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Friday, November 28, 2014

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  • With Next New Networks Deal, YouTube Evokes Cable's Early Days

    With Monday's announcement that YouTube is acquiring independent video producer Next New Networks, plenty of people have concluded that Google and YouTube have officially become content providers themselves - something the companies swore they'd never become. While it's tempting to conclude this, my take is that YouTube is actually lifting a page from the cable industry's evolution - seeking to act less as content creator, and more as a "strategic catalyst" for the online video era. Let me explain.

    Back in the early days of cable, its primary value proposition was purely improved reception. Many of the earliest cable systems were built in communities where over-the air broadcast signals were poor. Once those initial systems were built and then subsequently upgraded to have expanded capacity, the industry recognized that it needed to hang its hat on more than just the proposition of "better picture quality." Thus began a frenzied process of creating new specialty channels to appeal to specific audience segments. Initially these channels offered re-runs and other inexpensive shows they could get their hands on (who remembers that ESPN's early days featured ping-pong?). Eventually however, these channels would become original programming powerhouses in their own right.

    Cable operators gave budding channels three important things: distribution, a viable, dual revenue stream business model, and financial sustenance in the form of direct investments. TCI, the largest cable operator in the 1980s and 1990s, embraced this approach to a greater extent than anyone else, eventually amassing stakes in so many channels that it successfully spun off a whole new company - Liberty Media - with its programming assets. Key to TCI's approach was granting upstart channels distribution on its systems, a foothold that helped the channels clinch further distribution deals.

    Fast forward to today and we see YouTube doing something similar with its Next New Networks acquisition and its new "YouTube Next" program. In fact, YouTube head Salar Kamangar hints at the comparisons to cable in a recent interview. YouTube recognizes that as the online video market leader, it needs to drive the medium to the next level of mainstream appeal, which will only happen through relentless improvements in content quality. Next New Networks has come as close as anyone has to cracking the code on how to create winning web programs and generate huge audiences, primarily on the YouTube platform.

    Under the YouTube umbrella, Next New will more formally drive these lessons home to other aspiring content producers. Where some see the quality of today's independent web video as being on a par with cable's re-runs of old, YouTube has a long-term vision of helping incubate the Internet's equivalent of "The Sopranos" down the road. In other words, today's so-so quality niche web shows could well morph into tomorrow's mainstream hits, delivered over-the-top to connected TVs and other devices. The Internet offers content providers unlimited shelf space; YouTube is trying to fill it with the best video possible.

    But, as with cable, this isn't solely about differentiating through content; it's also about leveraging distribution and technology. YouTube is like the old TCI, capable of giving new entrants a huge leg up through featured distribution, potentially aided by cross-promotion with more popular content. And just as early cable operators helped create viable business models for early channels, YouTube, which has invested heavily in its monetization solutions, will help video producers generate a financial return. Granted, we shouldn't expect YouTube to start paying cable-style monthly affiliate fees to content providers, but if they can keep their production and marketing costs down, that might just be ok.

    With Google as its sugar daddy, YouTube has deeper financial resources than anyone else in the online video world. No doubt the folks at Google and YouTube have been pitched endlessly on using their booty to acquire high-profile content assets. While there would have been some merit in that approach, YouTube's unfolding strategy is far more strategic. By leveraging its deep pockets, developing its platform and focusing on the long-term, YouTube is positioning itself for a far greater role in entertainment down the road.

    It will take some time to see the Next New deal and YouTube Next initiative bear fruit (and execution will be key), but when they do, their impact could be as significant as what we've seen unfold in the cable industry.


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