I’ll be honest and say that I don’t fully agree with Michael Eisner’s online video strategy at Tournante. In fact, I don’t get it. I’d say he’s throwing a bunch of things against the wall hoping that some of it sticks. More power to him for that.
In the spirit of candor: I emailed him last year to inquire about what he was looking to invest in, shockingly I got no response. That’s fine. I was told by his peeps it had something to do with not having agent representation. How old media!
He went on to make more investments that dumbfounded me some more… but that might have more to do with my ignorance than anything else. Bottom line is web video is very nascent and experimentation is the way to go. In fact, last year people thought we were crazy at WatchMojo.com and yet this year everyone thinks what we’re doing is “obvious and smart”.
Anyway, I’m not sure if I agree with it or not: like most media moguls, I think Michael Eisner says some pretty smart things in between some pretty not-so-smart things. But, I’m linking to this Valleywag post because the last line is pretty darn funny:
Indeed, failure seems to follow him. It did when interviewer Deborah Soloman asked him to explain the name of his production company Vuguru. She said:
“To me it sounds like a drug, like Vioxx or Viagra.
Eisner responded:
If it reminds you of something that creates new strength, I guess that’s O.K. In French, vous is second-person plural. Vuguru — you are the guru of viewing. It was just a made-up word.
As made-up as his observations about the business of online video.
Ouch.
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WatchMojo NewsletterJust last month, Google’s stock nearly hit $750/share, or $225B in market cap. Today the stock is down over $100/share. No, that’s not a typo. Yes, a lot of it is due to profit taking as well as the uncertainty surrounding the credit markets, though an analysis of the situation would definitely suggest that Google in particular and online advertising would win over offline advertising as the economy cools.
Either way, what makes this $100+ drop more interesting is that Google’s market share in the red hot search market now stands at nearly 65%. That’s right, almost 2 out of every 3 searches are powered by Google. Look at the search advertising growth in years to come and tell me if Google at $625 is a buy opportunity or not. I don’t know.
To me Google is expensive but indeed, every other correction in share price has turned out to be a buying opportunity. Invariably stock prices don’t continue to climb, but Google - as search king - does not seem to have run out of gas.
Who owns a video stream? Obviously, the short answer is the copyright-holder. Online however, it’s never so easy.
Earlier today, we asked who would become the Google of Video? It’s not an easy question, mainly because the web is so fragmented and there are many well funded companies taking on Google, who itself aspires to be the Google of Video via YouTube…
Alas, this begs the greater question: who owns a video stream? Answering that philosophical and practical (read technical) question might help us answer the question.
First off, a search query is fundamentally different from a video stream in that each one can be broken down into:
Both video and search can be summed up by:
Value = content + technology + advertising + distribution
What is different is how each component is defined.
With search, content can be defined in two ways: the keyword or the organic results that load up after the search is served.
Thus, the Value of a Search Query:
+ content: a keyword/search results
+ technology: an underlying search index/algorithm
+ monetization engine: advertising
+ distribution: a search box/text link that triggers the query (a place/destination where the search is done from)
To understand why Google became such a money machine, frankly, it boils down to understanding that Google does not need to remit anything for the content component of the value chain: the keyword is part of the public domain, and as such, Google does not need to pay out anything for it, even though it is what generates the value chain. Then, Google does not pay the websites that appear in the organic search results, au contraire, it is offering them something valuable in traffic and branding.
Next up comes the technology. In Google’s case, obviously it owns the underlying search index/algorithm.
Initially, Google was only a destination site and as such, it retained all the monies generated off the search, which takes us to the monetization engine. Again, in Google’s case, it owned the monetization engine because Google was building up its paid advertiser database. So when people did searches on Google, once again Google retained 100% of the revenues.
Once Google began to generate revenues, it made sense to extend its reach away from the google.com property outside to the Web and build distribution. Google leveraged its algorithm to power other high-traffic sites, and in exchange, it shared revenue with these sites. This was one more reason why Google was a one in a million case study: search was not a profit unit, it was a loss leader, so instead of charging portals a licensing fee to power their search, Google came in like a white knight, powered their free search and offered them ads to boot, with a generous ad share.
In fact, Google would remit anywhere from 50% to 110% to distribution partners whom it powered (Yahoo!, Ask, etc.).
That, of course, explains Google’s AdWords program.
Eventually, Google flipped AdWords onto its head and launched AdSense, which allowed publishers to serve up contextually relevant ads, again on a revenue share. By acquiring Applied Semantics, it got a great contextual engine, by buying Sprinks from About.com, it consolidated this market.
The point is, Google was a money machine because there was no underlying IP (the keyword belonged not to the user, or a third party, but wherever the search was conducted; the ads were powered by Google and depending on distribution, Google would keep all of a portion of the revenue).
This was the business model to hit the Web, frankly, since eBay’s 85% margins created a $40B company out of Pierre Omidyar’s vision.
Google took it many steps further. Today it’s a $200B company.
Why Video is Different
Video is really a very different market. I now believe that the video advertising component of online advertising will become greater than the paid search market. There are many reasons for this, but mainly, video ads on the web will be powered by TV’s $75B ad spending and the fact that large corporations will be the driver of this slice of the pie… whereas small and medium sized advertisers drove the paid search market.
In video, the value chain is quite different.
It starts with the content, which belongs to someone. As such, immediately, the margins are different and affected. Imagine if Google had to pay users for the query and/or the websites listed in the organic search results for a right to create the subsequent platform/monetization/distribution ecosystem. Would Google be worth $200B? Of course not.
Anyway, back to video, the content belongs to someone, be it a traditional or new media company…
Then, there is once again the technology that serves the video, which unlike search is far more expensive to host and serve.
Sometimes the advertising platform is embedded, sometimes it is not.
Then once again there is the distribution point where this video is consumed. If a content producer like WatchMojo.com serves this content on its own property, then it retains 100%; if alternatively we remit a portion to one of our many distribution partners, then we get a cut.
Today, distribution has really become fragmented. Even though YouTube might account for over 50% of all video streams, they do not account for 50% of revenue mainly because of the nature of the content found on the site. As such, over time, no one site will really be the Google of video… so in other words, we see that the advertising / monetization engine becomes quite fragmented, and in a mathematical mindset approximates to zero, because no single player will own the video ad market the way Google owns search. To understand why, click our previous post.
However, due to the breakdown of the video value chain, unlike in search,
the Value of a Video Stream:
+ content: the video
+ technology: the platform
+ monetization engine: advertising or subscription
+ distribution: a place/destination where the video is streamed and watched
Again, you can see that the breakdown and economics of video content and advertising are fundamentally different in the sense that the underlying content is not in the public domain. Someone owns the content, and they are the chicken and egg of the value chain.
While YouTube is currently the technology platform of choice amongst consumers, that is not the case for businesses (content producers and other web properties).
For the reasons we outlined above, it is neither as ubiquitous as Google is in search nor will it exert the kind of financial leverage Google did due to the nature of the content found on the site, so it won’t command the kind of grip on the monetization either… In fact, while Google borrowed from GoTo.com/Overture’s pay per click model and made it the de facto business model in search, no one, and we mean no one has found the holy grail in video advertising.
Lastly, distribution remains in favor of YouTube, but even that is awfully fragmented, suggesting that distribution alone won’t be what determines the winner.
Why Content is King, Particularly in Video
In this context, I think that content will rise to the surface if the quality is good enough, distributed widely, on a wide array of platforms and easily sellable to advertisers. Digital content, in this context, is the new software in the sense that once it is produced, all incremental consumption is practically pure profit… because content owners do not need to worry about platforms, they also do not need to worry about monetization, and if syndicated wisely, they can become successful regardless of any single point of access, format, or platform.
Last week at Om Malik’s New Tee Vee conference, CRV venture capitalist George Zachary said that content was not the place to be, in fact, he argued, the social networks who owned the users were the larger creators of wealth. I respected his perspective but respectfully disagreed because unlike in search, where the search query (content) comes from one point and is exclusive to that point (though powered by someone else, usually Google), in video, the content is not exclusive to any one social network, distribution partner, portal etc., the only one who owns that content, is, you guessed it, the content owner.
For that reason, the fundamentals of video advertising are very different because the dynamics between content and technology are fundamentally different.
Take all of this with a grain of salt, of course, because it comes from a content producer.
Today AOL attempted to be the Google of Video by introducing Ticker Ads.
I’ve frequently written on how Google managed to leverage a perfect storm to become the fastest growing and most valuable web company ever.
The factors include:
- Google was not the first search engine, so its technology was not lagging, quite au contraire, it was arguably better than that of its peers
- Due to the lack of business models in search, all of the larger search engines - AltaVista, Excite, Lycos - embraced portalization and left the pure search business.
- Google managed to “borrow” from GoTo’s pay per click business model and took advantage of the fact that GoTo.com lacked direct to consumer distribution to make the model its own.
- Somehow Tim Koogle, Jerry Yang and David Filo got convinced to showcase Google as its default search engine on the world’s largest portal, Yahoo!
- The dot com bubble burst, so no one was competing with Google aggressively while Google rose to prominence>
- By virtue of being a private firm, Google did not need to disclose financials until it filed for its IPO. Only then did competitors realize just how profitable search and Google were. But by then, it was too late for others to step on the offensive.
- By the time Yahoo! decided to get serious about search by buying Inktomi (algorithm) and GoTo.com (then called Overture), it got entangled in an integration nightmare, giving Google even more time to build on its lead.
- Looking back, search advertising benefited from the bust because pay per click was a relatively low risk advertising proposition for advertisers.
These factors, in a nutshell, explain why Google became a dominant player in search, and has since leveraged its quasi-monopolistic position in the market to extend its grip on ad dollars onto display/banners (acquisition of Doubleclick), newsletter/emails (Feedburner), video (YouTube).
SEARCH IS KING
Clearly, search accounts for the lion’s share of ad dollars, at 40% of the total pie. Google, in turn, accounts for 40% of the ad dollars spent online, at least in the US. Combining these two, Google’s position has drawn envy, jealousy and criticism, hence the potential blocking of the Doubleclick acquisition…
VIDEO IS NEXT GROWTH AREA
Because Google showed just how valuable an online advertising supported business can be, investors have aggressively invested in what they consider to be the next high growth area of online advertising, that of video.
There has been a very large investment in video file sharing networks as well as video advertising networks. We personally think that the top 1, 3, maybe 5 players in each space will do well, but only 1 or 2 will represent the 10x, 100x, let alone 1000x return investors want.
In fact, in file sharing, YouTube has already emerged as the winner, though like Google demonstrated, it is possible for someone to emerge as a winner even if they are not one of the first players in a space.
Then again, Google managed to win not by being the first search engine, but because it emerged out of the bubble…
IT’S A MARATHON, NOT A RACE
While we might invariably experience a slowdown in the euphoric state we’re in, we will never have a 2000-2002 style of meltdown and nuclear winter because few of the companies are public and investors that are exposed remain private ones such as VCs, well-funded corporations and private equity behemoths.
But because Google has created believers out of many, I simply expect investors to keep funding the top 5 players in each space while the laggards vanish. This will certainly happen in both the file sharing space and the ad network space, too.
In fact, you have already seen Daily Motion, Veoh, Metacafe all get Series B, C, D and E rounds of financing. Likewise, companies like Video Egg et al. are getting follow up rounds of funding… but some of the smaller, less fortunate players will not. We won’t name those here because that’s not the point of this post and if we did, we’d like them to have a chance to answer the allegation that they will go out of business. Although we don’t think they’ll go out of business, they will simply get consolidated as the video market amalgamates.
Ultimately, the problem with the current investor risk / return profile is that investors seem to have bet on many of the file sharing and ad network services expecting them to become a Google of video, but what they fail to realize is that unlike in search, in video, you will never have one company own the market like Google owns search… and if one company does own video does dominate video, it would be currently be YouTube, incidentally, acquired by Google. Though over time, we doubt that YouTube will win over many traditional media companies who would rather see their content go unseen than add more firepower to the Google / YouTube juggernaut, whom they accuse of raiding their business.
As such, ironically, if Google pulls off the acquisition of Doubleclick and continues to improve YouTube, then the Google of Video might be Google, and not anyone else… this would put a dent in a lot of investors’ dreams because those companies will fail to get the kind of revenues and margins that their current funding rounds would call for.
Part 2: WHO OWNS A VIDEO STREAM?
Last week, on November 12-13th 2007, a who’s who list of broadband video players gathered in Barcelona to look at the state of high definition in Europe.
The speakers included:
Day1
The European Hi Def Landscape
Jim Bottoms, Co-Managing Director, Understanding & Solutions
Conveying the Hi Def Message
Tim Page, Technology Marketing Manager, Sony Europe
Olivier Van Wynendaele, European Assistant General Manager, Toshiba
Dietrich Westerkamp, Director Standards Co-ordination, Thomson/EICTA HDTV Issue Manager
Moderator: Sarah Carroll, Co-Managing Director, Understanding & Solutions
Filling the Content Gap: Where Will the Hi Def Programming Come From?
Seetha Kumar, Head of HD, BBC
Fiona Maxwell, Director of Operations & Servicing, Granada International
Bill Roberts, VP of Programming, Voom HD Networks
The Challenges of Live Hi Def Broadcasts
Peter Angell, Director, Production and Programming Division, Host Broadcast Services
Florian Camerer, Senior Sound Engineer, ORF (Austrian Broadcasting Corporation)
Timo Koch, Managing Director, Outside Broadcast
Moderator: Bill Foster, Senior Technology Consultant, Understanding & Solutions
Day 2Video Market Overview
Alison Casey, Business Director: Content and Services, Understanding & Solutions
Filling the Content Gap: Movies on Hi Def DiscsAlan Bell, Executive VP & Chief Technology Officer, Paramount Pictures
Philippe Cardon, President International, Warner Home Video
Ken Graffeo, EVP High Definition Strategic Marketing, Universal Studios Home Entertainment
Simon McDowell, SVP Europe, Sony Pictures Home Entertainment
Moderator: Jim Bottoms, Co-Managing Director, Understanding & Solutions
Filling the Content Gap: Localised Entertainment and Music
Alasdair Ogilvie, Group Operations Director, 2 entertain
Olivier Robert-Murphy, VP of Strategic Marketing, Universal Music Group Intl.
Moderator: Alison Casey, Business Director: Content and Services, Understanding & Solutions
Games Consoles: Hi Def’s ‘Secret Weapon’
Robin Truchy, Director Xbox Live Europe, Microsoft
Qumar Jamil, Xbox Platform Program Manager, Microsoft
The Challenges of Publishing on Two Hi Def Disc Formats
Lesley Johnson, Head of Production, 2 entertain
Hi Def Broadcast Delivery OptionsLukas Kernell, General Manager Thematic Channels, Chello Benelux
Alain Komly, Director DTT Projects, TDF
Thomas Wrede, VP Product Management - Media, SES-ASTRA
Interactivity and connectivity on next generation discs
Robin Cole, Director of Business Development and Marketing, HD DVD, Microsoft
Keith Prokop, CEO, Radius60 Studios
Here is an overview of the panels and conference in general, taken verbatim from Understanding and Solutions, who organized the shindig:
The rapid transition to HD Ready flat screen TVs in Europe is creating a ‘content gap’ that European broadcasters in most territories will struggle to fill, leaving a pent-up demand for other sources of high definition video entertainment. That was the over-riding message from Understanding & Solutions’ High Definition in Europe: conveying the message conference held in Barcelona this week.
A large amount of programming is now being originated in high definition across most popular genres, but there is a distinct lack of actual channels available to satellite operators and cable companies. Unlike the US, where almost 100 HD channels are creating bandwidth constraints, European operators have significant spare capacity, but countries like France and the UK still only have around 10-12 channels, none of which have enough HD content available to provide original programming 24 hours a day.
The primary reason is the cost of original programming, which is often restricted by the budgets of Europe’s public service broadcasters. Organisations like the BBC use their reputations as programme makers to encourage co-productions with broadcasters in the US or Japan, while others are looking to their archives. The UK’s Granada International showed how it has restored some classic British films, as well as TV shows that were shot on 35mm before programme makers moved to standard definition video. These new masters have other applications outside of HDTV, such as digital cinema and high definition discs.
The importance of providing a clear and coherent message to consumers and the need for strong retailer support in this endeavour were highlighted by a panel of leading CE manufacturers. The confusing array of logos facing a TV buyer is a key issue (one speaker had counted 17), as is the widely varying terminology used to describe the new ‘1080p’ flat screen panels.
In the case of HD DTT, it was generally agreed that advances in video compression technology were needed before terrestrial services could match the multi-channel offerings of satellite and cable, even with the additional spectrum provided by analogue switch-off.
The next generation of high definition optical discs – Blu-ray and HD DVD – provide an alternative source of high quality content, much of it in 1080p. However, the ongoing ‘format war’ is slowing adoption by consumers and, to some extent, content owners outside the Hollywood majors. The cost of creating titles is also considerably higher than DVD, an area of concern for independent studios and distributors on more limited budgets.
Hardware pricing is another issue, particularly when there is a danger of obsolescence. Nevertheless, studio executives attending the conference expressed confidence in the future of high definition discs and are continuing to support their respective choices with new releases containing progressively more advanced interactive features. Delegates had a first-hand opportunity to see demos of the two formats’ online interactive platforms: HDi, now available on several HD DVD discs, and BD Live which is due to launch next year.
Some of the findings include:
- European consumer expenditure on Consumer Electronics in 2007 is pegged at 75Bn Euros. High Definition will help revitalise CE’s many product segments over the coming years
- Hi Def broadcast subscriptions are still in their infancy and many consumers believe they are watching in HD just because they own an HD Ready television:
* UK: <4% of Sky subscribers take HD services; 4.5% of Virgin subscribers take HD services
* France: <2% of CanalSat subscribers take HD
* Italy: 1.2% of Sky Italia subscribers
- Lack of original HD content for broadcast provides an opportunity for Hi Def discs
- European revenues from online video will make no real impact for at least 5 years, so Hi Def has an essential role to play in bolstering the declining DVD market.
* Hi Def DVDs will account for 27% of the home video market value by 2011
* By 2011, online video will still only account for 6%
- Despite much higher profit margins for online video, high definition disc sales will still derive double the revenue for studios in 2011.
* European online video sales will yield around 70% margin for studios (525Bn Euros)
* European high definition disc sales will yield around 35% margin (more than 1.1Bn Euros)
Courtesy of U&S.
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