We Need To Remember, Online Video Is A Cost Center, Not A Profit Center

It seems that no matter who you talk to, or what industry segment they are from, you can't escape the whole online video monetization debate. While it's a topic that is important to talk about, I think many forgot that today, for the vast majority of content owners, online video is a line item cost, not a revenue generator.

While everyone is working to change the economic dynamics of online video from cost to profit, we have to be realistic and truthful about what content owners are going through, especially in today's tough economic climate. I hear a lot of industry vendors talk about how they are looking to "add value" with their offering or how their platform allows for "monetization" of content. In many cases, the value is not clearly spelled out by the vendor or it does not exist. Many times what one vendor or customer sees as adding value, another customer wouldn't. Content owners don't want a bunch of fancy marketing terms used to describe what they are buying. They want simple, straight-forward details on how the product or service is going to help them generate money, lower their costs, or at least allow them to break even with their online video offering.

The other day, one major content owner told me that they have nearly 50,000 hours of video archives they have yet to encode and place online as doing so would simply cost them money each month. And while they already have a large volume of traffic to their site, the simple cost to encode, store, manage and deliver all of that content won't generate them any revenue this year. This highlights the major problem that content owners are facing, even a top-tier major content owner such as this one.

Aside from a handful of online video offerings from companies like Apple, MLB and others, how many other companies can we point to who are making money today? When asked, even the major broadcasters won't give out any real details on whether they are even covering their costs for their online video offerings. As an industry, if we can't point to dozens of successful case studies published online that show content owners making money, then we have to be even smarter on the projections and expectations we set with content owners and with one another in the industry.

Many are working and working hard to solve this problem. Online video advertising is only just beginning, new consumer devices are starting to come to market and the quality of video is getting better each year. Three to four years from now this will look like an entirely different industry, but it's going to take a lot of work to get there. Some content owners won't make it and many are going to struggle for some time to come. While we are seeing progress with many different facets of online video, we need to keep the industry grounded and realistic and remember that for nearly all content owners, online video is still a cost center.

Comments

[Rob Green]

The voice of rationality - good article Dan. Thanks for the gut check.

[D]

hmmm - if folks in the 50's had used this sort logic then we probably wouldn't have TV today

Make/Transmit TV content = cost
Advertize on TV = revenue

Make/Transmit online video content = cost
Advertise on online video = revenue

What is different other than online video is at the state of where TV was in 1950s?

$65B in TV advertising in 2007 or '08 and going down - online video no where near that but increasing unlike TV advertising

[Dan Rayburn]

You can't compare any of this to TV in the 50's or the TV model of yesterday or today. What a bad example to use. The two aren't even close.

Online video advertising did about half a billion dollars in 2008, which is not even one percent of the total ad market for traditional TV. But since TV advertising is going down, we're suppose to panic and declare the TV to be dead. You may not be, but you sound like an old school broadcaster who does not get online video. Online video is not replacing TV.

[Kevin]

I agree with Dan. The fact that you even try to compare this to 1950's Television shows you are so out of touch with reality that you don't warrant a real response.

[Adrian Payne]

Dan addresses an number of valid points that most consultants neglect to mention. Also, building out a cost effective infrastructure is probably one of the most important components in the overall strategy.

One bright spot for the online video segment is showing live content at least in the sporting industry. This is a profitable niche but nowhere near close to TV advertising numbers.

I am focusing on how to tie in VOD with live content to increase the value of select content around each event.

As more sporting events are broadcast live (ie NCAA, NFL, MLB, etc) and the audience increases, the advertisers will continue to follow.

It will be up to content providers to figure out how to keep the audience around.

[Bruce P.]

Some companies entering online video will be very successful and others will fail. It is the same for new business owners in any industry. Failure rates for new businesses in any market are high, success requires extensive planning, preparation and sufficient cash for operations. In any industry, strong business plans tend to succeed, ill prepared plans will fail. This will be no different for new companies entering video.

The problem I have with your article is that it lacks vision. The successful companies will understand where video was two years ago, where it is today and where it will likely be two years from now. Globally there are about 850 million cable & satellite TV subscriptions, one billion PC's (desktops, laptops & netbooks), 1.4 billion internet users, 1.5 billion TV's and 4 billion mobile phone subscriptions. This year approximately 280 million PC's will be sold, 300 million TV's, but 1.1 billion new mobile phones. I offer these numbers only to put a scale on the potential market for video. Yes, many are working hard on the advancement of video. The reason they are working so hard is because the scale of the opportunity has become so clear.

Adobe had a 'Installed Base' of 40 million devices with Flash Lite 3.0 (and greater) in 2008 and see that at 285 million for 2009. Cisco sees mobile data traffic doubling every year for the next several years, building to 2/3rds of that traffic, video. The next several years will see unabated mobile video adoption through growing EDGE, EV-DO, HSDPA, WiMax and LTE networks.

Skype has about 400 million registered users globally, Facebook and MySpace over 100 million each. Are they building their business models for today or are they looking at tomorrow's landscape. Hulu, YouTube, Apple, MLB, the NFL, ESPN, MTV, Fox, CBS, ABC, NBC, Comcast, AT&T, Viacom, Disney, AOL, Yahoo all have strategic plans for video and it's not strictly related to the PC. Yes, there is concern for operational costs, who and how video is making money today, but most of the majors are positioning themselves for the digital convergence to devices, a market growing in three dimensions and several times larger than today's. Online video advertising was half a billion in '08, but what about this year and next?

Any one reading your blog already has a fair understanding of video in today's ecosystem and surely has a feel for monetization in this landscape. It would be enjoyable to occasionally see a vision for tomorrow and not just yesterday's news.

[Dan Rayburn]

Hi Bruce, I have to disagree. The problem as I see it is that too many people in this industry talk about the "future" and what things will look like in years to come, even though many times, years later, those predictions don't come true. We have too many people preaching their "visions" when they don't even know what is happening today.

It seems all anyone every wants to talk about it what will take place later on down the road and not what's happening today. If these companies can't survive today, then they won't be around years from now when everyone says things will be different. Three years ago all we kept reading was talk of how mobile video and set top boxes were going to change the industry. Well, three years later and they have had no impact on the market as of yet.

Personally I think way too many people in the industry aren't dealing with the reality of today. Yes, lets talk about what "may" happen in the future, but keep in mind that simply trying to plan a business on what may happen years from now is a sure fire way to guarantee that you won't be around as a company when those times come.

[Bismarck Lepe]

Dan, this is a good article. We've all seen hundreds of companies come and go because investors and management teams ONLY focused on the promise of a business opportunity and not on building a profitable business. That said, the media companies who have the resources to invest in online video will be the ones who will evolve and survive in a world where:

- Audiences are becoming more fragmented
- Consumers demand more targeted media
- All content is delivered over IP
- Usage patterns (For both content and advertising) are becoming more transparent to marketers
- Lower CPMs - at least for a certain period of time as we move away from a supply/demand driven model for ad buys to a value driven system for pricing ads

The online video industry looks a lot like the Internet back in the late 90s. 100s of billions of dollars were spent trying to figure out how to monetize the growing user-base. At first it was the commerce related models that showed signs of viability but as targeting improved, advertising became the standard.

[Corby Fine]

The fact that there is such an opportunity with strong consumer interest for online video, it should force industry to find a way to both make it cheaper and more efficient to deliver, as well easier to monetize. The cost of storage and bandwidth according to Chris Anderson and his "Free Model" are essentially nothing. However ask the average online publisher of video how much it costs to stream and manage all their video assets. Far from free. As a result, innovative and effective revenue models will need to be in place before all the potential can be realized from putting video online.

[Danny Mack]

Frankly, I'm shocked to see the struggle the video industry is having monetizing their content. I think the struggle is based largely upon everyone trying to take a shortcut..namely - advertising. If advertising isn't cutting it for some, then why not take larger risks in developing revenue streams.

For example, what if you sell ad space on a website that hosts real-estate related content. There may be an ad there in which you get a few cents for a click-thru or impression...let's be generous and say a buck. That ad may be placed by an affiliate...let's say for Lending Tree. The affiliate will now get $40 if they fill out an application. The lending tree, will in-turn get $75 from 3 to 5 lenders for that application. As you can see, the short-cut ad gets a buck, the affiliate gets $40 and the lending tree gets up to $375. Now continue to chase the money…if they get approved for a mortgage and buy a house, the broker gets thousands! If I had a real estate related site, I would try and get as close to the thousands as possible.

Ads are easy, which is why they don’t pay well.

Ads are often used to generate leads. If you are a source of video content for investors, you can send your users elsewhere via ads that fill out contact info for more premium info on investing. These leads are then sold to brokers for $5 to $75. The brokers then make thousands. Once again, I would be more interested in turning the visitor into a lead and then selling the lead…instead of the ad once again being on the small end of the funnel.

Monetizing isn’t the problem…tracking end sales and trying to take a piece, that’s the challenge….and it’s just that – a challenge, not a problem. A more difficult road for greater rewards.

YouTube has a ridiculous viewership. They can probably sell t-shirts and make more money than they do in advertising. If I were them, I would:
a) Be a super affiliate
b) Capture and convert viewers to leads, then sell the leads at a premium
c) Sell! What does YouTube sell? Ads? How about apparel, electronics, video games? You don’t even have to stock inventory, create a amazon-like model.

The first ad on my next site? It will be to sell my Toyota Camry for $4,000…a lot more than google ads will be giving me for the same space!