Hard Times Are Good For The Online Video Industry: Don't Give Into The Scare

No one will argue that just about every business vertical and our country are experiencing hard times. But for the online video industry, the challenging times are good for business and as a whole, good for the industry overall. To me, it looks as if too many folks are writing for headlines and want to predict doom and gloom just so they can play on emotions and do things like create lists of ways that companies in our space can "survive" the hard times. How many more posts do we have to read where someone gives advice saying things like "watch your expenses" or "renegotiate vendor contracts"? If any company in any industry does not already know to watch their expenses and isn't constantly working to renegotiate vendor contracts, in good or bad times, then they don't deserve to survive. Let them go under.

Part of the reason why we see so many of these is lists is that quite frankly, there are way too many companies that have to do with the Internet, being run by a bunch of young kids with no business experience at all. What other industries besides the Internet space do you see lists like this being made? The airline and automotive industries as a whole have been taking for years. We don't see the Airlines and those who cover the space talking about how airlines should "watch their fuel costs" or "make sure they don't have empty planes". A lot of what we are reading about in the online video space is due to the fact that many running these companies just don't have a lot of business experience. I don't fault them for that, you have to get your start somewhere, but those who have money in these companies should be overseeing them very closely all the time, not just when times are bad. And how many companies have a CEO or executive management team who might have very strategic visions or be very smart people, yet have no leadership skills or business experience. Many of the companies in the Internet space as a whole are founded by very smart technology people, not business people.

It seems that many writers want readers to give into the scare of these articles talking about how bad things are, and how much worse they are going to get, without looking at the real reason companies are having problems. Most of the companies I see laying off employees, don't have any business model to begin with. So at some point, in good economic times or bad, they are going to layoff employees anyway. That is not the case for all companies, but it is for many of them. And what about the positive impact this will have on the industry as a whole? Do we really need a hundred user generated video sites out there? Chopping many of them out of the market will help better define who the leaders are, what business models work and will assist those with real business models to grow faster and help them stand out from the sea of confusion. Many companies who have a legitimate shot at making it tell me their main marketing problem is how they make themselves stand out from all the noise that comes from having way too many companies, with no real business, in the market.

That being said, I'm not suggesting that anyone losing their job is a good thing or easy to deal with. And some cuts are coming to companies who I do think have a real business model in the future. But layoffs are a part of any business. The thing I don't like hearing is how so many executives of these companies are only just now talking about keeping an eye on costs because of the economy. Any real business person will tell you that you keep a closer eye on costs when things are good, when you tend to waste money, so that when things are bad, you are already prepared and don't have to take drastic actions. More money is wasted in good economic times with things like lavish dinners, expensive hotel rooms and company branded swag, than in times when the economy is bad.

I think it is also crucial for all facets of the online video industry to keep things in perspective and set expectations properly. For instance, at the beginning of this year it was all about how online video advertising was talking all this money from broadcast and print advertising. The death of every medium except the Internet was being predicted and as a result, people expected more than what was possible. The most aggressive prediction I saw was for online video advertising to be a billion and a half dollars in 2008. Now, at the end of this year, it looks like it will be more along the lines of $500 million. While there is nothing wrong with that number, even if it was a billion and a half dollars this year, that's less than 3% of the entire TV advertising market, that the industry is predicting such immediate death for. Lets be positive and excited about the growth we have coming, but also be realistic.

We have to keep in mind that even though this industry has been around for more than ten years now, every facet of the online video industry is still very small. The markets for online video advertising and content delivery for video are both under half a billion dollars this year. The market size for video transcoding, video publishing platforms and niche video networks are all under a few hundred million each. I think it is very easy for people in the industry to forget that while many have been working in this industry for years, our industry as a whole is still very small when compared to just about every other vertical market. We still have a lot of growth to do, a lot of innovation to bring to the market and many applications that need to be developed on top of the basic underlying technology that has been created.

Things will get worse for companies with no real business model, product offering or clear and defined message of who they are and what they offer. That's just business. But after the shakeout, our industry will still be here, business is still growing and the industry will be stronger as a result of it. We are only just getting started.

Comments

[Rob Powell]

Imminent doom sells, people buy newspapers and click on links to read it. That's why they write such crap. It's the opposite of a bubble, where people get excited and the media feeds it until it pops.

[John Farrell]

Great post. Being in media for higher-ed is counter-cyclical to the rest of the economy in one sense: When people get laid off and decide to retool for a different career, they go back to school.

[Rob]

Yes, great post Dan. Having your HBS degree and doing case studys isn't quite the same as dealing with these issues in real life.

There's going to be contraction but with all of the funding that's gone on I think it will take at least a couple of years regardless of what the economy does.

[Justin Foster]

First off Dan, this is a GREAT post. I'll offer two comments here. First, I am sick of dumb companies with no viable business model getting funded. The next guy I talk with who is more concerned with closing his bridge round than generating a viable business is going to turn my insides out. In lean times, the ones that survive are the ones that:

a) understand the value they create
b) can articulate the value to customers
c) COLLECT REVENUES FROM PAYING CUSTOMERS
(surprisingly, that last one seems to be way too 'retro' for a lot of new businesses) and finally,
d) spend less than they make - or have large enough reserves and friendly enough investors they can make it through the storm.

There are way too many companies out there that received too much easy money - there was way too much leverage in the system that dried up overnight - and now VCs are looking for quick paths to profitability for their portfolio companies and are pushing harder for exits. I found this TechCrunch article re: the VC model highly illuminating: http://www.techcrunch.com/2008/11/12/a-scary-line-has-been-crossed-for-vcs/ It's a nice little read, and though it might seem like a little more doom and gloom, it offers helpful suggestions and questions some of the cultural norms that have driven the VC industry to where it's at today.

The other comment I wanted to make is to echo my total agreement about the general state of the online video industry. I'm actually newer to the industry (and on the marketing/advertising side), but I see a lot of innovation going on here relative to my previous industry (also an Internet industry). There continues to be HUGE untapped potential for video, and it is extremely difficult to imagine a future Internet with LESS video than today's Internet. I think online video in general is going to be squeezed in 2009 by clients that demand more accountability; budgets everywhere are getting a review right now. One of my observations from talking about the online video industry each day is that companies are looking to make fewer investments in new marketing/advertising initiatives (including video), and are instead looking to shore up what's tried and true (hopefully, they've already tried video ;-). I have little doubt this dynamic will make accelerating the growth of online video challenging in 2009 - but the companies that were fit in the first place, offer real value to the market, and understand business fundamentals will stick it out and be even stronger for it in the long run. Ultimately, the whole industry will benefit from what's going on now.

[Neal Page]

Dan, I disagree with some of your comments, particularly regarding the need for companies to change. I've worked with, around, and advised many small companies, and that message cannot be overstated enough. Fellow entrepreneurs take note. We may be sick of the message, but the flip side is when things are good, our press obsesses on optimism exceeding reality.

It's no news the economy at large took an unusual, rapid and significant plunge. The ripple effect in digital media has yet to be truly felt, but the effect will be very significant. Successful companies run by either savvy business people or astute/lucky innovators recognize the need to watch/cut expenses looking forward and adapt their companies accordingly. In particular, they need to objectively evaluate their customers’ needs, forthcoming budgets, and their realistic revenue stream. They need to OVER estimate their need for cash. Those that don’t will die. Using a sailing analogy, I argue this economy not a normal “planning bump” where well-run companies just trim their sails. No, this is a period to batten down the hatches and reduce sail before the real storm hits. It’s going to be tough for small companies and large alike.

That said, I remain one of the most optimistic guys in this market...the significance of online video to the next gen Internet and the infrastructure to support video as an inherent component of the Internet fabric remains under valued.

I do agree with your points about the “weed out” process for ill-run companies in our sector. As you suggest, it is natural and beneficial to our industry long term. Those that die will have NOT have removed the rose colored glasses of a very bright future. Those that survive and prosper in this market will be prepared for the worst so they can survive and prosper during the best of times in the future.

The digital media space is indeed small, much like computing was in the late 70s and through much of the 80s. Yet the growth rates in our sector are extremely high and there is no doubt of the long term size and significance of this market. Economic swings and variables in adoption rates will near-term continue to effect our industry disproportionately because it is small and growing. But again, the companies that are well run will survive and prosper….so long as they adapt....NOW.

[Todd Culotta]

Let the newsmakers continue to provide doom and gloom, its takes our indsutry to get that news to the viewers/readers. Print media is dying so to much information distribution is great for us!!!