There’s a tremendous amount of pressure on TV networks as advertisers flock to the Web, according to WPP Chairman Sir Martin Sorrell.
Earlier this year, NBC Universal and News Corp. announced a new, yet to be named venture that will reach 96% of homes and aggregate premium content from the major TV networks and film studios.
In other words, the TV companies will try to seize audiences’ attention to secure ad dollars. Great. There’s only one problem, the economics do not really justify it.
TV advertising is huge: $75B per year. Web advertising, which includes search, display/banners, classifieds, listing, sponsorships and video, is a $20B advertising, set to become a much larger.
eMarketer pegs the industry at $25B, Morgan Stanley at $32B, Piper Jaffray at $60B. Indeed, no one can wrap their arms around it, particularly TV execs.
Breakdown of Web Ads by Format/Type:
Of course, in the next few years - the short term future - display/banner ads will grow at the expense of search ads.
But as video viewership rises on the Web, TV execs are scrambling, because their protected fiefdom is being attacked.
When YouTube went from $0 to $1.65 billion in eighteen months, TV executives felt shafted. Sure, YouTube generated but $15M in ad revenue in all of 2006 (and none of it from video ads), but the future was proving ominous for television, hence headlines like TV is Dead, Long live TV.
A deeper look at the figures, however, make me scratch my head and wonder what the hell are these folks thinking.
Admittedly, I should be tooting the online video will kill TV horn loudly. I am the founder and executive producer of WatchMojo.com, an online-only producer of video programming for the Web and wireless markets. I break down the video content market as follows:
WatchMojo.com is in the middle: we’re not user generated content, we’re not - at least not yet - in the top tier where the TV networks are. I have written quite a bit in the past about why I think the middle spot will win in terms of online video… but that implies online. Offline, I think TV needs fixing but it ain’t broken. But judging by the fate of newspapers and classifieds, TV companies must worry because the fundamentals are stacked against them.
How so? Let’s look at some figures from a May 2006 article in Fortune on News Corp.’s FOX:
As you can see, TV made $185 billion in 2005 and is set to make $230 billion by 2009. Advertising alone will make $73 billion. Of course, under the most bulllish scenarios, online advertising will be within striking distance of TV advertising, but that will include search, display, classifieds and video. As bullish as I am about video advertising, I think many of the analysts and soothsayers are getting video advertising wrong. But that’s another post, another day. Oh wait, here’s the post, today. Here’s one more.
My argument here is that when I hear Mr. Peter Chernin and Mr. Jeff Zucker demonstrate GooTube envy and want to create NewTube and give away content, I wonder: is this really wise?
Sure, content will move towards digital distribution, but should it if it means cannibalizing your lucrative TV revenue streams? Ultimately, the 25/5 divide - now almost the 25/10 divide - in other words, the discrepancy between people spending 25% of their time online whereas marketers spend more than 5% but less than 10% of their advertising budgets online means that content will migrate online, it will remain free, ad-supported… but even under the wildest, most bullish estimates, will a company like NBC and News Corp. really benefit from cannibalizing TV revenues - be it filmed entertainment, tv networks or tv distribution - for online advertising?
Who knows. I know, Google today makes $10B from online advertising each year, it boasts a market cap of $150B, but that’s from search, not video. In other words, GooTube envy is not alone immoral, but misguided. No matter how much old media firms try to emulate the new media model of free, ad-supported, it won’t even really help them, it might just hurt them.
There’s also mobile advertising, which implies wireless entertainment in general, but do you know anyone that wants to watch 24 or Star Wars on a handheld device? The content that will win on a cell phone will not look much like the content you see on TV or the big screen. Mark my words.
A decade ago, the newspapers and print magazines put their head in the sand and overlooked the Web. They made so much money from traditional lines, that they never wanted to embrace the Web. As a result, the value was seized by startups like Yahoo!, Google and company.
But the simple, sobering truth is that even if they had embraced the Web, they would have simply cannibalized offline revenue and not made it up online. They would be well positioned for the Web today, but they would be much smaller companies. This is problematic.
TV companies today face the same dilemma. Slow web connections made broadband programming a non factor for the first decade, today that is not really the case. What are Mr. Chernin and Zucker to do?
If they put their heads in the sand, they are screwed in 5 years or so (if that). If they fully embrace the Web, they will cannibalize sales, and suffer on Wall Street. And do not for one second think that TV networks will embrace the Web, they see these very same numbers, and they don’t like it, despite the bravado. Why else do you think that cable companies cut off eBay’s ad marketplace idea, even though major advertisers like HP allocated substantial sums to the project?
The simple fact is that TV executives have seen this story unfold: that same Fortune article mentions:
The Hollywood studios have had an uneasy relationship with technology ever since. They hated television. They went to court to try to outlaw the VCR. These days, they have to contend with digital piracy, Internet distribution, and TiVo boxes.
Indeed. In other words, just because TV executives have seen what has happened to newspapers and magazines does not mean that they will fully embrace the digital revolution.
And, given the absolute revenue figures on TV vs. those online, the TV companies have little incentive to embrace the Web, much the same way that newspapers and magazines didn’t. But because they did not, they are suffering today. Yet had they embraced the Web, they would have hurt themselves sooner. It’s not a rosy scenario.
A few months ago, people thought I was crazy to launch an online TV station in WatchMojo.com. Today they all understand what we’re doing, and why we’re doing it.
They can understand, more importantly, where we will be in a few years. It’s pretty ballsy to say what I am about to say: but a couple of months ago, I thought one day, if we played our cards right, we’d be eventually integrated into a larger media company’s operations. Today, things are changing so quickly, that I do not doubt that we can grow very quickly and become - much like the Yahoo!s, Googles, CNETs, IGNs, etc. - a company that took advantage of this “doomed if you do, doomed if you don’t” reality of old media firms that we indirectly compete against now to become a massive thorn in their side. Maybe that is why new and old media companies are coming to us to forge partnerships. They understand, given these numbers, that we have an insurmountable cost and economic advantage. The fact that we have set up numerous other units in search, classifieds, display/banners etc. only means that once we get to where we need to be, expanding horizontally and vertically will be considerably easier. Like I said, mark my words.
Disclosure: I own Yahoo! shares. News Corp. was my employer for 3 months after they bought the company that bought my old company… They then kicked me out. Of course, that’s water under the bridge.
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April 9th, 2007 at 3:21 am
To my mind it’s a simple Clayton Christensen innovator’s dillema fact going on.
The TV execs’ profitability figures show that they’re good the way they are and that it doesn’t make sense to explore the UGC online content that would canibalize the present revenue avenues.
On the other hand the rapid user adoption of Youtube and the like is an indication of a low end disruption (addressing over-served customers with a lower cost business model) and basically this source of a new market disruption will force the TV exec to compete against what they may call the non-consumption (or the long tail, etc).
In this context, partnerships or separate business units somewhat canibalizing existing profitable channels but directly competing against online UGC may be the only way to go.
A very good similarity in this strategic respect is Intel’s launching Celeron to directly compete against AMD.