More on Cuban’s The Ala Carting of Video on the Net - Will it lead to disaster?
May 27th, 2008
My recent post “Economic Constipation and Digital Malnutrition” was an attempt to critically analyze Mark Cuban’s provocative May 4th post entitled “The Ala Carting of Video on the Net - Will it lead to disaster?”.
Incidentally, it was my most trafficked day and much to my surprise, I received a comment from one of my favorite bloggers, Hank Williams, who writes the influential whydoeseverythingsuck.com?”
Mark’s post has sparked a debate that has spilled over from the circle of web video bloggers into a broader conversation. Next week I’m in New York for the Advertising 2.0 event and plan to bring Mark’s position, and my rebuttal, to the panel on which I’m speaking.
There’s a lot that’s accurate in Mark’s post, primarily that production budgets for online will continue to be micro versions of TV and film for the near future. But that’s not a threat, it’s an opportunity – for the producers who design profitable businesses (of which we’ve seen only a few) and for the emerging art form of narrative web video, what I like to call the Hemingway novel, (which we’re only starting to see online). And, more importantly, it’s not a steady state assumption. Web video in five years will look and behave very differently than it does today.
Mark’s Achilles heel is that his polemics are biased due to his financial conflicts of interest. His investment in digital TV and HDNet skews him away from a balanced perspective on web video development. He misses the forest for the trees. But the truth is that it doesn’t matter what Mark Cuban or Charlie Rose or Hank Williams says because there’s no stopping web video’s growth. It’s what the market wants.
We’ve heard it before: an entire generation is growing up on web entertainment, and video is a major component. I just spent my weekend with my 8-year old niece who spurned a trip to the American Girl store to make iMac Photbooth videos with a light saber to post on YouTube. We went to the Apple store on Saturday and the bank of computers was filled with teenagers playing web based games and watching videos. It was their version of my childhood arcade (I felt compelled to record a primary source video and upload it for posterity).
Channels are being created and they will need to be supported with content. Scripted, produced programming is and will be required to fill those channels. The question is when and on whose time line.
Cuban’s public persona is that of the billionaire entrepreneur outsider making big bets on underdogs to buck the system. He does it with his basketball team, he did it when he backed Grokster against the Supreme Court, it was the essence of this TV show The Benefactor and he does it with his movie production company, 29/29 Entertainment and with HDNet.
I’ve worked on two 29/29 movies. Akeelah and the Bee at Lionsgate and Turistas at Fox. These movies didn’t do any business and more than likely didn’t endear Cuban to the studios. Why should he? He’s one of Arrington’s modern-day pirates whose business is outside the system. He’s not looking to protect legacy models. He bets on futures, digital cinema, 3D. He thrives on the challenge of “going against Hollywood.”
I don’t think Mark wants to acknowledge the influence that the studios have in defining the future of web video economics.
But the reality is that the studios have been able to take advantage of a legal loophole. In the Hollywood Antitrust Case of 1948, the major studios were ordered to divest their ownership in movie theater chains. The Court held that the existing distribution scheme was in violation of the antitrust laws of the United States, which prohibit certain exclusive dealing arrangements. You weren’t allowed to finance, produce and distribute entertainment content on your owned and operated theater circuit.
But isn’t that the case today with digital?
Today, the studios or their conglomerate parents either own outright or influence through media spends and content partnerships the vast majority of web traffic (think portals, Google and social nets) and digital distribution (think iTunes). The current scheme, which I’ve referred to as oligopolistic, is a thinly veiled workaround to the full vertical integration that was banned 60 years ago.
I point this out not because I think it’s somehow economically immoral, but because I’d like to hear Cuban’s perspective on how the studios decision time line plays a part in the complex equation that leads the current state of web economics to be undefined
Lastly, Cuban’s analysis of the economics of web video is flawed because he’s analyzing the landscape today, not taking into account the development of products that will change the economics tomorrow. The most important factor, (and the least manageable), is time.
What does that mean? When it was first concepted, Hulu engendered a great deal of negativity and skepticism among early adopters. There were a variety of reasons to doubt it – studio pushback, user rejection, advertiser skepticism, technology costs. Now that its launched, it’s not perfect by any means, but it’s over performing expectations in all of those areas. Most importantly – it’s a product under constant development. Hulu in five years will be very different from what we see today. It requires deep pockets to keep it solvent while it spends heavily to build its business, and it needs help from the content owners and policy makers, but it has big corporate parents who will grease the skids.
There are other example of similar products soon-to-be released that will turn Mark’s blog on its head. I had lunch with Adam Bain last week and he outlined the advertising model that MySpace is moving towards, which I had alluded to in my blog. It’s unlike anything out there and will be a market changer and sweeten the economics of web video.
Others too, and specifically for video, including my model for video advertising which I’ve discussed with execs at Google and MySpace.
Lots of challenges that need to be overcome before we get to a smooth and steady economic state, but the bottom line, is that the more things change the more they stay the same. In other words, it’s the studios that will define the timeline because it’s their content, their distribution channels and their imperative to build these businesses lest they go the way of the music industry.
Tags: advertising 2.0, antitrust, business week, charlie rose, grokster, hank williams, hulu, mark cuban, new york, ron grover, the benefactor, the hollywood case of 1948
Posted by: jake Posted in Advertising, Business, Fun, Gift Culture, Interesting, Regulation, RightsYou can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
May 28th, 2008 at 7:16 am
Thx for reading my blog. In response, I actually have fully taken into account where i think web video is going in the future. The economics get worse, not better.
Why ? Unicast vs broadcast. Traditional TV is broadcast. One stream is all you need to reach everyone. Even in newly switched digital environments. one stream fits all.
On the web, all web video is 1 to 1. Which means, the more people that watch your video, whether its one video to one person, or 100 videos to 1mm people, the more expensive it is to deliver.
Delivery costs escalate because not only do your bandwidth costs go up per viewer (compared to Tv, where costs go down per viewer as audience increases), but your server delivery and quality management costs escalata even faster.
All of this is masked right now because Youtube as the largest video host basically subsidizes the video delivery cost of the net. Since you are referring to commercial delivery of content, which is a violation of Youtubes terms of service unless you do a license deal with Google, you are missing the very big point that “All your video is belongs to us” being chanted by google every day.
So the future, as its setting up right now is that independent content creators either license their content to Google, maybe Myspace on a COMMISSION basis, or they take on all the cost themselves. In either situation, they likely make no money
I dont see that as a better future than licensing content to TV networks.
May 28th, 2008 at 9:51 am
@Mark,
You’re right that you can’t beat the economies of scale for broadcast distribution. TV and radio may always be most cost effective means of pushing content to consumers. Licensing to TV may be more profitable today, but you’re assuming that distribution that doesn’t scale means that there is no opportunity for profitable business and that’s just not true.
It’s about the margins.
There are several examples of proven business models which include content distribution that don’t scale particularly well.
For instance, movies. Digital cinema is coming, but today every film print that is sent to a theater costs ~ $2K. It doesn’t matter if one person is in the theater or 400, the print costs the same. Studios do their best to forecast demand to adjust their print count up until the release date, but ultimately the cost of distribution is passed along to the ticket-buying consumer.
So how do margins work in web video? Hulu is a great example. When Hulu was developed it was modeled such that the CPMs would cover the cost of streams and other operating costs with a sufficient margin. The cost of HD streaming is still prohibitive, (to get there bandwidth costs will have to continue to decline or CPMs will need to rise), but the bottom line, in theory, is that because the content is premium the CPM can be relatively high ($40), when every individual consumer watches a video, Hulu makes money on their margins.
There are several steps that need to be taken to ensure proper margins. Advertisers need to create better web-based ads and agencies need to do a better job of reporting analytics to their clients. That’s a whole other discussion…
You’re right that independent content creators will have to license their shows or bear the costs themselves, but that’s not very different than the way things work in the entertainment industry today. If you can sell a show or a film, you’re generally giving up your ownership. If you’re lucky enough to be proven, bankable talent, then you can negotiate for ownership and get a bigger piece of the pie. In some ways we’re reverting back to the mean.
Saying that the future of web economics gets worse needs some more qualification. I think the future of web economics gets more exclusive. Premium, relevant content isn’t easy or cheap to make. People who can deliver a consistent stream of compelling stories are a valued and scarce resource, and have been throughout history. Web video may not supplant TV as the most lucrative distribution outlet for creators, but if that’s the case it’s not because the economies of scale of distribution aren’t favorable.
In any case, I’d love to continue this discussion and thanks for responding to my post!
May 28th, 2008 at 2:01 pm
GO WARRIORS!!!
- MF DOOM
June 2nd, 2008 at 12:00 am
The economics don’t seem to be there for web-based entertainment. At the same time, we have seen the web, technology and “free” kill the music industry and the TV sitcom.
I offer the terribly happy thought that Jake and Mark are both right. Digital TV may be the future of entertainment but perhaps the web will be (as Jake suggests) an enduring player within that kingdom. For example, maybe comedy and music will drive the web while drama, sports and special thrive on DTV.
This sill leaves us with the question of whether content on the web can support a viable economy making worth anyone’s time to produce anything. Sadly, I am not smart enough to offer a real theory on how this is possible. But because I am a writer, I can tell you that I hope all of this will trigger a higher level of quality in what we produce because I do know that people will pay for entertainment it it’s good and no one watches crap because it’s free.