Written by Lou Kerner on Wednesday, February 3rd 2010
Back when I was an equity analyst at Goldman Sachs following media companies, the question I got asked most often was “What’s more important, which is king, content or distribution”. It’s an age old question, which I always answered the same way. Depending on the day, one might seem more important then the other, but over the long run they were Ying and Yang. You can’t have one without the other. They were co-Kings. Let me state very clearly, I was wrong.
In fact, the question is no longer relevant, because as we all know, the internet is commoditizing distribution. Commscore estimates that more then 12 billion videos were streamed over Youtube in December 2009, more then triple the combined streams of the next 10 sites combined. Many of the top videos were shot by amateurs (my favorite last year being bicyclist Danny MacAskill, check it out). I’m in the camp that believes that Comcast bought NBC Universal to further diversify away from distribution, to get more content, most notably cable channels. So in a world of commoditized distribution, does that leave content as King? Is all that matters now having compelling content (e.g. Avatar) or developing a platform for user generated content (e.g. Facebook)? I posit two thoughts below in my construct for new media. The first is that monetization is replacing distribution in the value chain. The second is that the way to think about content is rapidly changing, moving from the search for “franchises” (NBC’s been searching for another Friends for 10 years) to the search for “enduring” content models.
The world in which grew up had 3 channels. Each one had a major sales force that monetized the audience in similar ways, through advertising. The focus was on ratings, as everyone monetized the audience at similar rates. Monetization was a commodity. Then we moved to 500 channels, and the cable channel fees were added to the monetization mix. Now we find ourselves in the 500,000,000 channel universe (350,000,000 alone are on Facebook), and that has many implications.
While the significant majority of channels, namely most user generated channels, are not looking to get compensated for their content, there are tens of millions of content providers who are looking to monetize their efforts, and 99%+ of them will never achieve a scale to have an internal sales force to sell branded ads. So what do they do? First, not surprisingly, they almost all use Google to some degree. It’s estimated that 50% of Google searches come from searches and text links on sites other then Google. There are millions of people who make their living off of generating traffic and monetizing it through Google text links. Google is a godsend for these people because they are so good at what they do. The downside is, Google’s growing market share is leaving it a virtual monopoly, so well positioned that it is taking an ever increasing percentage of the revenue generated through its text links and searches generated by other sites.
The other way that the vast majority of web sites monetize their traffic is through ad networks. Ad networks aggregate tens of millions of unique visitors across tens of thousands of sites, and sell them to advertisers en masse, generally through their own sales forces. There are about 20 ad networks that reach over 100 million uniques a month in the U.S. including Platform-A (owned by AOL), Specific Media (which raised $100 million in 2007), ValueClick (Public, VCLK), and Tribal Fusion. There are also many niche advertising networks that target specific audiences (e.g. Jumpstart for automotive sites, Glam for females…). There are ad networks for social media (RockYou). There are ad networks for applications on social media (e.g. AppSavvy). There are ad networks for blogs (e.g. BlogAds). There are mobile ad networks (e.g. AdMob currently being acquired by Google for $750 million). Cox Enterprises is one of the few large media companies to get in to the game in a big way with its $300mm purchase of Adify, a platform for others to build ad networks (e.g. MarthasCircle, an ad network of lifestyle sites and blogs started by Martha Stewart). MTV started a comedy ad network, Comedy Tribe, which includes its own sites like Comedy Central and other sites like JibJab. There are ad exchanges like Right Media (acquired by Yahoo for $680 million) where buyers and sellers of audiences are matched through technology. There are ad network optimizers like PubMatic that enable publishers to optimize their ad inventory through real time analysis of all the ad network that a given publisher has relationships with. While many have written about the eventual commoditization of ad networks for years, they continue to evolve, adding value to publishers and to their shareholders.
There are literally hundreds of other monetization models. An example being Vibrant Media’s double green underline in the text of content on many sites that acts as a text link to advertisers.
My point is that there is a massive market for companies with the ability to monetize audiences that have been aggregated by others. Big media companies have their own sales forces that sell branded ads, but even the vast majority of large sites use ad networks to monetize their unsold inventory. They almost all use Google search boxes and text links to add incremental revenue. It is increasingly the ability to monetize an audience that is becoming the Ying to content Yang in the value chain of media value creation. My second point is that the construct of content is simultaneously changing.
In a three channel universe that lasted for 30 years, the audience simply shifted in moderate increments from one channel to the next over time depending on the quality of the broadcast network’s slate of shows. The name of the game was to build hits that could last for years, and often birth spinoffs (e.g. All In The Family ran for 9 seasons, was #1 for five years and spawned five spinoffs including The Jeffersons and Maude, which then spun off Good Times). With the emergence of cable and the 500 channel universe, the audience began to splinter, and the networks have found themselves on a never ending treadmill of audience erosion and splintering that they can no longer offset with higher pricing. But large media just shifted the audience between their 3 channels to their 500 channels. And in the process, they created the second stream of revenue, cable channel fees, and industry profits continued to mushroom through the 90’s and well in to the new millennium. Now we can see that the end of that game is in sight.
The network model is already in tatters, and with the emergence of Hulu and other sites, TV shows are increasingly being watched over the internet. As that happens, cable will become like land line telephones. Consumers have long been forced to pay for dozens of cable channels they don’t watch, because they had no other way to get the channels they wanted. It’s like if I went to the local grocery store to get eggs and cereal, and they made me buy dozens of other things like cheese (I’m lactose intolerant) and tampons (I’m male). If there were no alternatives for food I’d suck it up and pay for the cheese, but I’d certainly like to avoid it. So the cable model, as we know it today, is eventually toast. What about cable channels ? They are eventually toast as well. With 500,000,000 million channels, they are also on the audience splintering treadmill. So what’s the new construct? I call it “Enduring Content”, by which I mean content models that don’t get splintered.
The most obvious examples of “Enduring Content” are platforms for other people’s content or applications. Facebook is the champ here. It seems everyone on the planet will be providing them with content soon, and the page views from their user generated content that are only surpassed by page views generated from use of all the applications written for their platform. It’s estimated that Facebook accounts for 25% of all page views on the internet. Youtube is another great example of a platform. It seems every piece of video ever shot on the planet will be posted there some day. I love DeviantArt.com, a platform for artists, and one of the top 100 sites in the U.S.. However, platforms are just one example of “enduring” content.
Google is another amazing example of “enduring content”. They have the best search engine which they continue to iterate and improve. Every day there is a massive amounts of new content “on” Google (or indexed by Google), produced by others. Their share of internet audience continues to grow.
One of the most ingenious “Enduring Content” models is being built by Demand Media (who’s founder Richard Rosenblatt was the CEO of the parent company that founded MySpace). Their main site is eHow.com (videos on “how to do about everything”). Check out their traffic growth chart on Alexa.com, It’s really impressive. eHow is now one of the top 50 sites in the U.S.. eHow’s model is ingenious. They mine Google and other data sources to understand what people are searching for, what content they “demand”. Richard uses the example of “Where can I donate a car in Dallas”. Their algorithm showed that their were numerous people were looking for an answer to that question, and that the audience for that content could be well monetized. The next step is the creation of the content. eHow posts a request for the demanded content to their site, where they state that they will pay one of their thousands of approved videographers $10, $20, or $30 to shoot a video about the topic (they currently have about 30,000 requests posted). When the video is submitted, it’s reviewed and posted. The video is optimized for Google, so when the topic is typed in to a Google search box, the video will hopefully appear as the first or second algorithmic result (in other words the resulting click is free). When someone clicks on the Google search result, the corresponding video on eHow is monetized through a pre-roll video commercial, Google text links, and other monetization tools. If Demands algorithms are right, they are assured of making more money off the video then they paid the videographer. About 3,000-4,000 new videos are added a day to eHow’s library every single day. The content model is “enduring” because it constantly adds new content and gains audience share. It’s a machine. That’s why eHow is growing like a weed.
Interestingly, there are lots of content plays that are dubbed “new media”, and given huge valuations, that are old school. Most notably of late is Zynga, the leading provider of games on Facebook (their largest by far being Farmville with over 60 million registered users). Zynga recently raised $180 million at a valuation widely reported to be in excess of $1.5 billion. While Farmville is wildly successful, there is nothing “enduring” about game. People will get tired of it over time, and usage will drop. They will need to come up with new games. Zynga’s model is no different from EA’s model, and that model appears broken. In fact, EA just paid $300 million for Facebook game developer Playfish. To me, the more impressive thing then the reach of Farmville, is the monetization through the selling of virtual goods. While not public, speculation is rampant that Zynga generated more then $100 million in revenue in 2009, largely off virtual goods. That’s a lot of dough. But where will Zynga be in 5 years? Other then Pixar, I can’t think of a single old school content creator that has maintained an ability to steadily create one hit after another. While I can’t tell you what Pixar’s secret is, I feel confident that that Zynga is unlikely to be the Pixar of online gaming.
I’ll finish this diatribe with the premise that a company’s ability to create lasting value in the emerging world of New Media depends on staking out the right territory in the two-by-two matrix below (you want to go up and to the right….Google and Facebook are the big winner so far).
