Category: Business & Marketing

One of the more interesting experiments that came out of frustrated creativity during the Writer’s Strike was Joss Whedon’s Dr Horrible’s Singalong Blog:  A three-part musical with some very well known actors in the lead roles. 

Until an interview with Knowledge @ Wharton we didn’t have a lot of the financial detail, other than it was done with a SAG low budget or experimental contract.

There are a couple of interesting observations in the article. The one that immediately caught my “I don’t believe advertising can support new media” prejudice was this comment about where the money came from:

 iTunes has been a great boon for us. And the DVD has done quite well — although I’d love to bump that up more. Streamed [online video] with advertising is probably the smallest revenue. Whether that’s a viable monetization scheme … is the question. In some ways it acts as an advertisement and in some ways it might be pulling people away from bothering to download it or to buy the DVD.

What’s funny here is that Whedon’s experience was that the “free” (with advertising support) was useful in promoting the paid downloads and DVD – people paying for media!  That’s the complete reverse of the more theoretical positions held by many that the content will be free but some other income stream will “subsidize it” (like advertising has for the last 50-60 years).

It’s also satisfying to know that even when it was being streamed on Hulu with advertising – horribly irrelevant and repetitive advertising – it was the best selling download on iTunes. The pay-for-download version was being purchased through the iTunes store even though there was a free alternative (if you like to see the same ad over and over again). 

The budget was something over $200,000, which is more than had been previously guessed, but total revenue has now been “more than” double that. Even considering that a lot of the income over $200,000 went to actors and department heads who had worked for nothing, that’s still not too bad overall.  It also means the production budget is within the range for similar content – with similar level stars – as a musical would for cable. For ease of the Math, let’s say the total budget was $350,000.

Given that the range for network shows is 25-65c per viewer/per show from advertising revenue and cable rates are lower, let’s be generous and go with the 25c per view figure. At that rate, the show would have had to have enjoyed a cable audience of 1.5 million to have covered its costs. 

If we were to be more realistic about the advertising rate – they were network rates after all – the audience would have needed to be around 2 million (cumulative) to have funded the show. 

Cable can certainly get the numbers: Monk, The Closer and Burn Notice all enjoying audiences of over 5 million on USA and TNT. Shows around the 2 million audience are The Daily Show, Real Housewives of OC, and  Intervention. Very few musicals and not much drama/comedy content!

The one thing we don’t know is what the total audience numbers are across iTunes, Hulu, other online outlets, and the DVD release, but we do know that $6.50 (their share after the reported figure Apple take) for a 45 minute show is better revenue than any other model has provided on a “per minute” basis. Sure, they added additional content so that people who might have already seen the show on Hulu or have it from iTunes still have a reason to buy the DVD. (Directly sold DVDs could bring in a higher per viewer revenue, but not if there’s a distributor or Amazon CreateSpace in the middle.)

Of course, I thought it would have been a show that would have been perfect through Open TV Network. All the benefit of having people delivered each episode as it comes out, with the ability to make a small charge for each download. 15c an episode would have bought in more than a cable showing would and definitely be worth it. Plus when there were DVD Extras they could have been offered to existing fans via their feeds.

Regardless of how, I believe it’s clear that some part of “new media” has to disintermediate the conversation between viewer and producer, without another editor in the middle. And that’s going to require a little direct revenue. We tip for service, why not pay for entertainment?

Seth Godin has a post Do Ads Work that makes the case that the only reason why there are “ad budgets” is because the advertiser really has no idea whether or not the ads are paying off. They limit the potential down side.

If your ads work, if you can measure them and they return more profit than they cost, why not keep buying them until they stop working?
And if they don’t work, why are you running them?

There are some businesses that do follow that rule. In one of my dad’s businesses they knew that more than 60% of their business (at the time) came from their Yellow Pages ad. But in my production businesses I could never find an advertising outlet that measurably gave results better than the cost. (My own digital video business ad in the same Yellow Pages drew two enquiries in a year and broke even.)

So, we basically have a whole bunch of advertisers who don’t know if the advertising they’re placing is paying off, that’s cluttering up “new media”.

I think Doc Searls is right when he posts:

What we need is for demand to find supply, not just for supply to “drive” demand. We’re not cattle, and we don’t like being herded, even if it’s by friendly chutes like Google’s. This was true before online advertising went nuts, and it will be true after the chutes get trampled.

In that he echoes what I posted from Dave Winer last week.

Advertising is on the decline in relevance and usefulness because we are no longer dependent on advertisers to push information at us all the time, in the hope they hit the few that might want to buy their product right now.

As a result of the Internet, control = power is moving from the advertisers and their network appointment economy, to one where information about desired product, as well as entertainment content, is delivered on demand. On the schedule of the viewer and consumer.

Advertising budgets are necessary because most advertising doesn’t work. It merely devalues the content. Back to Doc Searls for a final comment:

It’s 2008. Isn’t it time we thought past advertising, toward revenue models based on serving customers, rather than guessing at them?

Advertising is not going to power new media. It may not even power old media for very long if we project forward from the way that print media is being displaced by online content.

Seth Godin has written a reprise of an old article of his called Monopolies, seven years later, which I heartily recommend.

The recording industry once had an important role that justified its monopoly, as did Broadcast Television stations and other limited outlet industries. But inevitably the monopoly is broken – by legal fiat in some cases, but by technology in a whole lot more cases.

It’s hard for a monopolist to give up the position because monopolies are very, very profitable. Sad to think that a company that was once raking in multiple millions of dollars every year, for many years, suddenly has to compete on the quality of their offering in a completely changed market where they are no longer a monopoly. This is why the music industry (concert tickets, merchandise etc) is doing very well while the recorded disc business is slowly fading away.

Some of the time monopolists don’t realize what business it is that they are in. Railroad companies apparently thought they were in the railroad business, rather than the transport business, so when their long-haul monopoly was threatened by trucking, they didn’t respond fast enough, and faded in importance to society. Record companies think they’re in the disc business, when they’re really in a promotional business. That’s probably the only role left.

Other times, industries lose relevance because technologies bypass them. This is the position that broadcasters and cable channels are facing right now: they had an effective monopoly (mandated by the government in the case of broadcasters) because they had access to limited resources – broadcast licenses and access to cable distribution. However when we don’t need those limited resources to get entertainment “out there” to the viewer, what role is left? Finance company? There’s lots of competition there.

And finally, industries lose out when they focus on the wrong customer. Broadcasters and cable programmers have the wrong focus. They believe that their customer is the advertiser, and they are correct in an advertising supported entertainment model. However, the producer’s customer is the viewer and is often in conflict with the broadcaster’s customer.

Losing a monopoly is inevitable. You can avoid fading into irrelevance by focusing on the core value of your business to the customers and to keep focused on the customer’s needs. Unfortunately, the more broadcasters do that, the faster they’ll fade from relevance because they are unnecessary in an unmediated marketplace.

On the Digital Production BuZZ show of February 15th the BuZZ in Depth segment (50 minutes into the show or use the chapter mark) was on Competing with Free where I drew heavily from a Techdirt article Saying you can’t compete with free, is saying you can’t compete, Period.

The Techdirt article and discussion on the show revolved around the thought that the price of everything ends up competing at the marginal cost of producing the good. The way to add value, and therefore make profits even when the marginal cost is zero with digital distribution, is to differentiate with branding, convenience or service.

Then today an email list discussion that’s been ongoing about the need/no need for DRM. Naturally opinion is somewhat divided. However one of the examples chosen to highlight the “need for DRM” cited a proposed book in the UK written by chef and personality Jamie Oliver. A draft of the book got leaked by pdf and appeared on the Internet. The entire projected run of 200,000 books was cancelled because bookstore owners cancelled pre-orders because they thought they could not compete with free.

And yet, Cory Doctorow, who is an opponent of DRM, practices what he preaches.

“I’ve been giving away my books ever since my first novel came out, and boy has it ever made me a bunch of money.”

In the Forbes Magazine article he tells of his first novel Down and Out in the Magic Kindom published by Tor Books in January 2003. Since then the book has had six printings – a serious commercial success in a publishing world where few books make it to a single reprint. During this same period more than 700,000 copies were downloaded from his website, free.

Don’t fall into the trap of saying that those 700,000 “freeloaders” would have been potential sales. That would be to fall into the same trap as the IRAA and MPAA! This author is smart enough to realize that an eBook download is not a lost sale.

Most people who download the book don’t end up buying it, but they wouldn’t have bought it in any event, so I haven’t lost any sales, I’ve just won an audience. A tiny minority of downloaders treat the free e-book as a substitute for the printed book – those are the lost sales. But a much larger minority treat the e-book as an enticement to buy the printed book. They’re gained sales. As long as gained sales outnumber lost sales, I’m ahead of the game. After all, distributing nearly a million copies of my book has cost me nothing.

It’s not just books. By the time they released their album Barenaked Ladies Are Me in Q3, 2006 they’d been offering the album as unprotected MP3 files at 196 Kbits/sec. BNL offer the album for $9.99 as an MP3 and $12.99 for lossless quality. And yet, in the week following the official album release, BNL grossed $970,000 from “intellectual property” sales. Selling direct, the artists are getting a much better deal, about $5 an album and much better than the 4.5 cents/download that artists like Cheap Trick and the Allman Brothers reportedly get from each download of their material under their contract with the record company. Nearly a million dollars in gross revenue and yet the same material was available free. (It should be noted that BNL get income other than from digital download sales that would fall into the “Intellectual property” category.)

Also consider the example of The Shins, who had never been higher on the Billboard 200 than 86 prior to the last week of January this year. That week Wincing the Night Away” sold 118,000 copies, a career best for The Shins. What makes this remarkable is that the album had been widely available on file-sharing networks since October, three months earlier!

An independent study by economists Felix Oberholzer-Gee and Koleman Stumpf concluded…

there is likely no effect of downloading on US store sales.

Clearly you can compete with “free” when the product is differentiated again. The UK booksellers clearly do not believe in the value of their product – the book – and their shopping experience – the bookstore. Had they not blinked Jamie Oliver might have had his best-selling book ever: the opposite to what happened because of a lack of insight.

Edit: Apparently the book did get published and is called Cook with Jamie and it sells in Australia for Au$49.95 (about US$39.25) and is differentiated from the PDF by being in a splash-proof vinyl cover, fabric tape marker and great visual and physical appeal. I’d love to know how it has sold compared with the original prediction.

So, Google bought YouTube in an all-stock transaction. Did not see that coming. In fact if you look back at my last post on the subject, I ruled Google out because it already had  Google Video of its own that seemed a competitor to YouTube. Still, I wasn’t the only one who got it wrong.

So, what of the substantative issues: copyright infringement and potential revenue? Well, it seems that YouTube were already on the way to solving part one of that conundrum, as their recent content agreements have shown. As part of these agreements, ostensibly to put up promotional videos, YouTube has promised to “quickly” develop technology that will search out and identify copyright material, but not to take it down. Instead, what is planned is that YouTube will identify, for example, a video with a Warner Music soundtrack and beside that video, place a Google ad. The ad revenue would then be shared with the copyright owner.

A neat solution to a seemingly intractable problem: YouTube stays in operation, the videos stay up and the copyright owners share in the revenue. Part of the deal is also a “don’t sue us” agreement. If YouTube can do enough of these deals, the copyright problem goes away.

Otherwise, Google is no stranger to copyright litigation and will fight the suits the way they always have. Some have speculated that the reason YouTube will be kept as a separate entity is to keep the suits in YouTube leaving Google untouced.

So, now the deal’s done, what changes? Not a lot really. Chad Hurley and Steve Chen are America’s newest paper millionaires. Since the deal was all-stock they will have to wait to cash out as there is usually a waiting period for these kind of deals. For Google, the $1.65 billion in stock to be issued seems to be handily covered by the short term rise in their stock price after the deal was announced. A rise that added $6 billion to their market capitalization over the week. A handy premium on the deal and one that arguably could be already “in the black”!

So, with 20/20 hindsight do I want to rethink the problems I had with anyone purchasing YouTube? Given that Google CEO Eric Schmidt is not stupid it’s only reasonable that I try and see the value that he sees in the deal. Particularly since with that much money Google could have purchased the New York Times with arguably more valuable advertising real estate and more visitors (if not more page views). In the linked article Susan Mernit puts forward the arguments why Google did not buy the New York Times.

My first thoughts were that $1.65 billion was a lot to pay for, basically, a platform to put ads on, because after all Google is an advertising company. It is a lot of money to pay for an advertising platform, but with law suits in a “manageable” position Google may actually turn an operating (as opposed to stock) profit on this deal. When you consider that the three major networks bring in $5-6 billion a year in advertising revenue each there’s a lot of advertising dollars around. A lot of those dollars are going to leak from network television to the Internet and frankly Google has the majority of Internet advertising dollars sewn up.

What’s also important to note is that YouTube has almost zero cost of content, although heavy bandwidth bills and about 65 on staff. YouTube’s content is created by visitors to the site or by the networks themselves, which is why the advertising revenue sharing deals noted above are so crucial to YouTube’s survival. It is plausible that sufficient advertising revenue will come in over the next five years to justify diluting the stock by $1.65 billion worth of shares. (Ironically, the increase in share value this week will reduce the number of shares that are issued to fund the deal as the deal was predicated on the dollar value, not number of shares.)

Getting in bed with Google’s bandwidth deals will lower YouTube’s overall cost of delivery (when existing agreements run out).

So, while I’m still uncertain about the wisdom of the deal, it’s not totally crazy.

It will have very little impact in the distribution of commercial video. Google retains their own Google Video play, complete with commercial video for sale in that store. Although it’s not well regarded maybe they can learn a few tricks from the YouTube folk. YouTube will still be a place to be seen, or to have your video seen and where a viral hit can get you massive exposure, such as people like Judson Laipply (now viewed over 5 million times) or David Lehr who I interviewed on Creative Planet’s Digital Production BuZZ back in April 2006. Getting a break out hit is a definite career builder.

Despite being the new “waitress discovered in a coffee shop” for producers and performers, YouTube has little to offer people who produce video professionally, or who have any hope of repaying investors (beyond posting a trailer, which should be mandatory).  The real developments in that arena are yet to come.

So, on the balance, I still think $1.65 billion, even if it’s only stock, is a lot to pay for a loss-making, two year old (not quite) startup, it seems Eric Schmidt may only be smoking the cheap stuff and not really wacked out!

Now the talk is Yahoo buying FaceBook for $2 billion!