Sometimes you have to wonder why we’re not taken seriously. Tech Crunch asks who will replace Bill Gates. The man put a PC on every desk, he not only said it, but he did it.
The list they offer? Some make a lot of sense, such as Jeff Bezos, or the Google guys… but putting Slide, Facebook, Digg, Twitter, Friendfeed or Flickr is kind of ridiculous people, no?
Microsoft’s Ray Ozzie
Google’s Sergey Brin and Larry Page
Amazon’s Jeff Bezos
Facebook’s Mark Zuckerberg
Salesforce.com’s Marc Benioff
Slide’s Max Levchin
Digg’s Kevin Rose
Twitter’s Evan Williams
Flickr’s Stewart Butterfield and Caterina Fake
FriendFeed’s Paul Buchheit and Bret Taylor
Maybe I am just becoming an old fart… but that’s laughable. Might as well put up Fred Flintstone and Buju Banton while we’re at it.
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WatchMojo NewsletterHmm… WTF:
Revision3 is the first media company that gets it. Born from the Internet, Revision3 is a TV network for the web, creating and producing shows for a new audience: passionate fans who want to watch shows about technology, modern culture and music that entertain, educate and help to expand their life experiences.
With more than 35 million downloads, Revision3’s shows can be found everywhere from Revision3.com to a wide range platforms, including Apple iTunes, Bittorrent, DivX, YouTube, and PyroTV. Shows can be watched on any device, from a cell phone to an Apple Nano, on a computer or a TV.
The company was founded in 2005 by technology visionaries Kevin Rose, Jay Adelson and David Prager, because they couldn’t find anything they wanted to watch on traditional television. The company is now led by Internet TV pioneer Jim Louderback.
I added the boldface and italics above.
News Corp. - amongst other things, buyer of MySpace parent Intermix in 2005, struck a $900M ad deal with Google the subsequent year. They don’t get media.
NBC Universal - owner of what is arguably the biggest and most valuable movie and TV library, refused to drink bong water and totally open up library to pirates, partnered with News Corp. to launch industry sweetheart Hulu. They don’t get media.
CBS - launched the CBS Interactive and catapulted reach to over 100M uniques. Then avoided the UGC / social media hype train to pay $1.8B for CNET, one of the most valuable independent network to propel selves to Top 10 Media Property status. They don’t get media.
Disney - Printing money on ABC.com, ESPN.com and Disney.com, on their own terms and laughing all the way to the bank. Nope, they don’t get media, either.
Hum… memo to Kevin Rose, Jay Adelson, and in particular Jim Louderback, puh-lease drop that first line. You lose all credibility right there.
After dollar-cost averaging my shares of YHOO in the $20-25 range (over 6-digit investment by the end) I ended up selling everything in the $28-30 range. Any sane businessperson would have assumed a sale to MSFT in the $31-35 range… but I figured bulls make money, bears make money but hogs get slaughtered, so why be greedy… just sell.
So I did. Now I have great assurances that it was a smart move. Here’s an email a Yahoo! insider sent in to Fortune’s Adam Lashinski.
“I wanted to let you know about some of the good things going on at Yahoo. We are poised to double free cash flow in two years; we have the right people in the right places; our senior management is aligned with our shareholders; our employees are fully behind our senior management; and our advertisers are delighted with our services. This is the dawning of Yahoo’s best era ever. Things could not be better!
Ok, so there are some details to be worked out about how we actually meet those revenue targets, the fact that our new org chart shows absolutely no changes at the top, and the fact that we can’t get our stock price anywhere near what Mircosoft offered. But those are really just details, aren’t they? A few headwinds now will only make our sailing that much smoother later.
Take the new re-org announced today as one example. It had only one objective: solely to make our organization better aligned with our corporate priorities. Perish the thought that it had anything to do with personal power plays or internal politics. Sure, we just had a major re-org in January, which was really just a completion of the re-org that we had in October. But we work in the Internet, and we have to be nimble and responsive to the market demands. Just by example, when Hillary Schneider was promoted in Spring of last year to run HotJobs, Autos, Real Estate, Local, Shopping, Travel and Personals, we were all moved across campus into one larger org for no reason other than to ensure that our customers would be better served. Then, when Hillary moved on to run Sales for Yahoo (but kept HotJobs) at the end of the summer and we were moved back to our old homes, it was only to meet the needs of our customers again. When that uber-org was divided up in November and Autos and Real Estate went to our old Media group while the others fell under the Search group, it was because our customers demanded it. When the head of this group switched places with the head of the Search group in January just in time to do annual reviews for all of the people in their new orgs, well, you knew all along that our customers would be reaping the benefits. Now that this re-org will put all of those properties back under Hilary - except for Local, which is going to be under the group called Global Products (just out of curiosity, what is the opposite of Local?) - I can say with the utmost confidence that our customers will be delighted with the greater efficiencies that this structure will bring. (As a side note, the Engineering team, which has for the past few years re-org’d in lock step with the business re-org’s will not in fact re-org in lockstep this time, because quite frankly, they don’t need to be better aligned with the business teams.)
Sure, we have lost a few executives over the last week - eight in six days by my count. The fact that so many are leaving in such a short period of time right after we announced the end of all discussions with Microsoft might appear to be a lack of confidence in our own prospects, but I can assure you that nothing could be further from the truth. If you read the official announcements, their motives were made clear: all of them had decided either to spend more time with the families or pursue other opportunities. End of story.
As for the Microsoft offer, well, I can’t emphasize how relieved we are that we did not sell ourselves short. All of us who are working in the trenches know the full potential of Yahoo! Sure, we may be losing market share in search to Google every month and we may be losing market share in pageviews to social networks, but our future has never been brighter! As the market grows and our share declines, our opportunities for growth only increase! Simple math there. We have another 80% of the search market left to capture - Google only has about 30%. Now, whose future is truly brighter?
As for the Google deal, HOORRAY! Now, you might be thinking that we employees - particularly those in Search - who have spent most of our waking hours trying to do battle with Google might in some way be disappointed that we are now getting into bed with the enemy. Au contraire! We love it! Nothing indicates a job well done better than outsourcing your own job to the competition. Am I right, or am I right? After all, it is not as if we had sold the entire search team to another company for a premium price - that would have been a slap in the face! By contrast, outsourcing as much of the search business to Google as legally allowed in exchange for near term cash, that is much more re-assuring. It tells us all that we are truly valued.
So, as you can see, things here are great. Hope you are doing half as well.”
Wow. Yahoo!: a great stock, for me to poop on.
The Misplaced Bet on UGC
Back in 2006, we’d get the occasional call from someone pitching us a turnkey solution to add User-Generated Content (UGC) videos to our WatchMojo.com property, which houses professionally produced videos we have created.
At the time, I thought it was an odd pitch, akin to adding a half liter of malt liquor over graciously aged scotch. Biased no doubt as the producer of these clips on WatchMojo.com, I tempered my prejudice and disdain for UGC and said, maybe, just maybe, UGC is the great next big thing, and advertisers will catch on.
Mind you, having served for 6 years as a VP of ad sales at a Fox Interactive Media-acquired property, it struck me as odd. The advertising ecosystem has long been a tiered on involving marketers, publishers and users. That was not to change in my opinion.
That part regarding advertising is key, for in this free, ad-supported ecosystem we’ve created online, no self-respecting consumer pays for anything; advertisers are supposed to foot the bill for both content and technology.
2008: The Flight to Quality
Fast forward to 2008, and things they have changed. For one, no one calls us with such offers, in fact, the calls are coming in asking for the right to license and syndicate our library of professionally produced, premium content.
While this is refreshing to hear for us, I do believe that it spells a potentially doomsday scenario for many of the aggregators of video content as well as suppliers of the broader video space, namely hosting companies and content delivery network (CDN) firms.
UGC’s Impact on Media, Publishing, Marketing and Advertising
Numerous companies raised a lot of money betting on UGC, expecting the so-called wisdom of the crowds to change the rules of engagement in media. Indeed, social media (of which UGC is a subset) has changed the dynamics of publishing, but advertising will remain largely immune as marketers won’t come near it. In fact, the only real impact UGC shall have on advertising is depress advertising rates as an influx of ad inventory floods the marketplace.However, a solid 5 years into the UGC video “revolution”, it’s clear that advertisers are not impressed. eMarketer just reduced the forecasts for social advertising: The company is projecting that by 2011, advertisers will spend $4.3B worldwide on social networks; it had previously guessed the number would be $4.7B. It also took down its US 2008 estimate to $1.4B from $1.8B. You won’t see that in any investor decks, I’ll tell you that.
This spells a lights-out scenario for many in the space, let’s consider the domino steps to explain why.
Today Chad Hurley, co-founder of YouTube, suggested that affiliate marketing (the low paying, low hanging fruit in the marketing ecosystem) might become a source of revenue for YouTube. This year, analysts have been throwing darts at the board trying to guesstimate YouTube’s earning power. As a professional content provider to YouTube, I can probably add my own two cents, but in this post, that makes no sense… and with an NDA in place, that would be folly. So as usual I will keep the comments to the market as a whole. To read our 2006-era estimate of YouTube’s earning power, potentially the first one conducted on YouTube, click here.
The point is: apart from YouTube’s massive, outlier $1.65B sale to Google, every single YouTube competitor in the social networking file sharing video segment has been throwing airballs and putting up donuts on the scoreboard that matters most: making money, either via income or via capital gain. It seems, in fact, that the only time money is even an issue or in the news is when one of these firms raises a ridiculously high financing amount. As I like to say, success should be measured by return on invested capital, and not invested capital.
Measured by the former, practically all of these firms are flamboyant flops. Measured by the latter, granted, they’re smashing successes.
What Should These Sites Have Done?
In essence, VCs have financed these UGC sites to spend money on hosting. Oftentimes, these hosting firms are engaged in price wars with other hosting firms (or CDN companies) that the same or other VCs have invested in. Then, these companies go public and they flop. Case in point: Limelight Networks, who has put up a disastrous return since its IPO. Limelight raised $130M from Goldman Sachs before its IPO.
Quality vs. Quantity: Are You Better Off?
Well, first off, remember that while social media/UGC is a numbers game where you hope to generate 1 billion impressions; and then sell those for $0.10 CPM. The math is simple: 1B impressions x $0.10 CPM equals $100,000.
With professional content, you can build a lucrative business on 10M impressions and then sell those for $10 CPM, which once again running the numbers yields a revenue of $100,000. This was further discussed in our Hulu vs. YouTube: Quality vs. Quantity post.
As a business person, I much rather take my chances building the business that needs to hit 10M impressions.
But, if you are a VC who invested $10M in a CDN or some infrastructure company, you get far more value by investing in a video file sharing site that can house tens of millions of videos and generate 1 billion streams, even if pound-for-pound, those streams are of lower value. This is especialy true if you’ve never sold a single ad deal, and don’t understand the ad business, as most VCs don’t. Of course, it does not help that VCs have a predisposed bias against content businesses, anyway.
As a result, the bulk of video aggregators essentially spend their VC funding on hosting, CDN, etc., and other non-differentiating costs instead of things that could get advertising money in the doors. Advertisers really don’t care where you house your clips and who your CDN provider is, they do however care about the quality of the content.
In other words, instead of footing CDN charges to host crappy UGC videos that are unmonetizable, these companies should have licensed professional content instead.
Chicken, Meet Egg.
As a content producer, I am biased. But the truth is, it’s the other way around. It is not the fact that I am in the content business that I am biased. I have a belief that advertisers seek professional content, so I am in the business of producing high-quality video content.
In the same vein, content owners are now turning their backs on speculative revenue share arrangements and demanding guaranteed money not because they did not initially believe in the idea of revenue sharing, but because the aggregators loaded up their sites with so much crap that they became unmonetizable.
However, had these aggregators taken a portion of their massive funding and licensed professional content and combined that with their burgeoning audiences, they would have been in a very strong position to profit from it.
But don’t take it from me, take a look at Hulu (for more on this, read Mark Cuban’s post). Admittedly, Hulu had a unique advantage what with being owned partially by News Corp. and NBC Universal. Hulu does not need to pay out for content because it leveraged NBC and News Corp.’s content to come out of the gates.
Hulu came to market 2 years after Google bought YouTube. It also came to market years after the YouTube clones had raised boatloads of cash. But when the dust settles, YouTube and MySpace TV will remain standing, along with Hulu. As per all of the others, I suspect one, maybe two will remain in business. The others might cease to operate not because their traffic is stalling, but because they will be perceived as largely untouchable and undesirable to advertisers. There are way too many low-quality UGC clips on those sites for advertisers to care to bother with. Consequently, advertisers will continue to seek a distance between professional and low-quality (or pirated) content. They’ll have no one to blame but themselves, because they got lazy and arrogant about the value of content.
For the record, WatchMojo.com syndicates content to YouTube, MySpace TV, Hulu, Veoh, Daily Motion, Revver, Metacafe. etc. etc. etc. and genuinely wants every single aggretator to succeed, because marginal distribution - while susceptible to diminishing returns, too - is always welcome.
In the end, sure, YouTube will have walked away with a $1.65B payday, but when you consider that since 2006 the online video has garnered $1B in VC investment, suddenly, you wonder if that’s anything to write home about.
Moore’s Law is Meaningless in an Environment Devoid of Revenues
Back in the day, YouTube’s hosting fees were said to be $1M per month (according to a piece by Dan Frommer in Forbes, he is now at SAI). Today it’s rumored to be $1M per day (according to Fortune’s Yi-Wyn Yen).
YouTube commands 75% market share, Veoh (placed #5) has 1%. In other words, Veoh, Daily Motion, Metacafe et al. are not spending $1M per month, let alone a day, but they are spending alot. Veoh has raised $80M in funding, Metacafe and Daily Motion are at $40M each. I presume the companies are now spending $5-10M per year on hosting fees to house User-Generated-Crap.
VCs are no longer indifferent. Initially, VCs were at best ambivalent about hosting costs because when the technologists who programmed these file sharing sites pitched their vision and business model, they presumed that it would replace the historically expensive cost of creating content. They were wrong.
Their business models relied on the wisdom of the masses and collective mojo to create content that advertisers would want. Why pay for content, was the idea, if content would be created on the cheap? That might very well go down as one of the biggest investment flops ever, when you consider the sum of money invested in UGC with no promise or hope of payoff in the near, mid or long term.
Don’t take it from me, take it from existing case studies:
- YouTube - despite a 75% market share - continues to wonder about monetization.
- Revver sold for $5M after raising $13M in VC.
In both cases, the companies bet on the wrong cost structure: hosting of crap over licensing of quality content. YouTube won, others did not. The”others” camp is far more numerous while YouTube remains the lone winner.
So, What’s Around the Corner
Ultimately, my gut says that many of these VCs who 3-5 years ago placed their chips on these horses will grow wary and tired of burning money while Google’s YouTube continues to galvanize market share. Before long, much like the fate reserved for Revver, VCs will cut off the lines of financing; they will have to sell for pennies on the dollar.
It’s not like this is new, either:
- GoFish has changed business models a few times as it looks for something to hang on to.
- Handheld Entertainment / ZVUE is now worth a whopping $6M, it’s changed its name a few times and paid an obscene $25-50M for eBaumsworld.com, something that left many scratching their heads.
But these have been off the radar. The more visible players are entering a period where they will have to raise $10M or more to maintain their lifestyle… I am not sure those content libraries are worth their weight. I am also not sure if an audience that has been conditioned to watch UGC will suddenly embrace professional content, either.
Once this happens, I expect to see a lot of the videos that are fueling the growth in CDN business take a further hit, too (as a whole, this is a bad market to invest too, as it has become a commodity).
Onto the Next Fad
Of course, this is all moot, because VCs are now chasing the next pipe dream: wireless, clean tech, space travel…
But there too expect a meltdown, and look no further than today’s news where Helio sold for a paltry $39M after raising $650M.
From a general entrepreneurial perspective, the lesson is simple: VCs talk a big game about being in it for the long haul, but their definition of the long haul is unique to their attention spans, which rivals that of a 2 year old’s. When you craft a business plan, build a company based on your gut and your understanding of the space. Generally speaking, you as the entrepreneur has the best understanding of the opportunity and market reality, and not your VCs or advisors.
From a video specific perspective: it’s on. Video is no longer about hype and its potential. With TV audiences now averaging a mature 50 years of age, newspapers declining faster than anyone could have predicted, the Web is the future of media and the future is now. A lot of money was placed on the wrong horse, a horse who is wobbly and in decline. The shakeout has started, it won’t hit overnight because some of these companies have money in the bank… but when VCs come knocking, you won’t know what hit you.
Related: Video
- The race for #3 in the online video space is on.
- Comedy video vertical sites getting cluttered.
Related: Social Media
- Connecting the Dots: Why Social Media Fails at Generating Revenue
- Why Social Media and Advertising = Fail
- Dark Cloud, Meet Social Media. Social Media, Meet Dark Cloud
- Social Media Hype Train Continues
- When Will Social Media Get It?
- Why Social Media and Beacon Are Doomed to Fail and What Facebook Should Do
- Social Media Growing Pains
Is it all negative? Nope. In fact, social networking might be better suited for e-Commerce, but the greed muscle clouds people’s judgment and makes them chase ad dollars, by far the more lucrative slice of the pie.
- Facebook, or MySpace’s, Multi-Billion Dollar Business?
- Are Affiliate Sales the Path to Facebook’s Billions?
- Memo to Facebook Sales Team
What do you think, is UGC going to experience a turnaround and experience a renaissance… or is it on its last breath?
Advertisers aim for the 18-24, or 25-34, or 35-49 segment. SAI is right that no one really ever aims for the 50 and over crowd. That can’t be good news to networks.
Average age for live-only viewing:
CBS: 54
ABC: 50
NBC: 49
Fox: 44
The CW: 34
With 7 days of DVR viewing factored in:
CBS: 53
ABC: 49
NBC: 48
Fox: 43
The CW: 34
Everytime I think running a startup in the video space is hard - where one site owns 75% market share but is refreshingly (but worryingly) candid about not really having a clue how to make money off videos - I look at newspapers and count my lucky stars.
Sam Zell is at least realistic about the fate of newspapers: he’s here to deliver reality. Some soundbites:
CNBC’s Carl Quintanilla: HOW IS THE AD MARKET GOING TO HOLD UP THIS YEAR?
Sam Zell: WHAT AD MARKET?
Quintanilla: WELL PUT.
Zell: I MEAN, ARE YOU TALKING ABOUT THE PEOPLE WHO BUY ADS? I’M TRYING TO FIND ONE OF THEM.
Quintanilla: YOU’RE ON YOUR WAY, THOUGH, TO EQUALIZING NEWS COVERAGE AND ADVERTISING, RIGHT?
Zell: THAT’S CORRECT.
Quintanilla: YOU’VE LAID OFF SOME PEOPLE IN HARTFORD, BALTIMORE. YOU’RE GOING TO SELL NEWSDAY TO CABLEVISION. HOW MUCH PROGRESS DO YOU FEEL YOU’VE MADE IN GETTING TRIBUNE TO A POINT WHERE IT CAN FINANCE, IT CAN SURVIVE?
Zell: I THINK THE CASE OF “THE TRIBUNE” OR THE NEWSPAPERS IN GENERAL BASICALLY COMES DOWN TO PRODUCING A NEWSPAPER THAT THE CUSTOMER IS WILLING TO PAY FOR. AND THE CUSTOMER IS THE ADVERTISER AND THE CUSTOMER IS THE READER. THAT’S THE CHALLENGE. I THINK THAT BECAUSE NEWSPAPERS HAVE HISTORICALLY BEEN MONOPOLIES, I THINK THEY’VE BEEN INSULATED FROM REALITY. I, YOU KNOW, AM IN THE POSITION WHERE I’M GOING TO HAVE TO, QUOTE/UNQUOTE DELIVER REALITY. I THINK WE CAN HAVE TERRIFIC NEWSPAPERS, BUT I THINK THE NEWSPAPERS HAVE TO RESPOND TO THEIR CUSTOMERS. IN MANY CASES A LOT OF THE THINGS WE’RE DOING RIGHT NOW WERE ALL IDENTIFIED IN FOCUS GROUPS OVER THE LAST EIGHT YEARS. AND THE FOCUS GROUPS WERE MADE, WERE TAKEN, AND NOBODY PAID ANY ATTENTION TO THEM. OUR CUSTOMERS WERE TELLING US WHAT THEY WANTED AND WE’RE GOING TO GIVE IT TO THEM.
Don’t know what is up with the CAPS Lock, you can thank/blame the folks at SAI for that. But then again, I’d be screaming too if my graphs looked like an inverted hockey stick, courtesy of VentureBeat:
If I were a newspaper tycoon, I’d be shorting print and going long video. It seems like a no-brainer to me.
In shelling out $100M for Powerset, MSFT basically weakens YHOO’s leverage and value. It’s not a coincidence that YHOO is now flirting with $20/share.
I know YHOO’s main value is in traffic and audience, not search technology. But the market is not so discerning, to it, it views MSFT ramping up its search know-how as reducing their appetite for YHOO’s IT in search.
YHOO is now at $20.75, about a buck over where it was trading on January 31, 2008, before MSFT launched its unsolicited $31 bid.
Can’t believe it’s been 5 months since that.
PLAY
