I'm pleased to present the 218th edition of the VideoNuze podcast with my weekly partner Colin Dixon of nScreenMedia. Both of us have continued to observe signs of how online video is coming of age, and today we discuss some of them.
We start with news that Comcast will begin selling episodes of "House of Cards" in its Xfinity online store. Putting aside the question of why someone would buy an episode for $1.99 when they could binge-view all 26 episodes in a month for $7.99, both of us thought it's noteworthy that the largest cable operator believes an online-only series is worth selling (and note too, the deal was done with Sony Pictures, and that Verizon also has been selling the series).
Then there was the report that Disney might acquire Maker Studios, a pure-play online video / YouTube content provider. While Colin and I get a chuckle out of the idea that the Disney flag could fly over Epic Rap Battles and PewDiePie, we agree it would be a smart bet to gain reach into the all-important millennial segment.
Then we turn to the $18 million investment by Warner Bros. in Machinima, an online video gamer-centric content creator also targeting millennials. The 2 companies already had a successful collaboration with the "Mortal Kombat: Legacy" web series. No doubt the new investment will spur more gamer-centric originals for distribution by Warner Bros.
We wrap up by discussing just how important millennials are to the video's future. Recent data suggest this group is still pretty glued into the pay-TV ecosystem, but their behaviors are changing fast, in turn leading established media companies to focus on online video more than ever.
Categories: Syndicated Video Economy
Daisy Whitney and I are pleased to present the 50th (woohoo!) edition of the VideoNuze Report podcast, for February 19, 2010.
This week Daisy first walks us through a piece she's writing for AdAge focused on viral video. In reviewing data on which videos have broken out online, Daisy concludes that invariably they are also supported by related advertising. In other words, viral video isn't accidental any more (if it ever was) - now it must be stoked by paid support. An example Daisy provides is for Evian's "Live Young" babies ad which has been seen online 76 million times. Evian initially promoted the ad with YouTube takeover ads. Daisy also discusses the online performance of Super Bowl ads based on Visible Measures' new Trends application, which shows a big disparity between ads that were viewed heavily online vs. rated highly when seen on TV.
Then we discuss my post, "In Trying to Preserve DVD Sales, Studios are in a Tight Spot," in which I described the lengths to which Hollywood studios are going to squeeze out the last remaining profits from DVD sales. As I explain, while the recession has had a dampening effect on DVD sales, the larger problem is that rather than buying them, increasingly consumers are expecting films to be available for rental or subscription or even for free, with ad support. A number of moves from Disney, Sony and Warner Bros. in the last week underscore the consequences studios face as they try to shore up DVD sales.
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It's not news that DVD sales - the lifeblood of Hollywood studios' P&Ls - are in a freefall. In response, the studios are doing all sorts of things to eke out just a little more profitability from the sales of the shiny discs. But as several news items over the last week underscore, the studios have little wiggle room before their efforts to shore up DVD sales have real or perceived consequences for key business partners.
Exhibit A is the brouhaha over Disney's new plan to release Johnny Depp's "Alice in Wonderland" on DVD 12 1/2 weeks after its theatrical opening, instead of the usual 16 1/2 weeks, regardless of whether it's still playing in theaters. In the past, when a film's "release windows" were distinct and well-separated, everyone in the distribution chain knew they'd have their separate bite of the apple. With collapsing windows, those bites are converging, leaving some feeling they're not going to get their fair share. In the U.S. there has mostly been just grousing about Disney's plan among theater owners, but in Europe there are threats by large theater chains of an all-out boycott of the film.
It's hard not to feel some sympathy for the theater owners as the "Alice" plan isn't a random event. Sony recently ran a misguided promotional campaign giving away "Cloudy with a Chance of Meatballs" DVDs to certain Bravia buyers while the film was still playing in theaters. And it attempted to accelerate the release of the Michael Jackson "This Is It" DVD until theater owners drew the line. No doubt there are plenty of other examples being floated privately in Hollywood.
Meanwhile, news also broke this week that Redbox, the $1 a day rental kiosk chain had acceded to Warner Bros.' demand that it not rent any films until 28 days after their DVD release, in order to help preserve initial sales. As part of the deal Warner dropped its lawsuit against Redbox. In return, Redbox got lower pricing on its Warner DVD purchases. The deal mirrors the 28-day deal Netflix did with Warner last month, which I thought was a win for everyone. But the key difference in that deal vs. Redbox's is that Netflix has a huge rental catalog available for its subscribers to choose from, meaning new releases are far less important (Netflix says only 23% of rental requests are for new releases). On the other hand, Redbox's whole value proposition rests on low prices and selection of new releases. What is Redbox's fate if it does similar deals with other studios?
Putting the squeeze on Redbox and its kiosks seems like a dubious strategy by studios. In an age where piracy looms large, studios should be focused on enhancing, not diminishing the accessibility of their product (as a Coke executive once famously explained the company's marketing goal: "always within an arm's length of desire"). While Hollywood doesn't like Redbox's lower margins, focusing on that issue excessively when the product is clearly in decline is missing the forest for the trees.
Studios' desire to preserve DVD sales is going to further intensify, but defending them is only going to get harder. Certainly part of the reason is that the ongoing recession is forcing many consumers to cut back on their discretionary purchases. But the larger issue is that there's huge momentum behind the shift to online subscription/rental and even free models. The data shows that online viewing hit an inflection point in 2009, with free premium sites like Hulu experiencing extraordinary growth.
And the data showing online's appeal pours in almost daily; yesterday it was The Diffusion Group reporting results of a study of Netflix users showing that two-thirds of them that have a broadband connection are now using the "Watch Instantly" streaming feature. This week's launch of HBO Go, the premium channel's site for its subscribers, and its distribution deal with Verizon, are evidence that even the mighty HBO can't resist online's allure. Last but not least, in 2010 TV Everywhere rollouts will gain steam.
There's no denying the truth that DVD sales are under assault from all sides. Studios, desperate to hold on to DVDs' precious profits, are increasingly contorting themselves to keep the DVD cash cow alive a little longer. No surprise though, their efforts are not without consequences. At what point do the studios capitulate and throw DVD sales under the bus? We'll have to wait and see.
What do you think? Post a comment now (no sign-in required).
Looking at Netflix's Q4 '09 and full year '09 results released late last Wednesday, plus Netflix's performance over the last 3 years, I have concluded the company has officially entered a "virtuous cycle." For those of you not familiar with the term, a virtuous cycle is when a single change or improvement leads to a cascading series of follow-on benefits which both reinforce themselves and add further momentum to the original change (a hyper "one good thing leads to another" scenario, if you will). Virtuous cycles are extremely rare in business, and when they happen they have profound implications.
The start of Netflix's virtuous cycle is obvious: the company's introduction of its free "Watch Instantly" streaming feature in January, 2007. Streaming has fundamentally changed the Netflix service offering and consumers are increasingly aware of this. Traditionally, Netflix subscription plans were defined by limits - 1 DVD out at a time for $8.99/mo, 2-out for $13.99/mo or 3-out for $16.99/mo. But with the company's decision to remove the confusing original caps it placed on streaming consumption and move to an unlimited model, Netflix is now providing enormous new value at the same DVD rental price points. Netflix has also changed how it advertises its services, strongly emphasizing streaming (see its home page for example). The "unlimited streaming" message is breaking through and Netflix subscriber growth momentum over the last 3 years reflects this.
Subscribers grew to 12.3 million at the end of '09, 31% higher than YE '08. To get a sense of Netflix's momentum, '09 growth handily beat '08 (26%) and '07 (18%) growth. The 2.9 million subs added in '09 was 85% above the company's own 2009 beginning year forecast of 1.56 million sub additions. Looking ahead, the mid-point of Netflix's forecast for '10 is for another 30% growth in subs.
As the streaming benefits have resonated, it's very important to note that subscriber growth is actually getting progressively cheaper for Netflix to accomplish. As the following graph shows, Netflix's subscriber acquisition cost (SAC) has decreased by an impressive 43% from $44.31 in Q4 '06 to $25.23 in Q4 '09 (the 2nd lowest SAC in the company's history). Better still, the quality of these new subs seems high; average monthly churn in Q4 '09 was 3.9%, equal to the lowest churn the company has ever achieved. While Netflix isn't "buying" growth with low-quality additions (an old trick for subscription-oriented businesses), it is however putting more emphasis on the "1-out" service, which, with the addition of unlimited streaming, is an outstanding value for the low-end of the market. Netflix is eager to penetrate this segment, to whom $1 Redbox rentals are very attractive.
While Netflix's financials already reflect the virtuous cycle impact streaming is having on the business, it is likely there is much more to come as streaming takes further hold. Netflix revealed that 48% of its subscribers streamed at least 15 minutes/mo in Q4 '09, up from 41% in Q3 '09 and 26% in Q4 '08 (Incidentally, I think it's conceivable that 80% or more of recently-added subscribers are streaming). But it's just in the last year that Netflix streaming has begun to make the move from computer-only consumption to TV-based consumption, truly making it a mainstream experience. Netflix has inked deals with all the major game consoles (with a Wii marketing campaign beginning in '10), plus numerous CE devices, Blu-ray players, etc. Just ahead is a future where Wi-Fi will be ubiquitous in all new TVs and Netflix's deals with all the major TV manufacturers will ensure it is even more front and center for consumers.
I'm now gaining more confidence that this will indeed happen, especially for these networks' original productions. Netflix is simply getting too big to ignore. It represents a whole new revenue opportunity for premium channels, plus an important loyalty-building outlet. Further out though, while Netflix CEO Reed Hastings says he wants the company to be a distributor for these premium channels, I think it's nearly inevitable that Netflix will compete head-on with them for Hollywood's output. Economics dictate that eventually it makes more sense for Netflix to bid directly for Hollywood rights than work through a premium channel middleman.
In fact, Netflix already has tons of Hollywood relationships, and its recent deal with Warner Bros, creating a 28-day DVD window is emblematic of how Netflix looks at streaming content acquisition going forward. In that superb deal, which was ludicrously criticized by some, Netflix simultaneously helped a critical partner sustain its DVD sales window, while gaining cheaper access to more DVD copies on day 29 and increased streaming rights for catalog titles. As Hastings pointed out on the Q4 earnings call, given the inconsistencies in DVD release strategies, most consumers have little-to-no idea when a title becomes available on DVD, so, while still early, opening up the 28 day window has caused no subscriber complaints. And the company's analysis of subscriber "Queues" indicates, just 27% of requests are for newly-released titles.
Importantly, Netflix's strategy is to pour savings from its DVD deals into streaming content acquisition. As I noted recently, Netflix's detailed subscriber data and usage analysis gives it a huge asymmetric advantage in negotiating additional streaming licenses from Hollywood. Netflix can surgically concentrate its resources on only those titles it knows its subscribers will value. Over time, as DVD sales continue to collapse, Netflix will be there to offer its subs a broader and broader rental selection.
The biggest challenge to Netflix for streaming content acquisition is how much it chooses to spend. Netflix's relatively small size among giants like Comcast and others is what prompted me to suggest over a year ago that Microsoft would acquire Netflix. I'm officially retracting that prediction now, as 2009 demonstrated how much streaming progress Netflix can make on its own. In fact, I think all rumors of a possible Netflix acquisition are off-base; I see the company remaining independent for some time to come.
Netflix is now riding a serious wave and its executives recognize the mile-wide opportunity ahead of it. The product is immeasurably stronger and more appealing with unlimited streaming included. That's in turn leading to impressive sub growth with much-reduced SAC and improving churn. The number of devices bridging Netflix to the TV is growing and portends ubiquity at some point down the road as these devices further leverage Netflix's platinum consumer brand. Streaming content selection is improving, bringing side benefits of reduced DVD postage and inventory costs. With millions of subscribers Netflix now has both the economics and the scale to be a very significant player in the video ecosystem.
Last but not least is a very favorable competitive climate. Aside from a hobbled Blockbuster, astoundingly, Netflix doesn't have any other direct DVD subscription/online streaming hybrid competitor (Amazon and Apple, are you paying attention?). And while Comcast and other multichannel video programming distributors ("MVPDs") are rolling out TV Everywhere services (5 years later than they should have, in my opinion), these are still early stage, and still encumbered by archaic regional limitations. Indeed, Netflix's growth may well cause these companies to consider their own over-the-top plans, as I've suggested.
For years I have been saying that broadband video is the single most disruptive influence on the traditional video distribution value chain. Netflix's success with streaming and the consequences that are yet to play out are resounding evidence of this. Above and beyond YouTube, Hulu, Amazon, Apple and others, Netflix is by far the most important video distributor to watch.
What do you think? Post a comment now (no sign-in required)
Following my 2 posts late last week (here and here) about how Netflix's new deal with Warner Bros is win for everyone, the NYTimes has posted a terrific interactive map showing the top rentals in 12 geographic areas of the U.S., sorted by zip code. The map is based on data that Netflix provided to the NYTimes. Playing around with the map, you'll quickly hunger for more details, but you'll also get a sense of the mountain of viewership data Netflix maintains on its 11 million+ subscribers. This data, when combined with the Netflix's algorithms for predicting its users' preferences, further demonstrates how valuable a deal like the one with WB could be for Netflix as it emphasizes streaming.
In the digital era, data is king because when used properly, it can dramatically improve the quality of the product delivered, in turn driving user satisfaction and profitability. Netflix has always used data very effectively; examples include how it has chosen sites for its distribution centers so that most Americans are within 1 day's delivery, or how it has recommended other titles based on yours and others' preferences, or how much inventory of newly-released DVDs it decides to build. Now, as Netflix shifts its business from physical to digital delivery, it has another big opportunity to leverage the data it has collected from its users.
While a lot of attention was focused last week on the new 28-day "DVD window" which precludes Netflix from renting recently-released WB titles, I believe more attention should be paid instead to how effectively Netflix will be able to use its trove of data to selectively tap into WB's catalog of titles to boost its streaming selection. Using the data it has collected on physical rentals and search queries, for example, Netflix should be able to literally request title-by-title streaming rights from WB. That's not to say Netflix will necessarily receive access to those particular titles, but by being able to focus its requests, Netflix avoids wasting energy asking for things that are unlikely to have much appeal to its users.
It's interesting to talk to friends who are Netflix users, including those who don't work in technology-related industries. They have an amazingly high awareness and usage of Netflix's streaming and recognize that it represents the company's future. It's also obvious to them how meager the options are in Watch Instantly as compared with DVD and desperately want more choice. Netflix knows all this, as Netflix CEO Reed Hastings said last week, "our number one objective now is expanding the digital catalog." But Netflix is in a tight position to get new releases due to existing output deals that Hollywood studios maintain with HBO and other premium channels for electronic delivery. So, as with the WB deal, and others likely to follow, Netflix is trying to be clever about how it builds its streaming catalog by tapping into older, but still valuable titles.
It's unclear whether Netflix will conclude similar deals with other Hollywood studios. If it can't then the above-described benefits will be limited. In fact, as a couple of people pointed out to me last week, with Hollywood also highly dependent on cable, it's not readily apparent that helping Netflix build its streaming selection is actually in their interest as TV Everywhere services continue to roll out. WB is actually an interesting example; on the one hand, Time Warner's CEO Jeff Bewkes has been the strongest proponent of TV Everywhere, but on the other hand, WB's deal with Netflix creates more competition for it. In short, Hollywood will have its hands full trying to recast its distribution strategy in the digital era.
DVDs are not going away overnight, but the user data Netflix has will be an enormously valuable tool in helping transition its business to digital delivery and add more value to its subscribers. As long as Netflix complies with its users' privacy expectations, that gives it a big strategic advantage.
What do you think? Post a comment now.
Following are 4 items worth noting for the Jan 4th week:
1. TechCrunch disagrees with my Netflix-Warner Bros. deal analysis - In "Netflix Stabs Us In The Heart So Hollywood Can Drink Our Blood," (great title btw) MG Siegler at the influential blog TechCrunch excerpts part of my post from yesterday, and takes the consumer's point of view, decrying the new 28 day "DVD window" that Netflix has agreed to in its Warner Bros deal. Siegler's main objection is that "Hollywood thinks that with this new 28-day DVD window deal, the masses are going to rush out and buy DVDs in droves again." Instead, Siegler believes the deal hurts consumers and is going to touch off new, widespread piracy.
I think Siegler is wrong on both counts, and many of TechCrunch's readers commenting on the post do as well. First, nobody in Hollywood believes DVD sales are going to spike because of deals like this. However, they do believe that any little bit that can be done to preserve the appeal of DVD's initial sale window can only help DVD sales which are critical to Hollywood's economics. Everyone knows DVD is a dying business; the new window is intended to help it die more gracefully. And because new releases are not that critical to many Netflix users anyway, Netflix has in reality given up little, but presumably gotten a lot, with improved access for streaming and lower DVD purchase prices.
The argument about new, widespread piracy by Netflix users is specious. With or without the 28 day window, there will always be some people who don't respect copyright and think stealing is acceptable. But Netflix isn't running its business with pirates as their top priority. With 11 million subscribers and growing, Netflix is a mainstream-oriented business, and the vast majority of its users are not going to pirate movies - both because they don't know how to (and don't want to learn) and because they think it's wrong. Netflix knows this and is making a calculated long-term bet (correctly in my opinion) that enhancing its streaming catalog is priority #1.
2. comScore's November numbers show continued video growth - Not to be overlooked in all the CES-related news this week was comScore's report of November '09 online video usage, which set new records. Key highlights: total video viewed were almost 31 billion (double Jan '09's total of 14.8 billion), number of videos viewed/average viewer was 182 (up 80% from Jan '09's 101) and minutes watched/mo were approximately 740 (more than double Jan '09's total of 356).
Notably, with 12.2 billion views, YouTube's Nov '09 market share of 39.4% grew vs. its October share of 37.7%. As I've previously pointed out, YouTube has demonstrated amazingly consistent market dominance, with its share hovering around 40% since March '08. Hulu also notched another record month, with 924 million streams, putting it in 2nd place (albeit distantly) to YouTube. Still, Hulu had a blowout year, nearly quadrupling its viewership (up from Jan '09's 250 million views). But with 44 million visitors, Hulu's traffic was pretty close to March '09's 41.6 million. In '10 I'm looking to see what Hulu's going to do to break out of the 40-45 million users/mo band it was in for much of '09.
3. Consumer groups protest TV Everywhere, but their arguments ring hollow - I was intrigued by a joint letter that 4 consumer advocacy groups sent to the Justice Department on Monday, urging it to investigate "potentially unlawful conduct by MVPDs (Multichannel Video Programming Distributors) offering TV Everywhere services." The letter asserts that MVPDs may have colluded in violation of antitrust laws.
I'm not a lawyer and so I'm in no position to judge whether any actions alleged to have taken place by MVPDs violated any antitrust laws. Regardless though, the letter from these groups demonstrates that they are missing a fundamental benefit of TV Everywhere - to provide online access to cable TV programming that has not been available to date because there hasn't been an economical model for doing so. In the eyes of people who think that making money is evil, the TV Everywhere model of requiring consumers to first subscribe to a multichannel video service seems anti-consumer and anti-competitive. But to people trying to make a living creating quality TV programming, the preservation of a highly functional business model is essential.
These advocacy groups need to remember that consumers have a choice; if they don't value cable's programming enough to pay for it, then they can instead just watch free broadcast programs.
4. 3D is the rage at CES - I'll be doing a CES recap on Monday, but one of the key themes of the show has been 3D. There were two big announcements of new 3D channels, from ESPN and Discovery/Sony/IMAX. LG, Panasonic, Samsung and Sony announced new 3D TVs. And DirecTV announced that it would launch 3 new 3D channels by June 2010, with Panasonic as the presenting sponsor. 3D sets will be an expensive proposition for consumers for some time, but prices will of course come down over time.
Something that I wonder about is what impact will 3D have on online and mobile video? Will this spur innovation in computer monitors so that the 3D experience can be experienced online as well? And how about mobile - will we soon be slipping on 3D glasses while looking at our iPhones and Android phones? It may seem like a ridiculous idea, but it's not out of the realm of possibility.
Enjoy your weekend!
Daisy Whitney and I are pleased to present the first VideoNuze Report podcast of 2010 (and the 45th edition overall!).
In today's podcast we first discuss my post from yesterday, "Why Netflix's Long-Term Focus in New Warner Bros. Deal is a Win for Everyone," in which I assert that the new 28 day "DVD window" that the deal creates helps Netflix, Hollywood studios and ultimately consumers. There is a lot of consternation in the blogosphere and Twittersphere about whether Netflix is hosing its subscribers with this new policy, but I believe there's actually little risk of that, and the payoff for Netflix is better content for its streaming catalog as well as lower costs for its DVD purchases. While WB surely doesn't expect to sell more DVDs due to the deal, it can only help make the DVD model's demise a little less disruptive.
Switching gears, Daisy then reviews some of eMarketer's predictions for ad spending in 2010, with particular focus on online video advertising, which eMarketer expects to grow from about $1 billion in '09 to $1.4 billion in '10. Listen in to find out more.
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Netflix's new deal with Warner Bros., in which it agreed to a 28 day "DVD window" for new releases, in exchange for greater access to WB's films for its Watch Instantly streaming feature and reduced pricing on its own DVD purchases, is further proof that Netflix is squarely focused on the long-term. That's not only smart for Netflix, it's also a win for Hollywood studios and also for consumers.
With 11 million subscribers and growing, Netflix has emerged as one of Hollywood's most important home video customers. This dynamic has only increased recently due to slowing sales of DVDs (down another 13% in 2009) and Netflix's dominance in DVD rentals. Yet Netflix is viewed warily by Hollywood, primarily due to concerns that in the digital age, Netflix could gain too much power over Hollywood's fate. This concern was reinforced by Netflix's deal with premium cable channel Starz, a de facto end-run around Hollywood in which Netflix got streaming access to certain Disney, Sony and Lionsgate films.
As I've pointed out many times (as recently as this past Monday, in item #6), despite the Starz deal and the impressive adoption of Watch Instantly to date, Netflix faces a major challenge in building out its catalog of recent films for streaming use. Part of the challenge is Hollywood's "windowing" approach; in particular, other premium channels like HBO, Showtime and Epix have made significant financial commitments for electronic distribution during certain time periods that effectively preclude Netflix gaining streaming rights. Because much of Netflix's value proposition relies on its vast DVD selection (100K+ titles currently), if its streaming catalog continues to look meager by comparison, then Netflix's goal of migrating its users to streaming delivery over time will be seriously undermined.
That's where the new WB deal comes in. While the companies didn't disclose which titles or how many would be available, my guess is that the benefits of the deal, when it's fully implemented, will be noticeable to Netflix's subscribers or Netflix wouldn't have signed on. While WB is just one studio, if the new deal can be used as a template, Netflix could have a solid plan for gaining more films without paying big bucks. And the studios would get greater leverage against Redbox, which is viewed with even greater alarm by much of Hollywood.
Netflix's focus on the long term is smart strategy, and complements well the company's near-term emphasis on riding the convergence wave by embedding its Watch Instantly software in every conceivable living room device (e.g. PS3, Xbox, Roku, Bravia, Blu-ray players, etc.). It's also a strategy that benefits Hollywood. By creating a situation where studios preserve as much of their DVD sales as possible (allegedly 75% of a film's total DVD sales occur in the first 4 weeks following release), Netflix is helping Hollywood gracefully wind down and milk the DVD business.
Not surprisingly, consumers' first reaction to the deal was sour. Yesterday the Twittersphere was alight with grousing about the 28 day DVD window and how Netflix was "selling out its customers." Some even talked about canceling their Netflix service. I think most of this is idle chatter. Netflix has publicly said that just 30% of its DVD rentals come from recent releases (though it is likely that for Netflix's heaviest DVD renters, recent releases are far more important). In the end, Netflix is making a calculated bet that it can manage the potential subscriber consequences of creating the DVD window in order to benefit its larger goal of migrating its business to online delivery.
If Netflix is right, and it can sign on additional studios to similar deals, then ultimately consumers will win. That's because, as Netflix proves in the value of streaming, it will be able to offer improved terms to studios, resulting in Netflix getting better and better access to films. But this will be a gradual process that unfolds over time. Whereas consumers always "want everything yesterday," the reality is that if Hollywood and Netflix can avoid disruption and instead preserve most of their economics by gracefully transitioning their businesses to digital delivery, consumers stand a better chance of continuing to receive the kind of premium-quality (i.e. expensive to produce) films they value. The demise of the newspaper industry is a cautionary example of what happens when disruption instead prevails and an industry's traditional economics are destroyed.
We are still on the front end of seismic shifts that will alter how Hollywood's films are distributed to consumers. By focusing on the long-term, as evidenced by its WB deal, Netflix is playing an important role in increasing the odds of a successful transition.
What do you think? Post a comment now.
Last week the WSJ broke the news that YouTube is in talks with Lionsgate, Sony, MGM and Warner Bros. about launching streaming movie rentals. On the surface this is an intriguing proposition: the 800 pound gorilla of the online video world tantalizing Hollywood with its massive audience and promotional reach. However, when you dig a little deeper, I believe it's a dubious distraction for YouTube, which is still trying to prove that it can make its ad model work.
I appreciate all the possible reasons YouTube is eyeing movie rentals. To evolve from its UGC roots, the company has been anxious for more premium content to monetize. But with Hulu locking up exclusive access to ABC, Fox and NBC shows for at least the next year and a half or longer, full-length broadcast TV shows are largely unavailable. And now TV Everywhere threatens to foreclose access to cable TV programs. All this makes movies even more attractive.
Then there's Google's uber mission to organize the world's information. YouTube executives are savvy enough to know that not all content can be delivered solely on an ad-supported basis - not yet nor possibly ever (for more about the challenges of effectively monetizing broadcast TV shows, let alone movies, see my prior posts on Hulu). To succeed in gaining access to certain content, offering a commerce model is ultimately essential. Since YouTube has already put in place some key commerce-oriented infrastructure pieces like download-to-own and click-to-buy, rolling out a rental option is less of a stretch. Lastly, YouTube can position itself to Hollywood as a more flexible partner and viable alternative to Apple's iTunes.
Regardless, YouTube movie rentals are still a dubious idea for at least 3 reasons: they're a distraction from YouTube's as yet unproven ad model, there are too many competitors and too little opportunity to differentiate itself and the revenue opportunity is relatively small.
Focus on getting the ad model working right - Given its market-leading 40% share of all online video streams, I've long believed that YouTube is the best-positioned company to make the online video ad model work. YouTube has made solid progress adding premium content to the site that it can monetize, but it still has a lot of work ahead to make its ads profitable. As I wrote in June, Google's own senior management cannot yet clearly articulate YouTube's financial performance, causing many in the industry to worry about YouTube's sustainability. Some might assert that YouTube can keep tweaking the ad model while also rolling out rentals but I disagree. With the ongoing ad spending depression, YouTube must stay laser-focused on making its ad model work, and also on communicating its success.
Too many competitors, too little differentiation - It's hard to believe the world really needs another online option for accessing movies, and mainly older ones at that. There's Hulu, iTunes, Netflix, Amazon, Xbox and soon cable, satellite and telcos rolling out movies on TV Everywhere, just to name a few. Maybe YouTube has some secret differentiator up its sleeve, but I doubt it. Rather, it will be just one more comparably-priced option for consumers. And in some ways it will actually be inferior. For example, unlike Netflix and Amazon, YouTube's browser-centric approach means watching movies on YouTube will remain a suboptimal, computer-based experience. Unless YouTube is willing to pay up big-time, there's also no reason to believe it will get Hollywood product any earlier than proven services like Netflix and iTunes.
Revenue upside is small - It's hard to estimate how many movie rentals YouTube could generate, but here's one swag, which shows how limited the revenue opportunity likely is. Let's say YouTube ramped up to .5% of its 120M+ monthly U.S. viewers (assuming it had U.S. rights only to start) renting 1 movie per week (not a trivial assumption considering virtually none of YouTube's users have ever spent a dime on the site and there are plenty of existing online movie alternatives). YouTube's revenue would be 600K rentals/week x $4/movie (assumed price) x 30% (YouTube's likely revenue share) = $720K/week. For the full year it would be $37.4M. With YouTube's 2009 revenue estimates in the $300M range, that's about 12% of revenue. Nothing to sneeze at, but not world-beating either, especially as compared to YouTube's massive advertising opportunity.
Given these considerations, I contend that YouTube would be far better off trying to become the dominant player in online video advertising, replicating Google's success in online advertising. Like all other companies, YouTube has finite resources and corporate attention - it should focus where it can become a true leader. There's enough quality content and brands willing to partner with YouTube on an ad-supported basis to keep the company plenty busy, and on the road to eventual financial success.
What do you think? Post a comment now.
TheWB.com's curtain is finally going up, with the site set to officially open for public beta at 11am Pacific Time today. Along with fellow analysts and press, I was given a sneak peek at the site and so I'm able to offer some initial impressions. At first blush, and after having some of my specific questions answered by a WB spokesman, my reaction is that the site is executed well, but that its strategy seems fuzzy.
As many of you know, TheWB TV channel went off the air in September, 2006. In April, 2008 Warner Bros. Television Group announced that it would launch TheWB.com as an online network. The new site contains a mix of about 20 classic WB and Warner Bros. programs and a slew of forthcoming original web-only programs created by big-name talent. Many of the classic programs have cult-like followings and will no doubt find an ardent online audience.
In addition, TheWB site has some nifty features such as a mashup capability called "WBlender" powered by Adobe Premiere Express, video search powered by Digitalsmiths (including full scene-by-scene indexing of all programs which allows search at the dialogue, character, location, episode, session and series level) and a pretty deep Facebook app allowing users to share content back and forth.
While these features all will eventually raise the bar for other sites, certain aspects are not yet fully implemented. For example, WBlender today only offers users a paltry 30 or so pre-selected clips and just 6 soundtracks to mash. Later this year the selection will widen when the WBlender is married to the video search feature, allowing all scenes from all shows to be mashed together. It's not clear whether users will be able to clip specific segments themselves from favorite episodes or not.
Yet how TheWB.com actually translates this strategy into which programs and episodes are available on the site at any given time is where I think it's going to generate considerable user frustration, not to mention a lack of competitiveness with its own syndication outlets.
Three shows "Friends," "Buffy the Vampire Slayer" and "Angel" illustrate the point. With "Friends" just 7 episodes are currently available on the site, inexplicably from 7 different seasons. If there's a thematic thread, it is neither stated on the site, nor intuitive to me. If I want to watch a specific episode from a particular season, I'm out of luck. Meanwhile TheWB.com shortchanges "Angel" and "Buffy" fans by offering just the first 5 episodes of each, while Hulu, as one example, already offers 22 and 34 episodes each program, respectively.
I think it will quickly become evident that TheWB.com's strategy to "program" its online network is at odds with the on-demand desires of users seeking unfettered access to the full catalog of all programs. Here we see legacy linear TV thinking being grafted onto a high-potential online platform, with the result being a confusing sub-par user experience.
I know I've said this before, but I continue to believe that Hulu is the reigning broadband video user experience king. Having cracked the code on how to deliver fast growth and user loyalty, TheWB.com would be wise to go to school on Hulu and borrow liberally from lessons it has already learned and acted on well.
Still, in fairness, this is still just the beta of TheWB.com. There's a lot to be excited about here, but getting the site's strategy aligned with user expectations is a key building block to eventual success.
What do you think? Post a comment now.