In November 2007, we published a piece called Online Video Distribution: The Race for #3 is On…
Hulu wasn’t even around, so #1 was YouTube and #2 was MySpace TV. Then came the usual suspects: Metacafe, DailyMotion, Break and Veoh.
Since then, Hulu has launched, gone from Clown Co. to media darling, to being called just another big bad media thug… but in the process, it has become a major player thanks to its stash of super premium content.
We define premium content as any made-for-web content that is professionally produced, such as our own content at WatchMojo.com.
We then define super premium content as television and theatrical content that is repurposed or published online. Despite their resistance, super premium content owners such as Disney and Sony are seeing no choice but partnering with YouTube.
Having taken notice, CBS, who initially refused to join Hulu, bought CNET for $1.8B, obtained the TV.com URL and has now set its sights on clashing with Hulu for super premium video supremacy. As a side note: wesupply videos to TV.com, Hulu and YouTube.
Meanwhile, YouTube continues to forge ahead, though rumor has it, its costs are spiraling out of control and turning it into a profitable business is becoming more challenging as every day goes by. YouTube is in a thankless position:
- consumers want free videos
- it has to take on “Big Bad Media” when they file a lawsuit (how dare they, right, it’s their content!)
- oh, we also want someone else to foot the hosting bill for increasingly better quality video.
How do we thank them? By calling them a monopolist. Evil. Or worse, heartless. The last one came from us, but it was actually meant as a compliment. Sort of.
What About the Rest?
Anyway, in the past 18 months since I wrote that first piece, more has changed:
YouTube, Hulu, TV.com have all made life for Break Media, Metacafe, DailyMotion and Veoh tougher and tougher. They made things nearly impossible by launching their own sites, however, and not acquiring them. You see how with content, you can launch a new site (Hulu, Tv.com) and scale quickly if you have the resources. By launching these sites and shooting up in the traffic rankings, they removed a lot of leverage these companies would have had in any M&A talk.
I should mention, we have partnerships with all of these companies as well, and to borrow an analogy from Fred Wilson, like any book/newspaper/magazine publisher wants to see bookstores or newspaper stands do well, we genuinely want these companies to grow in traffic and in revenue, but the truth is, you don’t need a gazillion aggregators, either.
YouTube’s success comes partially from the fact that it stayed one step ahead of the copyright issue and managed to literally aggregate all of the videos in the world (or close to it). Hulu and TV.com will leverage their pedigrees to remain relevant and grow.
But there will be a shakedown amongst Veoh, Break, Metacafe and DailyMotion, unless they shift strategies or get some kind of differentiator.
Some would argue the shakedown has begun:
- Last week, sadly Veoh laid off more people. It will now focus on its toolbar, called Compass. Here is a piece by Tech Crunch talking - and describing - Compass much better than one my one-line “it’s a toolbar” description.
- Break Media, in trying to avoid such a fate, seems to have taken a different strategy: producing, investing and acquiring content libraries… which I personally think makes sense. They just bought HBO’s Runaway Box.
Few of these companies will ever really become profitable businesses, I think, though one or two might cash out and exit, making some money for investors. The challenge they face lies in demand and supply: too many similar offerings.
But by making a play for content, I do think that Break Media differentiates itself from the others enough to have some kind of premium or leverage in potential M&A talks, because a buyer would be getting everything else the others offer (traffic, technology, advertisers and content they not only have rights to, but actually own).
Please note, as a content producer, I am biased. Readers of this blog know this all too well. But the fact is, Break Media does get an edge here, ironic or fitting, since they are partially owned by Lions Gate, who owns a right to buy the whole piece.
Since Lions Gate owns the right to buy the whole company, then logic would suggest that Veoh, Daily Motion and / or Metacafe will also make a bid to own content libraries as a differentiator, as well, since they are actually sellable and “in play”. I am not saying they are thinking of doing so, or will for sure, because the VCs that backed these aggregators were adverse to content to begin with… but the fact remains, in their quest for relevancy, it sure would be a hedge against obsolescence.
You are also going to see this with ad networks, as well. AdConion bought Red Lever, I do expect over time for others to follow suite.
From TubeMogul:
About a month ago, we launched a “Top 40″ list of the users getting the most views from videos deployed by us (an admittedly biased list, but an interesting one). We will be releasing an updated list shortly, but it’s worth pondering: what is the key to their success? Great content, for one. An additional insight came after we released our recent research on “Online Video’s Short Shelf Life.” A blogger savvily pointed out that most successful content creators already understood that online video fans have a short attention span, and thus put out a high quantity of videos.
Curious if that was actually the case, I tested it using our Top 40 list, and found it to be largely true. In the month of June, Chris Pirillo (#2 on our list), deployed 803 videos. Similarly, WatchMojo.com (#6) put out about 691. Further on down the list, Vlaze media (#35), put out a decidedly humbler 74 videos, and Sony (#40) deployed 32–and so on.
The data shows the brilliance of this. Since average online video viewership tends to peak on day three, putting out videos often allows producers to constantly ride the highest point of the wave. While individual videos rise and fall fast, a given producer can always have a steady audience.
Web video publishers need to balance quantity with quality if they want to be relevant, let alone scale, online. The pro of operating in a hyper-syndication world is that audiences might be splintered and fragmented, but you can reach them on those places if you have an effective distribution strategy. The con of it, frankly, is that it’s nearly impossible to stand out from the clutter.
When people question our strategy of publishing so much content (5,000 videos, 100 new each month), the analogy I use is this:
- Think of the Web as a massive college building… seemingly with no end in sight, as one classroom leads to another, and another, and another.
- Think then of the online video ecosystem as a huge classroom with a number of desks…
- With each online video aggregator (such as YouTube, MySpace TV, Veoh, DailyMotion, Metacafe, etc.) representing a desk. While those desks share some similarities, they are all, in fact, independent and stand alone islands. It’s not, after all, like YouTube links to the same video - or for that matter, related videos - on another site…
- On each desk you find stacks of paper on it, lots of them, with each stack representing:
* categories
* subcategories
* keywords- Each video is represented by a sheet of paper…
What do you represent? You’re a you-know-what disturber shooting spit balls on as many desks and stacks as possible. What services like Tubemogul do is help you get those spit balls on as many targets at once… but that’s just one small part of the equation. Why?
Ironically, while online video content is broadband content and dynamic in nature, currently SEO is utterly ineffective with video (relative to text content), so no one can really see through the sheets of paper, let alone see what’s on each desk.
Individually, no matter how great the content (quality) on each sheet of paper, they get lost in a sea of pulp and paper…
The only way to get your sheet seen by users - who might be landlocked to one desk (by having signed up on that site) - is to ensure that your sheets of paper fall on as many:
a) stacks, and
b) desks,
as frequently as possible… why?
In between the time you upload two videos… there’s a whole lot of papers landing on your sheet after yours has landed… making yours disappear from the top and rendering it nearly invisible to the human eye.
In other words, content companies that can’t scale syndication - and production - will find themselves irrelevant before long.
However, this opens up a new question, which is: is there such a thing as diminishing returns with marginal distribution?
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?
Hearing about Metacafe’s founders leaving and Google’s CEO Eric Schmidt admitting that it does not know how to make money off YouTube, I realized how random success is, in business in general and online video in particular.
I like to think that as a content producer, we have a business model that makes sense, and the signs are that indeed, it does make sense. But to be perfectly truthful, I wonder if this was exactly what I envisioned in January 2006 when we launched WatchMojo.com and while the broad strategy is the same, I’d be lying if I said everything has gone according to plan.
What is more impressive is that apart from YouTube, online video is a cemetery of VCs attempts to profit from online video but persistently missing the target. Revver and Grouper (renamed Crackle) are the other two notable exits: Revver was a bit of a disaster for the VCs, who invested $13M but got $4M out. It’s now part of Brad Universe’s Live Universe. Grouper sold to SONY for $65M. It is trying different things, starting with a rename to Crackle. That is in the aggregation/distribution space, the CDN, CMS and hardware segments will fare off pretty bad, I think, because many companies were just way too early and got costs ahead of themselves: look at Akimbo, who after $47M of funding is more clueless than ever. Do we need more boxes people?
Of course, the video landscape is very broad, let’s look at YouTube peers alone (we syndicate our clips to all of these players so we want them to do well in the trenches, but some of these companies will ultimately be left for dead in the trenches by those holding the purses):
Metacafe launched as early as 2003, two full years before YouTube, but it fails to gain traction. Metacafe oddly enough continues to focus on oddball and goofy UGC… even though everyone has left that ship, including two of the company’s three founders.
Vimeo made the classic textbook mistake of going niche and highfalutin. Vimeo was founded by Connected Ventures, the guys behind CollegeHumor.com, who incidentally also launched CampusHook.com before Facebook/MySpace but failed to focus on that. If you think about it that way, CampusHook.com was a MySpace for the Facebook crowd, and Vimeo could have been YouTube. Ultimately, Connected Ventures sold 51% to IAC for $10M, valuing the whole shebang at $20M. Not too shabby, but not FU money, either.
Revver interestingly had the pay model down early on, but thy totally mishandled the method by going CPC. Performance based advertising methods don’t work with video.
If you want the bong-in-hand reason, it’s simple: search captures intent whereas entertainment captures interest. Interest is for branding advertisers, search for performance based one.
If you want the consumer behavior reason, it’s simple: when you read an article, your hands are on the mouse, trigger happy to click on a link, any link. When you watch a video, you lean back… lean back… and your hands are off the mouse.
Revver even has the best URL taxonomy, who, for example, would think that this URL
http://www.youtube.com/watch?v=VQM0OTVcPlw
is better than this URL?
http://revver.com/video/853637/travel-guide-finlands-wilderness/
Yeah, pretty odd. Mind you, YouTube’s SEO mojo has little to do with its URLs and more with the fact that it had all of the videos in the world that you could ask for.
YouTube proved that the saying “it’s easier to ask for forgiveness than it is to ask for permission” is deadly accurate.
Break.com is already an asset of Lions Gate. They own a right to buy the company outright, which makes them a bit of a moot player in this rundown.
Veoh’s got the big name media backer: Michael Eisner. Heck, it even has the media and entertainment-oriented venture capital group, Spark Capital. Yet as much as I like Veoh and praise its recent growth, Veoh, I doubt, will exit via a grand slam sale.
There’s also Daily Motion. Daily Motion is also one of those sites that changes tactics and strategy, and I would too, if I had a decent sized audience and lots of content, even though a lot of the content is questionable in quality or too racy for advertisers to like. I can see a media company like Lagardere buying Daily Motion… not because they have to or need to, but because big companies do that: they make big random bets that leave many to scratch their heads but at least shift the focus away from not doing enough to trying to make sense of why they are doing to what they are doing. Mind you, maybe Vivendi will buy them. Why do I think a French company will buy Daily Motion, frankly, because I can see strings being pulled to get some VCs some liquidity.
The video market is odd, I tell you. A lot of sites have decent traffic but they have no clue what to do with it or how to make money. The only way, it seems, is raising more money to lock in a valuation. Then again, with Metacafe asking the two founders to leave and only giving them $5M for their 5% stake, that means even internally, the Board does not see much value in the company, which is a bad message to send out.
When YouTube got bought out by Google, Guba’s CEO all but tossed in the towel. The game was over, he argued. He left Guba shortly thereafter.
I think if you are an independent player in the aggregation/syndication space, you have to start looking for dance partners, and you have to do that soon.
Thankfully, MySpace TV is a unit of Fox Interactive Media and News Corp., so it can adopt a long-term strategy in building an entertainment hub.
Hulu is another News Corp. joint… a joint venture with NBC Universal. I think I know what Hulu’s purpose and raison d’etre is. That is coming in a separate post.
There are new players coming in this space, the How To space is crowded… that requires a stand alone piece, too.
This begs the question: in one year’s time, who will remain standing when video advertising starts to scale and marketers continue to flock to quality content and the audience/eyeball is valuable in itself argument fizzles alongside the soaring cost of serving and hosting crappy videos and undesirable content?
Paid Content refers to a NYT article on CBS which calls for the company that Bill Paley built to make digital acquisitions, which begs the question: should they go for a big purchase or make small moves?
Of course, answering that question alone without addressing the backdrop to that question yields an incomplete picture.
CBS has hit some rough patches, according to Paid Content:
The parent company is under a mini-siege of sorts about
a) its performance,
b) Leslie Mooves’ salary,
c) Katie Couric’s disastrous tenure at the company,
d) layoffs (even on the digital side, as others are ramping up) and other issues (…)
e) CBS’s need for an acquisition is becoming apparent. Some CBS executives privately agree.
All right. I want to dive in and comment on e) but let’s run through this list quickly.
a) Its Performance
We’re not sure if they are referring to its financial performance or its stock’s, either way:
As per the NYT:
“Without the cushion of Viacom’s other properties, CBS has been more exposed to the struggles of the advertising market. In 2007, it earned $1.25 billion, down from $1.66 billion the year before. CBS stock closed at $21.40 on Friday, compared with $30.99 a year earlier.”
While no company or manager can control what happens to the stock price, I think big media will see a lot of revenue loss over the next few years. Print-centric media companies shrank, why would TV or radio-centric media companies be any different in the next wave of the Web’s growth?
After all, 1994-2003 saw text-based media explode online, 2003 is about audio/video-heavy media.
CBS is seeing this sooner and faster due to its exposure to TV and radio. However, they are strong in outdoors, the challenge there is the upside there won’t account for the downside in more traditional media.
So all hope signals point to online… which explains why:
“On Monday, the company’s interactive unit will officially open a fully staffed office in Menlo Park, Calif., in Silicon Valley, to stir innovation and content development.”
Ironically, the CBS Interactive brass gets the Web quite a bit, but it’s true that they have been overly cautious, too. Being cautious is a bad thing in booming times and a great thing in corrections. The problem for CBS is that the correction is coming offline and online continues to charge ahead… so indeed, CBS does need to make some bold moves. But what are those moves?
Last year, we suggested an outright merger with Yahoo! With MSFT’s $45B gamble, those bets are off (hmm… are they?).
b) Leslie Moonves’ Salary
Last week Henry Blodget wrote: “CBS CEO Moonves Gets 29% Raise, Just Reward For Job Well Done“.
Clicking through, I realized he was being sarcastic by pointing to the seemingly inverse relationship between Mr. Moonves salary and CBS’ performance. While I appreciate Henry’s position, the truth is that CEO pay is determined on a number of things, frankly.
It’s also about the demand and supply for talent. As the CEO of CBS, Mr. Moonves could probably command a much larger salary elsewhere, if CBS’s Board wants to pay him $100M because that is what it takes to retain him, I am not sure CBS or Moonves should be blamed. For the record, he did not make $100M but rather $37M. Is that a lot of money? Yes. But the company made well over a billion dollars in profit and $14B in revenues. Of course, I’m an executive so my perspective is going to be different than that of an analyst or journalist.
But my point is: running a shrinking business in a mature market is not something most executives would embrace, to lure the best (or retain them), guess what? It takes a generous compensation program.
c) Katie Couric
Don’t care personally, but indeed, this is becoming an albatross and if indeed she is that horrific (I don’t watch TV), it’s time to try something else. I recognize she might not be best suited for news, but surely there is plenty of things she can be doing for CBS in other capacties (infotainment, mainly).
d) Layoffs
Layoffs are always demoralizing, especially when a company is making over $14B in revenue and remains profitable. But what about a case - like this one - when the company is shrinking? This is a tough question.
My gut says Jack Welch’s “the lowest 10% should leave” is not a bad thing… so while I don’t want to dehumanize the layoff dynamics and their effect, I think it’s unfair to question the layoffs.
Of course, I do wonder why layoffs are taking place in online areas… which is what both Paid Content and NYT refer to. But just bear one thing in mind: many traditional media companies are not necessarily well structured in new media; divisions and structures are sometimes borne out of legacy organizational systems and sooner or later a correction or adjustment is called for. If this is the case, then I don’t think it’s fair to bash CBS on this point.
e) Acquisitions
The question remains: should CBS make one big hairy and ambition acquisition or should it buy a number of smallish companies and roll them up and/or foster their growth?
For the record, CBS has done both. In fact, it’s done everything including investments in Spotrunner, Joost and many others. In terms of acquisitions: Last.fm was a mid-sized / big one; Wallstrip was a small one.
What would you do if you were Quincy Smith and company? Buy? Merge? Sell?
ACQUISITIONS:
You know what, I admit a small acquisition won’t move the needle, but a major acquisition won’t either. Who would they have bought?
- Bebo? Is a company that marketers love really well-served by serving advertisers social networking inventory? Nope.
- Facebook? Too expensive to buy. Nothing to see, here (perhaps a merger? See below).
- Gawker Media? That might be an interesting addition. But I think Gawker Media founder Nick Denton wants to become CBS, and not sell to CBS. Anywa, Gawker Media lags in video, CBS needs to look ahead and not look back.
- Speaking of video, one company that might position it for future growth is Blip.tv, but Blip.tv does not own any content… so that is a risky move because CBS might buy a great video platform with amazing bells and whistles but then lose all of the content therein. [Disclaimer: Blip.tv is a partner of WatchMojo.com]. In the same broad category as Blip.tv are Brightcove and Video Egg. Bright Cove also does not own any content and is way too expensive, having raised $80M in funding. Video Egg ain’t cheap either, with $40M of funding in the tilt.
- Then there’s all of the YouTube/MySpaceTV competitors: Revver, Veoh, Metacafe, DailyMotion, Break, etc. Mind you, CBS invested in Joost… so what message would that send? As well, Revver was on the auction block and I presume CBS looked at it and then balked. Again, none of those companies own any content, CBS needs to be stronger in web content. That would be the hedge for CBS going forward, of course, it also needs better distribution. I see CBS works closely with Veoh… but is Veoh big enough as a distribution source? [Disclaimer: WatchMojo.com syndicates video to all of the sites listed here]
- Craigslist.org? Not sure Craig Newmark would sell, no matter how progressive Quincy’s team might be. This is Big Media after all… but Craigslist.org would not unleash CBS’ digital revenues.
- Glam Media? That would be a shot in the arm with regards to bolstering its female audience online… but here’s the problem: female audiences still watch TV… what CBS might be better suited for is getting access to a men’s audience. [Disclaimer: Glam Media is one of WatchMojo.com’s syndication partners, too]
- Digg? Not a fan of this one, frankly. Maybe a combo Revision3 / Digg? Even less of a fan of that. Revision 3 is way too niche: it’s too tech-oriented and relies on two hosts, largely. Given how Kevin Rose’s interest waned from Digg to Revision3, then to Pownce, I am not sure he’s buyable because he’s the main asset of Revision 3. [Disclaimer: if you look very broadly at all video content, then WatchMojo.com is more or less competitive to Revision 3, though I view them as rather complementary to our programming].
- Federated Media? Too tech-focused and they don’t own any of the content on the blogs they rep. Big media needs to own content to make it worth their while. Sorry, but that’s just the way media works.
- Gorilla Nation Media’s audience might be a better fit, but as an advertising representation firm, it faces the same challenges: You are buying a stack of contracts that at any point could be severed. Unless you own the underlying content, those contracts are not worth the paper they are printed on.
- Heavy.com? They have a men’s audience, for sure. But if CBS is to buy a destination, it needs to be an enormous destination, I am not sure Heavy.com would move the proverbial needle. In fact, in 2005, News Corp. bought IGN Entertainment, but IGN was doing over $70M in revenues on the strength of its Media Properties (IGN.com, RottenTomatoes.com, etc.), had a lot of technology (in-game advertising + digital distribution of movies, music and games). Moreover, IGN Entertainment was far and away the leader in terms of men’s 18-34 audiences.
However, if Fox Interactive Media has become a new media behemoth, it has more to do with MySpace’s burgenoning audience than with IGN’s properties. That being said: IGN Entertainment does give a lot of content and audiences that marketers look for. The challenge for IGN is that a major chunk of their inventory comes from their message boards, which are notoriously hard to sell and monetize.
This being said, when one looks at how instrumental MySpace and IGN’s acquisitions were, it’s fair to say that the ROI has hitherto been higher on the MySpace deal. I am surprised at this, I won’t lie. But this lesson would encourage CBS to look for a MySpace and not an IGN.
I am not that familiar with Heavy.com’s business, frankly, but I am not even sure if Heavy is an IGN.
- IAC is way too e-commerce oriented. Its search engine Ask.com does not really fit with CBS, either. So pass.
- There’s Meebo, but at $250M or more in value… I am not sure if CBS would even know what to do with it. And, who are we kidding: do marketers really even want to advertise in instant messaging communications? That one makes sense in theory but in practice? Not sure.
- There’s the barrage of search video tools: Blinkx, Pixcy, etc., but CBS remains a media company; it should be technology-centric, I think. What I mean by that is that its content should be compatible with all tech platforms to make it was widely available as possible.
- There are a number of ad networks: Tribal Fusion, Specific Media, Casale Media, Adconion etc. I think the obsession over ad networks will pass. Moreover, a lot of media companies will build and launch their own, which is a mistake as well. I am not sure if CBS should plunk down $100-$500M on an ad network. Advertising.com rescued AOL’s butt because AOL was transitioning from a walled garden to a normal website but the fact remains, that says more about how poorly AOL was doing than how great Advertising.com has done (for the record: it has done great).
Valueclick is publicly traded, but expensive.
If it was interested in ad networks, it might as well skip over display ad-based ones and dive into video networks such as Tremor Media or Broadband Enterprises. Again, I am not sure being in the ad network business is the best capital allocation move.
- It could - much like how NYT invested $29.5M in Wordpress - make a bid for Six Apart (makers of Movable Type) or even Wordpress. But, again, I am not convinced it makes sense for a media company to own a platform without the underlying content. News Corp. buying MySpace made sense because the content on those sites become News Corp. property, or at the very least, MySpace gets a license to profit from it…
- Slide? At the company’s last $500M pre-money valuation, I think CBS would gain street cred in one block on SF by buying Slide but see Wall Street punish it. Hey, just being honest here folks: that is one expensive widget company with moutain-fulls of unsellable inventory!
- There’s TheStreet.com, though I am not sure if it’s big enough or whether CBS really wants to get that deep into finance and investments. Bear in mind Wallstrip was all about investing… so this would be a doubling down on one category. Moreover, at a market cap of $250M, it would eat a lot of money the company could spend elsewhere.
- CNET remains very tech-oriented but it has embraced a lot of lifestyle properties, too. In fact, CNET would be a good fit with 100M uniques, $400M in revenues etc. In fact, trading at $1.2B, it’s not that expensive. CNET would give CBS some web DNA and CBS would open up swarms of traditional advertisers to CNET. This could be the best move yet: unlike most other options, CNET owns a lot of content. It also owns a lot of URLs such as TV.com that with CBS’ help could come to life.
Updated: Oh, wow, they listened to me: it’s official.
MERGERS
- CBS could in fact merge with Yahoo! I wrote about this and frankly, this remains an option.
- It could merge with Facebook; won’t happen. At a market cap of $14B technically Facebook is worth roughly the same as CBS. This would be a bizzarro world deal where Facebook trades in growth for CBS’ $14B in revenue… but this one is so loopy.
- As crazy as it sounds, it could undo the merger with Viacom; won’t happen.
SALE
What about a sale to News Corp.? News Corp. owns FOX, it would love to own CBS. But for this to happen, it would mean Sumner Redstone and my old boss Rupert Murdoch would have to come to terms; won’t happen.
Incidentally, last Friday, GE lost 12% of its value, or $40B. It could have bought two CBS’s. By buying CBS, GE’s NBC Universal would own two of the three main networks, making this an impossibility.
That same obstacle is present in a sale to Disney, who owns ABC.
CONCLUSION
As you run down the list… you realize that all CBS is actually a great media company that just needs some tweaking. Yes, indeed: “Nobody likes negative growth, from the guy who shines shoes to the C.E.O. Everybody feels the pain” the truth is no one wants to blow something up either.
My two recommendations for CBS:
- Buy CNET for $1.5B - $2B (that would be a 25% to 66% premium), which would take its digital revenues from “$200M” to $600M. Combining CNET with Last.fm would also yield a lot of upside in digital music and video tie-in’s. But even then: for a company with $14B in annual revenues, does $600M mean much? Many analysts only give credit to a media company’s stock if digital revenues account for 10% of total sales. Even News Corp. or Disney do not claim that.
CNET remains one of biggest acquisition targets that represent meaningful revenue opportunities, and even that won’t move the needle. So what other options are there?
OR
- Merge with Yahoo!
Actually, there’s also one more option:
GO PRIVATE?
One way that no one will care about a) Performance or b) Les Moonves salary is if it were not publicly traded. Moreover, Wall Street is being unreasonable: yes the company is shrinking, but it will take time for digital revenues to grow, anyway. However, if someone came along and took CBS out at $20B, I think a lot of shareholders would buy that (or I guess, sell for that).
It then allows CBS to d) clean house if they so choose to (and will have to). Kate Couric becomes moot in the grand scheme of things… but most importantly, it will allow CBS to roll up a number of smaller web properties, content producers and tech applications to bolster its overall portfolio. In 4 years - when video advertising will be $7.1B in the US (up from $1B) and all online advertising will be nearly $100B in annual expenditure - it can then be go public again…
This might very well be the best course of action. The question remains: does private equity have the stomach for a $20B debt purchase? With $16B in annual revenues… I think so.
All righty, that was a great use of 40 minutes of my time. Back to work.
Newspaper company McClatchy writes down $1.39B. Magazine company Hearst reloads its digital strategy. You’d almost think that by 2008 (14 years after Netscape’s Navigator browser launched and made consumption of content easy), print companies would be better positioned online, right?
Wrong. In many ways, media companies - be it print, radio or TV-based - seem to be more uncertain about their next steps today than they were in 1998.
Web 1.0: How Print Media Blew It
The Web represented an enormous opportunity - and threat - for print media organizations in the 1990s and they blew it.
They played into their weakness and let the threat overcome their strengths; in non B-School lingo: they did not unleash their premium archived text content online, they either put it behind subscription walls or kept it offline altogether. In all fairness, no one could really predict that consumers would tuck away their wallets and the free, ad-supported ad model would prevail… but prevail it did.
As a result, online magazines and blogs won market share. In parallel, search engines leveraged what content was out there and attracted the lion’s share of online advertising as paid search captured 40% of the online ad pie
Over time, print media organizations realized that unless they embraced the Web, they would go out of business: the marketing dollars were indeed pursuing consumers online. Today online ads capture 7-9% of ad dollars but consumers spend 15-25% of their time online. This is the single greatest inefficiency - thus opportunity - in recent history.
With the dot com bust all of the upside disappeared, what little motivation print firms had to tackle the Web went down the drain. A few companies maintained the investment and charged ahead. The outcome was inevitable: Ziff Davis failed to buy IGN, for example, and Ziff Davis bleeded money and value; IGN, however, went on to be acquired for a cool $650M to News Corp. (disclosure: News Corp. bought IGN, who bought my old company in 2005).
The lesson, again in hindsight, was that the print media companies should have capitalized on the weakness from 2001-03 to invest online. Few of them did. I was a VP of a men’s lifestyle online magazine and we beat out Esquire, Men’s Health, GQ, Playboy and Maxim because they ceased to invest online as of 2001 whereas we continued to publish content and build an audience.
Web 2.0: All About Video
Today, online advertising is steamrolling faster than ever: over $20-25B was spent in the US alone in 2007, global ad sales accounted for $45B, with an $80B global market expected by 2010. While paid search prevailed up to 2007, the next wave of growth remain display advertising and video. When it comes to the former, print companies’ online properties are a natural fit to capture a lot of revenue; but what about the latter: what about video?
Video advertising is definitely the single highest growth opportunity online. I am biased as the founder and CEO of WatchMojo.com, one of the largest producers of original video content. But that bias is not unfounded: 2008 marks the first year that online video ads will cross $1B in the US, and this amount will grow to $7.1B in 2012. What would global video sales be at that time: $15-25B, I forecast, if not more.
I’ve always been conservative: while I said that online ads would surpass TV ads by 2021, Yahoo!’s CEO Jerry Yang turned to be more bullish, arguing that this tipping point would happen in the next five years. Mind you, he’s trying to fend off MSFT and convince shareholders not to accept Redmond’s offer (disclosure: I own shares in YHOO and predict a sale of YHOO to MSFT for $50B).
But five years! Maybe Yang is right. Regardless, online video represents the single biggest opportunity for print media firms. The problem: video is not in their DNA.
I was shocked to find out, however, that many print firms have in fact been investing in online video. NY Times, for example, has been publishing video content. Who knew? I didn’t.
Yet they do. According to Senior VP of Digital Operations Martin Nisenholtz:
Times journalists all create more than 100 pieces a month. We stream five million a month.
“We decided that our mission was to extend the Times journalism, and that mission would depend on Times video. We decided to extend that mission into video.”
Mind you, we do more streams per month, and we produce more than 100 clips per month… and we’re no Times. But we’re a company that focuses on web video content, so it’s like comparing apples with oranges.
I also expect Dow Jones’ WSJ to offer more videos over time (and no, we’re not limiting this to Kara Swisher’s videos on Boomtown!) now that they are part of News Corp., the most diverse media company in the world, who is launching FOX Business News (hold on, someone is handing me a note: oh, FOX Business Network has launched, we regret the error).
How Print Media and TV Media View Online Video
Unlike TV-based media companies (which incidentally, I certainly count News Corp. a member of) such as CBS, NBC, ABC (owned by Walt Disney), print media views online video as incremental.
TV-based media companies view online video as cannibalistic. Yes, all of the players in this category will tackle the space head-on because they have learned from print media’s 1990’s era mistake (which we outlined above), but the problem is: the print media companies who dived deepest in the Web mantra suffered most: the Chronicle laid off 25% of its staff last year even though it “got the Web”.
TV media companies, on their end, will probably look at online video content producers like AOL viewed Weblogs Inc., Jason Calacanis’ professional blog network, which they bought for $25M in October 2005. When that deal happened in 2005, a lot of people wondered: why would AOL buy a “bunch of blogs”?
I recently spoke with a high-ranking executive involved in the acquisition and the rationale is actually quite logical:
- Time Warner’s model of producing text content was outdated and expensive.
- Weblogs Inc., meanwhile, had mastered the art of producing high-quality, low-cost content.
By acquiring Weblogs Inc., AOL got a lot of content, a slew of writers, online audience, but most importantly, a process to produce content for the Web at low cost.
The process alone is key. CBS’s Quincy Smith always talks about startup DNA. Startup and entrepreneurial DNA is what all media giants lack. Few however admit it. Fewer yet do anything about it.
But the last part to AOL’s rationale for buying Weblogs Inc., - and the last three words (”at low cost”) in particular - are very important because the Web shrinks the media, publishing, marketing and advertising business. The Web is all about efficiency and eliminating waste, something that traditional media was synonymous with; just ask NBC’s CEO Jeff Zucker who practically welcomed the writers’ strike as a means to weed off such waste. If you doubt that, ask yourself why NBC’s Peacock investment fund just added $750M to its capital base from $250M to $1B. That’s where the growth - and savings - are.
Buy vs. Build
Ultimately, I think that 2005-2007 marked a period where many media companies - be it print or TV-based - adopted a “build” strategy, be it with regards to content creation, aggregation or distribution. I won’t single any one company in this post because we work with most of them and I do not want to judge their deeds (I do that more than frequently, what I mean is that’s not the point of this post).
Expect 2008 to mark the transition to a “buy” mode with online video. Why? I should probably shut my trap here… but I feel quite comfortable sitting on my perch to be direct and candid about the following.
When you read, for example, that
- despite $7B in revenues per year, Hearst “has about 2,400 videos live on its sites and are on pace to produce another 150 programs across its network. The programs will range from how-to, to episodic shows to user-generated reporting, man-on-the-street”;
- NYT’s About.com has 1,500 videos on its site despite being acquired for $410M by NYT in 2003;
- NYT produces 100 videos per month and has a market cap of $3B.
Then you realize that a pure video content creation company like ours has more content than Hearst and About.com combined and produces more content per month than the NYT does and does so across a larger base of categories then you start to wonder: how much more and how much longer will these companies invest to build?
You want candid and direct? Keep reading.
It’s all about Startup DNA
Big media companies remain just that: big media companies. Such firms have experienced and talented people who are certainly knowledgeable and smart, but they also operate in big companies where everyone is spending a portion of their day justifying their raison d’etre.
After News Corp. bought IGN and IGN bought my company, I knew that I did not want to stick around and justify my worth. So I built WatchMojo.com. I could have built WatchMojo.com with less strain, stress and risk within a company, but no way on earth would it be as big as it is today had I done that.
Why? Because all factors being equal, startups work more efficiently than big companies, and the Web makes that fact even more glaring. When media companies seek to build from within, inadvertently they compete with startups and only showcase just how inefficient they are.
In the initial few months, quarters, even years, big media employees facing the build vs. buy debate cast their votes squarely on “we can do this ourselves, why buy” (I’d do the same thing, frankly… maybe).
But over time, as big media companies pile on the cash on their balance sheets but they see their income statements shrinking at the expense of the Web… you can’t help but think that sooner or later, the internal preference to build will tip in favor of buy, buy, buy. At least if you ask senior management who has to answer to shareholders.
Content is King
Connecting all of the dots, it’s thus very funny to me - a former ad exec. and storyteller - that online aggregation and distribution plays like Joost, Hulu, Tidal TV, Veoh et al. keep raising more money at ever higher valuations while content creator companies remain somewhat off the radar.
Think about it: today Silicon Alley Insider and Valleywag commented on Veoh’s attempt - via Bear Stearns - to add to their existing $40M financing and add $40M more! I want Veoh to succeed: I love their crazy CEO and they are one of our hundreds of distribution points, but at some point, how much leverage do such companies have in exits for their investors?
Revver sold for less than $5M despite raising $13M in funding. Not sure about the math there but that’s not a sound exit strategy. When the dust settles, Veoh and their competitors will ultimately be vying to be # 3 after YouTube and News Corp.’s MySpace (more disclosures: all of these companies are part of our sprawling syndication network).
We in the online video space - be it content producers, aggregators or distributors - all want the same thing ultimately: more dollars flowing to online video advertising… but what will make that happen is better video content and more video content.
Content is king.
Yes, it’s a cliche. But cliches are cliches for a reason.
Daily Motion is escalating the battle for #3 in their space (after YouTube and MySpace TV).
Online video advertising is growing, quickly.
Online video advertising is where search advertising was in 2000-01: a major part of the web ecosystem desperately looking for a business model.
Unlike search - where traditional media companies failed to invest and even new media companies gave up in favor of portaldom - a lot of companies are vying for online video supremacy. My read on it is that we will never have a Google of video. That’s right, even YouTube - incidentally owned by Google - won’t command the kind of revenue within its segment that Google does. The reason for that is lack of competition and monetization ability. On the former, YouTube has a lot of competition in the monetization race.
Either way, looking at the stats, the numbers are impressive:
An estimate of the US online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the US online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the US online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the US online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the US online video ad market for 2011 - set in 2007: $4.3 billion | Source.
An estimate of the Worldwide online video ad market for 2011 - set in 2007: $10 billion | Source.
An estimate of the US online video ad market for 2012 - set in late 2007: $7.1 billion | Source.
An estimate of the US online video ad market for 2012 - set in early 2008: $6.6 billion (all broadband at $12.2B) | Source.
It’s thus not surprising to see the sheer volume of money that is being invested in the space, here is an incomplete snapshot:
Judging from that, investors better be patient because only YouTube has exited, handsomely, to the tune of $1,650,000,000 (that’s $1.65B, in case you’re wondering). I’d like to remind everyone that more money does not equal more return, but I digress.
It’s worth noting, too, that YouTube raised less money than everyone else in its peer group but I highly doubt anyone in that group will be worth more, ever, than YouTube.
I am personally hoping that WatchMojo.com pulls the same feat in its peer group. I won’t say “jokes aside” because I am not exactly kidding, admitting that yes, indeed, we’ve raised - and spent - less than $5M to build our content and distribution, which is actually bigger than some of our peers. You might notice that I do not call the players in our group competitors because we are the bastard children of the broader video space: everyone is betting heavily on platforms and user-generated content and our category is definitely going against the grain.
Lastly, I think most of these players are pricing themselves out of exits:
- IPOs will be very hard: yes online advertising is growing quickly but I suspect traditional media (that owns rights to the content) will garner a big share of the online video ad pie. In this context, hitting $100M in revenues or more becomes very challenging, especially with the low-quality content most of these sites are trying to monetize.
- M&A becomes nearly impossible because you need to sell for more than you have raised, and judging by Revver’s fate (who raised $12.7M and sold for less than $5M) that becomes quite hard.
It’s a good thing I am no low-expectations mofo… just because we have not raised boatloads of cash (yet anyway) does not mean we’re not gunning for a big payday one day, but realizing that such a day might not materialize tomorrow, I respectfully think a lot of the companies in the broader video space and our content creation space in particular have dug too deep of a hole for themselves.
To each their own.
This is a work in progress, I am adding CMS platforms (Brightcove, Maven, etc.) and CDNs (Limelight, Akamai, etc.) as we speak. If you have more companies and funding amounts, or if I made a typo, leave the correction in the comments or email me at ash@mojosupreme.com.
I like Veoh. Not because they’re a distribution partner of WatchMojo.com, but because Dmitri Shapiro is one crazy guy (in a good, Ozzy Osbourne kind of way).
Some time ago, Veoh snatched content from TV and funneled it to its online offering.
Then, it decided to preemptively sue Universal, who had threatened to sue Veoh. I wrote about it here.
Yesterday, Veoh leveraged NBC/News Corp.’s joint venture Hulu’s embed codes and funneled premium content from the joint venture. Bear in mind, this wasn’t even a novel idea, since it was inspired by OpenHulu.
Shapiro told NewTeeVee:
When asked about the move, Dmitry Shapiro, Veoh founder and chief innovation officer said, “Look, people want access to all kinds of content. We are striving to provide access.” Shapiro went on to say that Veoh is in official talks with all the major content providers, and that the site already has an official relationship for CBS TV content.
This seems like a strange move on the part of Veoh. It kind of cheapens the Veoh brand in that it comes off as though they couldn’t get a straight-up deal with Hulu, so they did a workaround instead. And it’s not even an original workaround; it’s already been done by the guys who run OpenHulu and TVParadise. Veoh has raised tons of cash and has a full staff — why lower themselves?
Hulu spokesperson Christina Lee has told us before that “Hulu encourages viral distribution of its service in accordance with its terms of use.” But I’m pretty sure Hulu wants the ads included in that viral distribution.
Initially the ads were disabled, Veoh blamed a bug, but then after back-channel talks, the ads suddenly appeared, to which Valleywag commented that while Veoh runs network advertising for low CPMs, Hulu’s high-yield pre-rolls ran amok, much to the delight of Messers Zucker, Murdoch, and Kilar.
Here’s what I think: Shapiro is a bad-ass, and he’s got $40M in funding to back up his bravado. I don’t want to take sides, because indeed Veoh is a distribution partner and we also work with these media companies, but since I won’t comment on what I think, I will comment on the bigger reason why I think Veoh did this:
Reason #1 (the PR Spin) is of course what Shapiro told NTV’s Chris Albrecht:
“Look, people want access to all kinds of content. We are striving to provide access.”
Reason #2 (the business development reason):
Sometimes a good salesman gives a little bit of taste before making their pitch. So it could be argued that indeed, Veoh wants Hulu to see how much traffic it can drive:
“Hulu encourages viral distribution of its service in accordance with its terms of use.”
Reason #3 (the mad scientist’s rationale):
Let’s face it, in America, litigation is a business strategy. Much like how sometimes business development deals spawn corporate development talks or vice-versa, I think that Veoh’s exit strategy entails acting as a shit-disturber to get the lawyers involved… because once that happens, sure, it becomes a shouting match or a competition for who wields the biggest cock. Sorry about that, it’s Friday evening. But, sometimes those discussions are resolved by some kind of sale. I could be very wrong, but there’s one more tidbit in the variables
CBS has an official distribution deal with Veoh. I personally think CBS might eventually make a deal to buy Veoh, but when you dig deeper, it makes little sense.
The Argument for CBS Buying Veoh:
Yes, CBS has bought Last.fm (music) and it has probably looked at Digg (and passed because social news - while it fits with CBS’ direction - is inherently tricky with a site like Digg, as I’ve covered aplenty).
In web video, it did not enter official partner status in Hulu and lacks distribution. Well, allow me to clarify: it lacks distribution that it owns. Rightfully and smartly, CBS has launched the CBS Distribution Network which has effectively made its distribution soar, but invariably, CBS might back out of that strategy and acquire one of the many YouTube challengers, be it Daily Motion, Metacafe, Revver, Break, or Veoh.
But, not all of those companies fit perfectly with CBS:
- Daily Motion hails from France.
- Metacafe from Israel.
- Veoh is American… and based in Los Angeles, where a lot of the power originates in CBS.
I am probably way off, crazy, and saying all of this might irritate some of my friends at CBS… but it is all making for a good storyline, and everyone knows I like to tell stories.
The Argument Against CBS Buying Veoh:
But are these enough reasons for CBS to buy Veoh?
Shapiro probably figured that CBS:
- until web video develops and becomes the behemoth it one day will, CBS does not really need distribution it owns
- won’t pay all that much (considering Veoh’s raised $40M) for a site with inherent legal issues,
- has already invested in Joost in its $45M round.
If CBS buys anyone, eventually, it would be Joost (sister company Viacom, too, has invested in Joost).
So what I think is happening, what is in fact pushing Shapiro and his backer Michael Eisner is to force News Corp./NBC to the negotiating table. I do not think that News Corp. will want to buy Veoh - it owns MySpace, after all. Neither do I think that NBC will want to buy Veoh, because in principle NBC’s Jeff Zucker is Old Media’s Defender against everything Veoh et al. represent…
So, Veoh figures it needs to get a dialog going with Hulu… because it recognizes that 2008 might very well be Hulu’s make or break year… Paid Content also adds to the Veoh-Hulu brouhaha here.
To clarify: yes, I know, Hulu bought a site like Veoh in terms of technology, called Mojiti, but Mojiti has no real distribution. Furthermore, Hulu is a stand-alone company, that happens to be owned by News Corp. and NBC, so it can allow itself to do things that its parent companies won’t do.
Veoh is probably - like its competitors vying for #3 after YouTube and MySpace - going to be raising more and more money. But before it gets over-funded (and thus unsellable) it is trying to see if any media company will bite.
Am I crazy for thinking all of this? Maybe, maybe not… but one thing is sure, Veoh’s Shapiro is far crazier than I am.
Assertive, Bold and Crazy! was the title of this post, and that of course spells ABC, which is owned by Walt Disney. Connecting the dots, we mentioned Michael Eisner, who up to recently was synonymous with Walt Disney. What about Disney? Will it be making a move for Veoh?
I don’t think so… Disney’s strategy is very different from the other media companies CBS, Viacom, News Corp., and NBC, who themselves are not all adopting similar strategies. We’re not even talking about Time Warner, because it is imploding AOL into an ad network. For a related post, called “Who is King of Digital Media” click here.
So, with the music stopping and starting and chairs starting to be tossed aside, this means that Hulu is a likely potential exit strategy for Veoh, and this technique is Veoh’s attempt to get Hulu to talk.
Disclaimer: WatchMojo.com is involved with all of these companies in one way or another but do not have insider information whatsoever. So take this all with a grain of salt! For a rundown of who is in bed with who in terms of media firms and video startups, click here.
Alexa isn’t reliable, I know, but it’s useful to compare two sites, sometimes. So if it’s useful to compare two sites, imagine the euphoria it creates once you compare four, lest five sites.
Anyway, check out the different second tier video distribution sites:
Interesting, no? Look at where they were back in May (warning: about to compare apples with oranges, Alexa is worldwide vs. Hitwise, which is US data):
But, if you do compare apples with oranges, you see that Veoh has surpassed both Metacafe and Break and now only trails Daily Motion. Daily Motion, of course, does have more risque content and does not seem to filter any content out… so it will invariably get a traffic burst.
Looking at Break above in the Alexa chart, one asks: what happened to it and the sudden and sharp drop in traffic? Alexa is not very reliable, mind you… but once you are a huge site then the margin of error gets reduced… so the trendline should be right, no?
Anyway, we do wish all of these sites well because we partner with most, if not all, though some more than others.
Of course, they’re all far, far back you-know-who:
The train has left the station: YouTube owns this market. But, the race for number 2 remains.
Actually, MySpace TV is the #2, so the race for #3 is on.
Oh wait, that will be MSN, AOL, or Yahoo!’s video site, once they get their acts together…
Mind you, I presume AOL, MSN and Yahoo! will probably buy one of if not more of these file sharing video sites because Yahoo! Video remains to have direction, MSN Soapbox remains to have a soapbox and AOL Videos seems to be feeds coming in from Truveo and lord knows the future of all things AOL is murky. Have they finished setting all of Dulles ablaze yet?
You can presume CBS, NBC, FOX (less so because it will want to back MySpace TV) and ABC will consider buying these sites too…
In fact, Break is already technically partially owned by Lions Gate, and they own an option to buy the whole thing…
Of course, so long as the makeup of content on these sites remains heavily skewed towards UGC and pirated clips, they won’t. Hence why made for web video content is actually important… but we’ll see more of that in 2008.
So the race for #3 is on… surely you’re wondering, what about Hulu. Good question. We’ll handicap Hulu’s odd some time soon.
Jack Welch argued that you should compete in a market so long as you could be #1 or #2 in that market.
Apparently, a lot of current VCs are students of Jack Welch. YouTube is the undisputed king of online video, then the market is fragmented:
I’ll admit this much, I am probably very diplomatic because most of these sites are distribution partners of our company WatchMojo.com, but by the same token, that’s never stopped me from ripping our largest partner YouTube, either.
So, first, some context:
- first Veoh raised $40M
- then, Metacafe raised $30M
- today, it’s Daily Motion, who raised a whopping $34M
According to WSJ, via PaidContent.org (who is less diplomatic than we are, calling the post “The Race of Also-Rans: French Video Sharing Site Dailymotion Raises $34 Million; More To Come”):
If Veoh can raise $25 million, and Metacafe can up the stake to $30 million, then why not Dailymotion? The France-based online video sharing site has raised $34 million in its second round of funding. The round was led by Advent Venture Partners of London and AGF Private Equity of Paris, a division of Allianz AG. The site has raised about $9.5 million in October last year from Atlas Venture and Partech International.
Dailymotion, which is based in Paris and was launched in 2005, has grown rapidly to reach some 37 million visitors a month, the story says. It was recently fined a modest $32K by a court in Paris for unlawfully carrying a clip from a 2005 movie by a French director. With this big round, the copyright infringement stakes are going to get higher, for sure. Last month Dailymotion rolled out Audible Magic copyright detection software on its site, which catches clips after they have been uploaded.
Of course, GE operated in mature businesses, well, mature by the web’s standards. So online, the argument could be extended to competing in a space so long as you can be Top 5.
In fact, that makes sense, if you think of search, where Google, Yahoo!, MSN, Ask.com and AOL account for 99% of the market share and all boast multi-billion dollar businesses.
In fact, 99% of the total market capitalization of the search engine industry is
= Google’s $150B
+ Yahoo!’s $17.5B
+ MSN’s $10B
+ Ask.com’s $3.15B
+ AOL’s $3.15B
= $183.8B.
For our analysis of their respective search business’ worth, click here and scroll down to Part II. This link actually outlines the value of the video advertising business in 2011, and the parallel between search and video is eerie.
Today, the search industry accounts for 40% of all online advertising, or $10B worldwide per year. By 2011, the more aggressive projections by Understanding & Solutions call for video to generate a $10B market (more dovish projections by eMarketer call for a $4.3B market, but we digress).
If you connect the dots, the potential for the Top 5 video players can represent as lucrative of a market in video in 4 short years as it does in search today. Mind you, this is a massive leap of faith. Also, one problem is that there is no guarantee that the Top 5 “value-holders” will all be video file sharing sites.
Yesterday, for example, News Corp. and NBC finally baptized NewCo./Newsite Hulu, and that already boasts a $1B valuation according to provate equity bankers Providence. Then, like we’ve outlined previously, come the numerous video search players who are vying for a seat at the table of Top 5…
Translation: it’s not my partner status as executive producer/founder of content producer WatchMojo.com that makes me diplomatic, I actually think that some of the VC investments in late round stages makes sense because a lot of VCs want exposure to this space. Where I tend to respectfully disagree with the “smart money” is that most of the content that currently gets played on YouTube, Veoh, Revver, Metacafe, DailyMotion and company is not what advertisers want, meaning that a lot of the use of funds will go to subsidizing hosting and bandwidth.
Of course, other uses of funds include legal fees. Make no doubt about it. As ridiculous as Viacom looked today in the Web Junk snafu, expect more legal muscles to be flexed… Another use of funds, obviously, is building out sales teams. Right now, most of these companies don’t have the sales infrastructure required to capitalize on the booming market, which takes us to the most likely scenario surrounding many of these “also-rans” (to quote Rafat, of course).
I know what you’re thinking, looking at the Table above: “but Veoh, Metacafe and Daily Motion” are not in the Top 5″. True. But considering YouTube was acquired by Google, MySpace was taken off the market by News Corp., and then Google Videos, Yahoo! Videos and MSN Videos being corporate giants, in VCs eyes, they are Top 5 sites.
A lot of these companies will eventually get bought out… either for traffic, or technology, or simply out of sheer paranoia.
So, are VCs dumb or smart to back them, it depends… anyway, we’re seeing late stage VC investing in file sharing, where will we see Series A rounds?
PLAY
