Commentary

Online Video's Bottleneck Can Be Addressed By Balancing Speed With Size

Last week, AOL acquired 5Min for $65 million, five times the $12.8 million it had raised.  If the venture capitalists owned roughly 50% of the company, that translates to a 2-3x return.  Given the dearth of exits in online video, that is something they should be proud of, but considering that

-       5Min was a Top 10 online video network;

-       Online video is the fastest growing segment within the fastest growing medium;

-       And 5Min CEO Ran Harnevo himself dubbed 5Min the "Google AdSense for video content"...

Did 5Min sell too early and for too little?  It depends.  Was this a case of "buying on rumor and selling on news"?  Not really.  Online video will grow from $1 billion in 2009 to $5.2 billion in 2014, but with hindsight, it will be clear that 5Min did the right thing, because size and speed matter.

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In general, traditional media possess size but lack speed; start-ups possess speed but lack size. In online video, traditional media first sought to build instead of buy, while start-ups sought to become the Google of video. 

By now it's clear that apart from Hulu, the build approach has generally failed for big media (and Hulu only really proved that content is king). Meanwhile, for start-ups, the company most likely to become the Google of video is Google (by way of owning YouTube, which accounts for 44% of video views in the U.S., though I believe that Hulu, Yahoo and Facebook all have a strong position to build on, as well).

Different Model for Different Media

Whether you are an aggregator or a content producer, online video is experiencing a bottleneck that its predecessor search never really did.  With search being priced in a pay-per-click model, an advertiser will bid on all incremental volume that searchers will generate for a given keyword no matter what the volume, especially since initially most of the search advertisers were small and medium-sized businesses who paid via credit cards to begin with. 

Yet performance-based models have hitherto failed in online video due to user behavior and cost realities, and will continue to do so.  When a user searches for a keyword and scrolls down a results page looking to click on something, the propensity to click is extremely high; the likelihood users will click on an ad, relatively good.  With video, you press play and lean back. With your hand off the mouse, the chances that you will click on an ad are low, even though you are extremely immersed in the experience. 

Moreover, video is expensive to produce, and content owners will shun performance-based models, while properties with large audiences and search volume tend to aggregate content and thus be more receptive to pay-per-click ad models for their search traffic.

Provided the content is of quality, it will only make sense to draft an insertion order if the reach and volume are high enough.  No one wants to waste their time to get an invoice or check for $15.  As a result, a lot of video views are left to be monetized via ad networks (thus low rates), or not at all, as fragmented audiences become hard to monetize via direct deals with ad agencies and brands. 

YouTube is scaling revenues as the market leader in a rapidly growing space, but many of the large aggregators are having a hard time monetizing their audiences because they are slow at building up their sales organizations, and even when they do, they tend to lack premium content that is monetizable.

Growing Discrepancy Between Audiences and Ad Dollars

As a result, in aggregate, there is a massive discrepancy between a) premium video inventory, b) audiences and c) ad dollars.  This is creating a bottleneck because marketers want to spend more money on online video, but they can't. 

YouTube is a microcosm of this problem. Premium publishers don't get as many views on their owned-and-operated sites as they'd like to and nowhere near as much as when distributed on places like YouTube.  Given YouTube's revenue share model, it's less interesting for the traditional media companies to place ads on the Google-owned property, so the chasm between potential and actual video dollars spent is growing.

Premium publishers are always sold out, whereas the sites with massive video views are unsold.  The problem is that higher quality does not necessarily imply higher video views.

The Secret's Out: The Web is More Effective

In 2000, the dot-com crash took down the Nasdaq and advertising with it.  But by the 2008 meltdown, marketers had anywhere from five to fifteen years of experience with online media, so once budgets returned, they went online at the expense of print, radio -- and to a lesser extent, television.

While the Web's impact on print is well documented, profound and irrevocable, at this exact moment, it's not necessarily clear what its impact on television will be.  Part of this issue has to do with the three-dimensional (audio, video/images, text) nature of television content vs. print's one-dimensional nature (text).  That has technical implications for things like piracy and distribution, which will protect television for some time against what happened to print, but for television executives to think that they shall be altogether immune to the Web is denial at best and a recipe for disaster at worst. 

Ultimately, with U.S. television advertising a $70 billion market and online video weighing in at $1 billion in 2009, it's clear that those numbers will converge at a rapid rate.  But for that to materialize soon enough, we need to bridge the gap between  reach and quality, and as outlined here today, size and speed.  AOL knows that, 5Min understood that, too -- hence their deal. With M&A being like a game of dominoes, we'll find out soon enough who else does, too.

3 comments about "Online Video's Bottleneck Can Be Addressed By Balancing Speed With Size ".
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  1. Mike Einstein from the Brothers Einstein, October 4, 2010 at 12:27 p.m.

    Beauty is in the eye of the beholder, and premium video is any video a consumer chooses to watch.

    The notion that "premium" video attracts a more upscale viewer flies in the face of Starkist's sage advice: We don't want tunas with good taste...we want tunas that taste good.

    It's a real pity when an animated fish knows more about marketing than we apparently do.

  2. Ashkan Karbasfrooshan from watchmojo.com, October 4, 2010 at 12:50 p.m.

    hey Mike,

    I removed a line due to length, but somewhere in the paragraph called "Growing Discrepancy Between Audiences and Ad Dollars" I initially mentioned that "just because a video has higher production value doesn't guarantee that it will get more views" but by now I think this is pretty much obvious considering the kind of videos (not stated in a derogatory sense) that get the most views.

    Cheers

    Ash

  3. Paula Lynn from Who Else Unlimited, October 4, 2010 at 3:25 p.m.

    Just to add in to the comment about newspaper: Regardless of the interent change and adjustments, newspapers, internally, have been killing themselves slowly by greed and CYA mentalities.

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