insider. You can also read my previous posts on AOL and their content initiatives here:
- Mediaglow: Silver Lining in AOL Empire?
- Did Armstrong Leave Google Because Content is King?
At WatchMojo, we’ve signed a lot of partnerships and distribution deals over the years. We’ve also managed to work with major marketers such as Coca-Cola, McDonalds and Malibu Rum; all sources of pride.
But probably none have made me as happy and proud as our new partnership with IGN.com. Check out our channel here.
IGN is the world’s #1 ranked video games site, part of the News Corp. media empire. They’ll be distributing our movie and video game content. Of course, we work with many News Corp. units, including MySpace and Hulu.
But this one is extra special… and long overdue.
As many of you know, in 2005, IGN bought my old company AskMen where I was a VP and partner, so this is a kind of homecoming of sorts. And yes, it was largely thanks to the proceeds of that sale that WatchMojo exists today.
Life has a funny way of unfolding and this deal is fitting (and ironic) in many ways, especially as we approach our 4-year anniversary and cross the 100,000,000th all-time video stream milestone!
Check out the sweet player, to boot:
Video via PaidContent of Arianna Huffington and Mathias Dopfner, CEO of German media giant Axel Springer, moderated by Christine Ockrent, CEO of the government-funded France 24 TV channel, was pitching it to be.
Here is the full interview I did with Tim Sykes - enjoy:
Monthly magazine ad pages are down 33%, or 8,359 ad pages this year. For Conde Nast in particular:
Man that sucks any way you dice it. Business Insider asks: “The real questions for Conde Nast: Is this is a one time event brought on by the recession? Or is this is a permanent trend?”
Hmm… I’ve subscribed to magazines for a decade now and the trend is pretty clear: they get thinner and thinner, and some just - poof, like magic - disappear.
Joining me for tomorrow’s 3rd show of WatchMojo Live is Tim Sykes.
Tim Sykes is an investor, author, entrepreneur and media personality who parlayed $12,415 Bar Mitzvah Gift money into a fully audited pre-tax sum of $1.65 million from 1999 to 2002 before founding his hedge fund, Cilantro Fund Management, LLC in 2003. Author of An American Hedge Fund, Sykes was born in Connecticut but attended school in Tulane, Louisiana and today lives in New York City. Since the beginning of 2008, Timothy has been the #1 trader/investor, out of 25,000+ on Covestor.com, a website that tracks and verifies all trades, by earning 365% as the overall US stock market dropped 40%. He has written for AOL and featured on ABC, CNN, CBS, CNBC, FOX News and far too many other places to name in this blurb. Catch him on WatchMojo Live on Wednesday November 11th 2009.
Let’s hope he brings the ladies tomorrow:
Check out his site here. Check out the show tomorrow, Wednesday, at 3pm EST on WatchMojo Live.
Here is the interview I did with PaidContent.org founder Rafat Ali last week on WatchMojo Live:
Somehow*, I came across Paul Lee’s post on high valuations, he’s a founding member and Senior Vice President at the Peacock Equity Fund, a joint venture between NBC Universal and GE Capital:
A high valuation is problematic for a number of reasons. The first, and probably most important, is the impact on the company’s ability to attract quality talent. That’s not to say that you couldn’t (I’m sure the aforementioned microblogging site is seeing a flood of resumes). However, most people in the startup world join startups for the equity upside in a liquidity event or IPO (although the garage sale furniture and stale pizza at 1 a.m. is tremendously appealing). When a highly priced round is completed, guess what–the strike price of the options also go up. In effect, the hurdle for the options to be “in the money” has gone up and the value of the options has decreased. The motivation for the employees coming in after the financing has been materially altered.
Another difficulty in raising a highly priced round is the set of expectations from the new investors. Given the high valuations, the milestones that you’d have to hit to justify the valuation are usually aggressive. The difficulty in setting such aggressive milestones is that if you only complete 50%, you’ve basically built a bridge to nowhere. When you next need to raise capital, you may be faced with a down round, or in extreme circumstances, a complete recap or non-funding. Lawsuits and tensions around the board about fiduciary responsibilities are common. Not very fun stuff.
It sort of reminds me of a quote from a low-profile entrepreneur named Bill Gates who started a software company in Seattle back in the day. He quit to run a non-profit to help end poverty:
One challenge Microsoft did face, and that Netscape now faces, is coping with a high market valuation. Netscape has little income, but investors have valued its stock at more than $2 billion. When a company’s shares have a high value, expectations from investors, including employee-owners, are correspondingly high. Failure to meet those expectations can be damaging. If you’re giving share options to employees so that they can participate financially in the expected success of a company, a high valuation hurts. If the market’s already anticipated the great work those people are going to do, then their stock options won’t appreciate much in value, if at all. This can make the options worthless. Many times in the past I have felt that Microsoft stock was higher in value than it should be. Subsequently I was proven, in a sense, to be wrong. Controlling expectations—whether about deliveries, product features or stock value—is often wise in a technology business. It’s a lot better to under-promise and over-deliver.
Read more about that here.
[* A lie. You will see why and how I was on Fast Company in a few days when I post the Fast Company article that mentions WatchMojo.]
The best line about the whole Skype saga has been that “everyone who has ever done a deal with the Skype guys has walked away unhappy.” I think it came from Tech Crunch.
Now, Index Ventures and alleged slime ball Mike Volpi are out, and in their place comes the original dashing duo.
Read more. But I wonder, how long before Volpi leaves Index to “spend more time with his family?”
And seriously, what is wrong with a VC like Index to begin with?
PLAY
