BUSINESS BLOGS
BUSINESS BLOGS
category: business
19 Oct 2007

Raise your hand if you’re a TV executive. Great, thanks. I see many of you are.

Now raise your hand if you’ve got a clue what to do regarding the Web. Hey, where did everyone go?

Media Malaise Reported in Mainstream Media

NYTimes has an interesting piece about how media firms are starting to take risks by acting like VCs:

NBC and another division of General Electric announced a $250 million investment fund last spring. There are venture investments from the Warner Music Group, the Hearst Corporation, Reed Elsevier, Comcast, The New York Times Company, Universal Music, Reuters, ABC and Disney and Sports Illustrated.

Apart from acting like VCs and investing in tech and new media startups, media companies have been taking greater and greater risks with acquisitions, too, in the process of driving up asset prices.

Some recent deals, such as the one where Hearst buys UGO for $100M, is just one example. As consumers ebb away from offline media to online, traditional media companies are starting to take bigger risks.

This week, Discovery Networks plunked down $250M for Atlanta-based How Stuff Works.

Let me say right off the bat that I absolutely love Discovery’s programming. In fact, when we at WatchMojo.com produce video segments such as the Wonders of the World (Ancient, Modern, Natural) or the feature on the planets and our solar system, you can smell the inspiration from light years away.

Let me also repeat that I like HSW and respect everyone there, even having met a few of the folks in person. I’m extremely happy for them and their big payday.

But it must be said, the deal is odd in that Discovery wants to funnel their hundreds of hours of programming from TV to the web via HSW. I see a few problems with that.

First, that sounds great in theory but that’s awfully akin to shoving ten pounds of meat in a one-pound bag. HSW, despite its great brand and content, has 5-10M uniques (US/global) only. To pop up in the Top 10 or 20, if not 50 sites, you need many more uniques than that… to move the needle, Discovery needed a bigger play, in fact.

I spent some time looking at Discovery Communications financial statements, it’s a $7.75 Billion market cap company, did $688 Million in revenue in 2006, flat from 2005, when it did a tad more at $694 Million. You don’t need a math degree to realize that flat revenues are not welcome and unless the company changes course it will suffer the same fate as print companies: a shrinking business, as users move online. But was paying $250M for one content company that is text-based the best thing to do?

Yes, would argue the M&A folks.

“We’re way behind in new media and digital,” says CEO David Zaslav, who has shaken up Discovery since taking over in January. “I don’t think we win just by building vertically.”

It helps that HSW’s search engine optimization is strong, the theory, then, is that as users land on HSW, they will now see video from Discovery, which the merged entity can sell ads against and make that $694M go up, right?

Video Ads vs. TV Ads

Well, that’s the game plan, but while TV ads account for a $75B market in the US alone, web video ads did $439M last year, will do $750M this year, and are pegged to do $3.1B in 2010 and $4.3B in 2011, with worldwide video revenue online crossing $10B by 2011…

As you can see, the entire online video market did less last year that Discovery booked in all, and will do slightly more this year. Video ads online will only take off in the next 18 months, but it’s started already. But this begs the question: how much will go to Discovery/HSW, time will tell. Clearly, the planners within Discovery felt that at present time, without HSW, the answer to that question would have been pretty darn close to nil. With HSW, the argument is, it should be something, hopefully something material.

But when you consider that YouTube - the largest video site in the world, far and away - only did $15M in 2006, or 3.4% (out of $439M in all last year), you have to wonder if plunking down $250M for a site with 5 to 10M uniques is money well spent (comScore shows HowStuffWorks with 3.9 million unique U.S. visitors in September, up 74 percent from a year ago, and with 18 million page views, up 40 percent).

Of course, it should be added that Discovery’s digital team is now led by former NBC executive David Zaslav, so the notion of remaining in full control of their content and distribution channels is expected, but it’s not the trend online.

Property vs. Network

YouTube’s explosive success (we ranked it the most explosive startup ever) was largely due in part to embedding video. Of course, when you don’t own the rights to the video, you don’t care where it lands. But if you own the content, surely you care where it ends up, so you want to be in control of the player and the advertising revenue attached to it, once the market for web video ads crystalizes.

Viacom Kills TV Business?

That’s why, I guess, it’s not a surprise that this week another media company did something interesting: Viacom decided to put the archive of Jon Stewart’s Daily Show, online, on their own site. From Paid Content:

As to why this made sense: “People should be reacting to ‘The Daily Show’ on its own site…God bless them doing it everywhere else, but this should be the epicenter of it,” said Erik Flannigan, EVP of digital media at MTV Networks, in a THR story.

The site will be ad-supported: LAT says designers have been experimenting with ads that appear for two or three seconds at the start of a clip, recede, then emerge briefly from a corner of the picture like a network-TV promo while the video continues playing.

Of course, not all strategies will pan out: either folks will go directly to Dailyshow’s website or to aggregators like YouTube, right? Well, that’s exactly what Rich Greenfield, the analyst with Pali Research wrote on his blog

“While there may always be a place for content aggregators, we believe the ease of going directly to content-focused sites such as The Daily Show and the ease of a Google search for content makes it hard to understand the value of the entertainment or television sections of AOL.com, Yahoo.com or MSN.com.

I work with content aggregators, we use them as additional distribution outlets, so naturally we wish them success… but you don’t need to be a genius to see which ones will remain relevant and which ones will flop. I can see, day in, day out, how many people watch our videos on each network. With 2,500 videos (4,000 if you count everything we’ve filmed but yet to publish), I have a unique dashboard on how each video aggregator is doing and growing, and Pali’s Greenfield is not wrong.

The problem is, I’m not sure if Viacom’s desire to retain full control of the content makes sense. Alternatively, CBS has taken the opposite strategy, by striking non-exclusive deals with everyone and anyone. Its reach has soared as more eyeballs have access to their content, but time will tell if the strategy pans out when ad dollars really shift to video advertisement online. Will CBS’ strategy prove to be the better one, I don’t know… we shall see.

What about the 800-pound Gorilla, Google?

Of course, in a certainly unrelated move, Google introduced a content ID protection tool at around the same time they start running ads alongside content.

But, I’m sure that is just a massive coincidence, right?

Who Will Win the Online Video Ad Sweepstakes?

Google commanded 40% of US ad dollars in the first six months of 2007, it paid out over $1B in Q2 alone to publisher partners, sure, but the point is at the starting point, Google has the lead.

It also owns YouTube, the biggest ecosystem of web video content and eyeballs in the world. So while I think media companies have fantastic franchises, assets, and upside, I also fear that they’ve been suckered into a game of who can most aggressively leverage the Web, which for a media company that relies on a $75B US TV ad market, means that their businesses are going to shrink quickly as consumers and ad dollars flow to the Web.

Of course, traditional media companies will never fully use the Web as a distribution outlet, they’ll use it as a promotional outlet because the ad market is tiny online while it will remain considerable on TV. As such, the notion of giving users a bit but not all will help the shift of dollars to the Web, but ultimately, in this context, moves by Viacom and Discovery really only accelerate their businesses becoming smaller.

After all, as I’ve written frequently, US advertising (total) is a $250B market, only $17B was spent online… but marketing remains uber-ineffective… as marketers wise up and shift more money online, I think that the total pie might not really grow all that much… at least not in the US, in some offshore markets, but that’s a separate post for a separate day.