• by Diane Mermigas , June 9, 2008

Michael Eisner has blown the lid off the prevailing fallacy about online video: that money is or soon will be made, advertising dollars are rolling in and content producers are adequately reimbursed. Not yet.

Many online video startups, some of which Eisner has financed, are receiving second rounds of financing even before demonstrating their new model can pay off. Veoh now has an additional $30 million in funding, for a total of $70 million in venture capital, prompting Eisner, an investor, to abruptly ask CEO Dimitry Shapiro--both on stage at Digitas' "Newsfront" Web showcase for advertisers--when he will be paid. Shapiro did not have a good answer.

The former Disney chairman, successfully bridging new and old media with his own Tornante Co., has the online video projects "Prom Queen" and the new "Foreign Body." Veoh and other video aggregators are "shooting themselves in the foot," Eisner warned. "They are trying to elicit a fee to integrate on sites like Veoh, but with a revenue split that makes it impossible for a content producer to get enough money to cover production."

The problem goes even deeper.

Business models don't count until they reliably generate revenues and returns to pay partners--which rarely occurs in the online world. Professional and user-generated content is being voraciously produced and consumed online faster than advertising and other revenues can be generated to pay the bills. Since Web sites can't function without content, producers must be revenue-sharing partners, which is meaningful only if there are sufficient ad dollars and other generated income to share.

This is complicated by the ongoing shift of ad dollars from traditional media coupled with economic weakness and the absence of efficient audience metrics. The online ad frontier is fraught with problems--from enraging members of a social network to easy misplacement of ads. (Eisner complained that a male enhancement drug ad was automatically targeted for and appeared with an episode of "Foreign Body.") Other revenue sources must be created: from sponsorships and transaction-related fees to various forms of sharing revenue and costs.

The answers are found in shifting the online focus from the value of the content and the advertising to the value of connecting to and continuously transacting with the right consumer.

There is no silver bullet for monetizing online consumers whose particular preferences, demographics and online social networking connections match content and advertisers. The challenge is so complex, the head of monetization at Google's YouTube, Sashi Seth, recently quit to develop an advertising and business model for a Silicon Valley startup. Nearly two years after Google acquired YouTube for $1.65 billion, the dominant video-sharing site is still straining to top $100 million in revenues this year amid declining ad rates. It is actively soliciting brand marketers and professionally produced content channels, while experimenting with user and advertiser analytic tools.

The nascent Web video space barely generates 1% of television advertising--but that will change. There is an inevitable intertwining of aggregators and producers of professional and amateur video and YouTube, trafficking nearly half of all shared user-generated and backdoor pro video on the Web, for which there is no compensation to content producers.

In the interim, all levels of content producers must help build tiered payment models. Eisner's Vuguru is hatching new revenue models that parallel television, minus the typical $1 million-plus cost per prime-time series episodes and the premium ad pricing. Shared ad revenues supported "Prom Queen's" $3,000, 90-second episodes; brand marketing exposure for Robin Cook's new book is supporting every $5,000, two-minute episode of "Foreign Body."

MySpace TV's approach to creating prime time-like three-minute episodes (also at a cost of about $5,000 each) of youth Web dramas, such as "Roommates," underwritten by Ford and making money, is the impetus for a dozen Web pilot series. Revver, which sells ads against user-generated content, paid more than $1 million to video producers last year of the more than $2 million in revenues. Revver affiliates get 20% of ad revenue for sharing videos, and the remaining revenue is split 50/50 with video creators. Among the many variables that impact the economics: the percent of videos that are monetizable, operating costs, advertising logistics, and research and development.

The outcome of Viacom's $1 billion lawsuit against the unauthorized use of its video on Google's YouTube will shape business practices. So will Hulu.com and other walled gardens of ad-supported branded network and studio content (MGM, Warner Brothers). Other seasoned online video sites, such as Heavy.com and Mania.com, are still works in progress. But the Web is too viral and self-defining an environment to adhere to rigid rules. It always will be a patchwork of business models and content mixes in search of creating steady revenues.

Some external forces will continue to intensify competitive tensions playing into these economics. With more than 40% of video expected to be distributed outside the TV in less than four years, Apple's leadership of the mobile market with its 3G iPhone (to be unveiled at the conference today) will drive content producers, distributors and advertisers to new models for monetizing on-the-go consumers.

For now, online video is a fledgling media business like so many others: production and storage costs are high; advertising is uncertain; and profit margins are low or nonexistent. Some experts estimate the best-case scenario will be 10% to 20% margins. Survival and success of the players involved depends largely on whether online video is their primary or additive business. In theory, that gives the TV networks and film studios a leg up, with most of the innovation and risk occurring elsewhere--if there is money to be made. That is a very big "if."