Commentary

Online Video Wealth Heart Of WGA Strike

While content producers, writers and directors haggle over residual shares of a potentially lucrative video content market, the quest for insights into the next generation of entertainment continues. For now, it's as much smoke and mirrors as it is math and art.

At the heart of the 4-month-old writers' strike are assumptions about online video content. Experts from disparate corners of the media universe gathered for a recent Bernstein Research-sponsored video online conference, and agreed that despite encouraging early signs, TV and online video economics will not be reconciled any time soon.

For one, network media conglomerates are comfortable selling more than 70% of their online video and advertising inventory in tandem with their prime-time programming and 30-second commercial pods. The halo effects of pricing even low-rated TV online, as well as the cross-platform synergies, are powerful forces in the nascent video content market, according to George Kliavkoff, chief digital officer for NBC Universal. The best example yet is the nascent Hulu.com branded streaming video venture of NBCU and Fox, which is already commanding two to three times the network broadcast CPMs for the strictly licensed TV programs and movies.

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However, Joost CEO Mike Volpi countered that made-for-online video content costs can be more assuredly recovered using a CPM model for Internet-oriented programs produced for between $200,000 and $500,000 per average 10-minute episode. Compare that with the conventional $2 million it can cost to produce a 30-minute episode of prime-time television. Such irresistible economics will singlehandedly alter the business over time.

Likewise, Blair Westlake, Microsoft Corp. vice president of the Media Entertainment Group, contends that the traditional production distribution model cannot help but change given the boundless trove of untapped talent surfacing on the Net and the general effectiveness of online distribution. "The days of $3 million-plus episodic TV are probably coming to an end. You will have less of a comparative difference between a $3 million show and a $400,000 show"--especially with more than 80% of all new prime-time series failing, Westlake said. "You're going to find there is more content."

Still, more content alone will not guarantee more revenues, according to Anita Elberse, an associate professor at Harvard Business School. Although lower transmission and search costs are fueling digital niche content, the flood of user-generated and professional content online is overwhelming. The rise of specialized "long tail" content has fragmented consumers and flattened financial returns, she said.

"We see a rapidly increasing number of titles that rarely or almost never sell. The long tail is incredibly flat, which means it is very difficult for providers and content aggregators to actually profit" or even recoup even inexpensive production costs, Elberse said. The truth is that the old laws of consumer behavior still apply: "Hits are still dominant, and hits are liked better...a winner still goes a long way."

Bob Iger, Walt Disney president and CEO, and the conference keynote, conceded: "I don't know what the economic model is for a lot of this product down the road because there's so much shifting going on, and declaring what it is today and making commitments in that regard could be dangerous and ultimately hurt our ability to produce at this level." Although Iger said Disney is creating for new media platforms at a substantially reduced cost, representatives of Madison Avenue at the conference insist there must be more bold experimentation with formats and business models. Efforts to devise new metrics for advertisers will substantively shift more dollars to online video.

"As advertisers start to get more comfortable with the new metrics of what's called engagement for the moment, they're willing to shift... because they realize (they) are as powerful as just driving pure brand impression," said Reuben Hendell, CEO of MRM Worldwide, the digital and directing marketing arm of McCann WorldGroup.

For now, there are more questions than answers. Will the move to Internet distribution generate incremental revenue streams--or will there be unintended negative consequences and cannibalization of revenues, similar to what happened with online music? Who will be the winners and losers in the new IT video world? What will be the most successful online video business models? At what point will advertising support be sufficient online to match or supplant the television universe?

"Those questions will become more complicated the more content is made available in the same windows," said Melinda Witmer, senior vice president and chief program officer at Time Warner Cable.

For instance, the idea of shifting from a program license fee model on cable supported by subscription and ad dollars to more of a virtually ad-supported model online suggests a fundamental change in the cable distribution business. "There are some issues starting to be raised about whether the advertising model on the Internet for video will ever compare or be as robust as what it is on television," Witmer said. "The willingness to pay in the traditional model, either as a consumer or ultimately as distributors, is very much dependent on what has an impact on the model and on our revenue."

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