Web Video’s Second Wave: Blood From A Stone

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Editor’s note: Benjamin Wayne, CEO of Web video company Fliqz, stirred up some controversy here in April when we published an article he wrote called “YouTube is Doomed.” Since then, we’ve learned that YouTube isn’t exactly doomed, specifically because its costs aren’t as high as many estimates — and its revenues are higher than assumed.

Ben’s latest essay is the first in a two-part series about the “second wave” of Web video. Here, he sketches the state of the market: No one is making much money. Still.

The years 2005 to 2008 charted the course of online video’s first wave: training wheels for a revolution. Consumer destination sites were ascendant, proliferating with almost bacterial abandon, fuelled by an inexhaustible investor avarice for a windfall which, despite seeming perpetually just around the corner, has more or less failed to materialise.

For the last few years, video was where it was at, and an entire ecosystem of platform providers, ad networks, live streaming and mobile streaming solutions, destination sites, peer-to-peer technologies and content delivery networks vied for the mercurial affections of first the venture community, and then the market.

If nothing else, that glorious digital albatross YouTube trained consumers to want video, and once on the juice, they suckled like an addict jonesing for his next fix. Numbers drifted quickly into the surreal, with more than 75% of the worldwide Internet audience basking in the Technicolor glow, and monthly consumption leapt manically to 200 minutes and beyond.

And yet, for all the frenetic excitement, and despite over $8 billion in collective venture investment, the video market has a dirty secret, carefully hidden away behind a façade of market exuberance, Pollyannic spin-doctoring, and stratospheric consumption: no one is making any money.

It’s true that some investors saw a return, at least in the early moments of the video revolution: Yahoo! purchased Maven and Jumpcut, Sony bought Crackle, and a little company in Mountain View purchased a site no one had heard of called YouTube for a simply staggering and ill-advised amount of cash.

But the “Where are they now?” reads like a “Who’s Who” of Jonestown: Maven and Jumpcut have winged their way to the land where startups are eternally blessed, Crackle barely tops three million monthly uniques, and to date, despite Google’s unsubstantiated tubthumping of improving revenues and sunnier days ahead, YouTube has most demonstrably proven a talent for losing money faster than the rest of the market put together. Others, like Revver, Eyespot, Vidavee, Dabble and VideoEgg either changed businesses, were scrapped for parts, or vanished quietly without a murmur.

And when it actually comes to generating revenue from video? Fuhgettaboutit. All along the value chain, players struggle to squeeze blood from a stone, but success in monetization is a phenomenon best characterised by its absence.

Given almost universal investor, analyst, and market agreement that video is the next big thing, why has it proven so hard? And what does this mean for the video market of tomorrow?

The Achilles’ heel of the first wave of video has been the promulgation of two flawed hypotheses: first, that content creators (read “media companies”) hold the keys to unlocking riches for players all along the value chain, and second, that advertising dollars are the revenue engine which will fuel the new video economy.

The importance of content creators, the guys who actually have the video content, seems so obvious and fundamental, that no one has taken the time to question it. Online video, they hypothesized, is more or less television translated to the web. So as end users move their viewing habits from boob tube to YouTube, the major media companies are going to drive the traffic, the advertisers will follow, and whoever can dip their cup into that stream of revenue is going to make a bundle.

So much for the theory; the reality has proven quite dramatically and depressingly different.

To understand why, let’s take Hulu as the gold standard for major media done right. They have the brands and the buzz, the execution and the audience, and they currently stream roughly 373,000,000 streams a month. (Source: Nielsen VideoCensus).

So first the advertising opportunity: the power of hundreds of millions of consumers, most of them in the magic 25-45 year old demographic, rabidly consuming premium high-value content.

Assuming Hulu could monetise every view (and they can’t) 373,000,000 streams at a $10 CPM represents $3.7MM a month in advertising revenue. Even if you could argue a $30 CPM (and I don’t think you can) you’re looking at a best case of only $11.1MM a month. Real numbers, but in the world of major media, hardly anything to write home about, and this is the best of the best.

And more discouraging, Hulu has reported problems in filling their existing inventory, so even if they can grow the traffic, there’s no current indication that that translates into anything but additional red ink. By way of comparison, YouTube will do only $200 million in advertising revenue this year off of more than 5 billion streams a month, more than 35 times Hulu’s traffic, and most of that will also be from professional content.

And bandwidth? Surely the CDNs are making money, if no one else.

Assuming a 25% completion rate, a video streamed at 700 kbps would clock in at 232MB for the 45 minutes of actual video in a 60-minute television program. This means that Hulu’s 373 million views translates into a whopping 20.4 petabytes of traffic, which in the days prior to video was just an ungodly amount of data. But given massive CDN commoditization and plummeting bandwidth costs, Hulu is paying six cents or less per gigabyte delivered, translating almost 20 million gigabytes of monthly transit into less than $1.3 million in CDN revenue.

So the number two video site worldwide, and arguably the one major media property really getting video right, is generating $5 million in monthly revenue for themselves and their vendors? For all their impressive success, from a revenue perspective they’re looking a little like the lemming that leapt the furthest.

And the news only gets worse. According to Nielsen, growth in video viewership is slowing as users satiate themselves on the glut of content already available. And given the small number of content creators worldwide, there are very few new sources who can unlock additional market growth. Early exuberance that the YouTube’s of the world would democratize content creation, creating instant iPhone Spieldbergs, only reinforced the same lesson that desktop publishing proved years ago: content creation is expensive, it takes talent, and lowering the barriers for the creation of crap only provides you with more crap. Quod erat demonstrandum.

What this means, ultimately, is that, whatever golden tomorrow video may achieve, it won’t be driven by the major media companies, at least not in the foreseeable future. The number of players is too small, the viewership too limited, and the monetization too hard.

And if professional content isn’t the road to riches, that’s bad news for video ad networks as well, remoras in the slipstream of the media giants. Without massive viewership of professional content, and with no clear path to monetizing user-generated content, there are lean days ahead.

Ultimately, however, no one suffers more than the CDNs. Commoditized players in a market where competitors are rapidly proliferating, price has become their only lever, and customers are insisting on early contract renegotiations, accelerating the pricing nosedive. Unless they can find some way to radically diversify or build in value-added services for which customers are actually willing to spend money, they are in very real danger of going the way of the telcos and becoming dumb pipes.

Fortunately, opportunities for growth are emerging from new quarters, and while this might not spell salvation for all, it opens exciting new possibilities for technology platforms and video providers, as well as content delivery networks, web developers, and others in the video ecosystem.

Part 2 of this article will explore the evolving video landscape and the driving dynamics of video’s second wave.

Benjamin Wayne is CEO of Web video company Fliqz.