|
Tuesday, September 12, 2006
Research Note: Show Me the Money Markets, Networks, and Communities
My dad has a great line. Whenever he asks me how things are going way, and I tell him things are going pretty well, he quotes Jerry Maguire: "show me the money".
His point is that I should go be a prop trader or something, because, contrary to popular belief, I'm not exactly loaded. To my dad, if it can't be converted into cash today - it's worthless.
Of course, my perspective is a little different. I think value has to created before the cash starts flowing. And here's where Dad has a point. What if you create value, but you can never capture a share of it?
I bring all this up because Fred has a nice post looking at YouTube's potential power to capture a share of the value it's created. Though Fred's assumptions are a bit shaky ($15 average CPM would make almost 2.0 play rich), it's a nice starting point.
But I also think Fred is missing the point a little bit too. The next great game isn't about just microchunking ads (preroll, postroll, blah, blah) - it's about making ads part of the hypercultural and part of the hypersocial.
Now, Fred's key assumption - a $15 CPM - actually comes from a comparable play - Heavy. In fact, Heavy charges even more - up to $40ish for featured videos, I believe.
But there's a very big diff, from a strategic pov, between Heavy and YouTube. The most obvious is that Heavy invests in content; YouTube doesn't. The second is that Heavy is a set of channels; YouTube is a platform.
What that means in the real world is that Heavy users spend >30 mins consuming mindless drivel; but YouTube users only spend a fraction of that amount of time doing likewise.
So it's unlikely that advertisers will pay for $15 CPMs at YouTube, because they will never see any returns by microchunking 10 second preroll ads into content which doesn't stick to users. In addition, the user base will evaporate, no one will click, and those who click won't buy.
This is, to beat a dead horse, just a simple application of the much-heralded paradigm shift: media going from push to pull, from mass to micro, from centralized to decentralized.
But there's a lot more to the story than that.
In fact, it's stopping here, imho, that led Polaris to back Heavy - though it's still very possible a desperate acquirer (hi Viacom) might offer a 5x-ish return.
What does this graph tell you about Heavy? It should begin to tell you that Heavy is not the juggernaut it is unquestioningly made out to be.
Heavy's traffic is extremely volatile - and growth is decelerating. Contrast that with YouTube for a moment.
Now, each has a different problem. Heavy's traffic (=attention) pattern is typical of content - it goes in and out of style, and so it often makes a pretty bad investment; unless it's a more neutral way to structure content (think Habbo). Even if it can be monetized, the cash flows it generates it will be volatile and at the mercy of players further down the value chain.
YouTube's problem is that though it's traffic pattern is killer - low volatility, constant growth - it will be hard pressed to monetize this attention, because it doesn't really exist anywhere along the new media value chain except as a platform at the very back.
The moral of the story is simple. You should see Heavy and YouTube as opposites in strategic error. Heavy doesn't create enough value consistently enough to be able to exert enough pressure to capture a significant share. YouTube, on the other hand, is creating a great deal of value - but also can't exert enough pressure to capture a significant share.
Let me put it more simply: focusing on being a channel or being a platform is the gap between value capture in the next media economy. It is going to be a kind of mournful refrain, an error players make over and over again.
Instead, capturing value for consumer-focused players depends critically on being able to plug brands and ads into the social and cultural structures of interaction itself, to make return on attention hyperefficient - like Myspace is doing.
If that sounds obscure, think about in Google terms: Google captured value by making return on attention for advertisers and consumers hyperefficient. Myspace promises to do the same.
YouTube only does it for consumers. Heavy only does it for advertisers. The gap is still yet to be bridged - in large part, because it will require the deep, fundamental redefinition of inert brands into living microcultures.
That's the next big media thing. It is about markets, networks, and communities - which are deeper changes sweeping across the larger economy.
Of course, that's also why YouTube's been trying - without much success - to transform itself from simple platform, to Myspace-like network. And it's also why Heavy will try and do the same.
But at the edge, time counts - you can't go backwards - and so these players would be better off thinking about markets. But that's a topic for another note.
NB: Yes, I know how much Heavy is making in revenues. But we're talking about value capture here - it should be clear at this point that Heavy's model can't/won't scale nicely enough to yield category-killing margins.
Comments:
ok im confused now. So youtube has the right strategy by providing a microplatform, leveraging content at the edge and its already benefiting from increasing returns mechanisms etc - but you're saying its not got enough of a choke point in value chain terms to make $$$?
# // jamescoops // 6:51 PM
hey james,
i can't say what the right strategy is, but ask yourself three questions:
0) are there really increasing returns present in youtube's model?
1) how could youtube exert enough pressure to capture value?
2) who would that pressure need to be exerted over?
apologies for not being able to discuss more.
thx for the comment.
Umair,
Good analysis. It strikes me that an example of something that sits in the right place along this continuum would be something like Penny Arcade. Content is at the core, but around it they've created a very strong and coherent community which has given them a ton of different monetization opportunities.
Does that strike you as the ideal model?
thanks umair
"0) are there really increasing returns present in youtube's model?"
yeah i reckon they're benefiting from network fx - they have the most people uploading stuff > they have the most content> they have the most users > people want to upload stuff there etc. This is now being amplified as they start to bolt on deals with content providers (e.g. the music vids deal)
I'm going to think about the other stuff. cheers
# // jamescoops // 12:27 PM
nope, James; it's all valid points you're making here.
But without a business model really monetizing every uploaded bit, the model is still called increasing expenditures.
Hello Umair,
Great post! I am curious to get some more insights from yourself regarding the following passage: "Instead, capturing value for consumer-focused players depends critically on being able to plug brands and ads into the social and cultural structures of interaction itself, to make return on attention hyperefficient - like Myspace is doing.
If that sounds obscure, think about in Google terms: Google captured value by making return on attention for advertisers and consumers hyperefficient. Myspace promises to do the same."
This discussion and problem, how to create maximum revenue from networks such as the ones mentioned is a great topic for discussion, since few but Google has solved that riddle, and mostly for themselves and the searchies. You hint at something that drew my attention, and that is by saying that MySpace has gotten this equation right, ie returns on attention equally hyperefficient both for advertisers and consumers alike. Pleease give me some more hints to how that works more in detail if you can.
Best Regards,
Fredrik Jung Abbou
Wait.
Heavy.com has content and revenues galore, but is not capturing value?
YouTube.com has lots of freeriders eating up those common lands ie., scarce VC money with limited shelf life, and that's a valuable business model?
What planet are you smoking?
Never mind increasing returns, how about just SOME returns, any returns to that kind of scale?! Didn't you sit in the class where they pointed out that volume is nothing without margin?
Content is king. Control of content is the business model of choice. There's no other way to monetize the transmission service.
This is so easy. I'm amazed you can still sit there and make these arguments. Seriously. Wake up man, this is almost embarassing now. Bain coming out, Heavy making money, Web2.0 crashing - what will it take for you admit you're wrong?
Wait.
Heavy.com has content and revenues galore, but is not capturing value?
YouTube.com has lots of freeriders eating up those common lands ie., scarce VC money with limited shelf life, and that's a valuable business model?
What planet are you smoking?
Never mind increasing returns, how about just SOME returns, any returns to that kind of scale?! Didn't you sit in the class where they pointed out that volume is nothing without margin?
Content is king. Control of content is the business model of choice. There's no other way to monetize the transmission service.
This is so easy. I'm amazed you can still sit there and make these arguments. Seriously. Wake up man, this is almost embarassing now. Bain coming out, Heavy making money, Web2.0 crashing - what will it take for you admit you're wrong?
The problem, as I see it, is with advertisers.
They key figuring out how to monetize users. Put the advertising tools in there hands and the whole thing explodes.
For the goo.
# // chartreuse.beta // 7:09 PM
Umair,
This is a very good post! And I agree completely. In fact, I would advise you continue clicking down your thesis (hyperefficiency-->value capture) as you did here with real examples as often as you can.
Cheers.
Robert, I think Umair chooses not to get anymore specific with examples etc. to protect information he shares with his clients. I personally think that the level of granularity provided on this blog is perfect...you don't need to spell everything out for the concepts to be deeply illuminating. If something piques my interest, I do my own research and in the process come to a deeper understanding (hopefully) than I would otherwise.
Anway, not to break off into a tangent, but the problem I am having deals with brand liquidity. Let's say someone figures out a way to create, support, and add value to thriving brand microcultures. These brand microcultures would seem to benefit firms which are capable of transforming brand power into real dollars, whereas many firms (especially musicians/artists) would seem to struggle to make this same conversion. Is this going to be a problem or am I totally off here?
What (I'm guessing) Umair means is that the branding will move *inside* the videos. Not be plastered in front of behind or around them.
Of course "branding" by then becomes pretty much the same things as "communication".
# // phil jones // 3:40 AM
Wait.
Heavy.com has content and revenues galore, but is not capturing value?
YouTube.com has lots of freeriders eating up those common lands ie., scarce VC money with limited shelf life, and that's a valuable business model?
What planet are you smoking?
Never mind increasing returns, how about just SOME returns, any returns to that kind of scale?! Didn't you sit in the class where they pointed out that volume is nothing without margin?
Content is king. Control of content is the business model of choice. There's no other way to monetize the transmission service.
This is so easy. I'm amazed you can still sit there and make these arguments. Seriously. Wake up man, this is almost embarassing now. Bain coming out, Heavy making money, Web2.0 crashing - what will it take for you admit you're wrong?
I agree with you, because I think communities solve deeper problems than the novelty of watching kids fall off skateboards (though I really enjoy slapstick humor myself)
The tech behind MySpace and Google is text based, which machines handle relatively well. Perhaps YouTube needs a way to understand the content of the entertainment better? Solutions in that area could be created. Then perhaps the current YouTube is just Google before AdWords. Perhaps GoogleVideo will crack the tech issues first and show that YouTube is susceptible.
# // Lloyd Fassett // 6:05 PM
Umair - this is the basis for a great debate. YouTube model (although unclear what it is other than "we'll sell ads someday") versus the Heavy model (which has already figured out their ad and licensing model).
I think there is also merit in the "chicken, or egg" debate over getting audience first/business model second - versus business model first/audience building second. You Tube has clearly opted for the first, while Heavy has gone for the second route. I reckon there is no right answer to this, afterall it's all in the execution and both of these companies have done both very well.
Your only glaring error is in referencing Alexa as a source. Alexa is not a trustworthy analytics tool like Hitwise, or even comScore for that matter. The Alexa toolbar is downloaded freely without regard to indexing for geography, or demography. It's also a poor judge of a unique audience. For example if you have the same one million people coming to your site every day, your site will look just as large as a site with 30 million uniques that come once a month.
Afraid of the truth,
If you bothered to read the post, you would note that I'm not arguing that YouTube has a great b-model; I'm arguing the opposite.
As for Heavy having "revenues galore", I think you should do a bit more research before posting.
Content may be king - *the whole point of the post is to figure out how to capture value from it*.
How much clearer can I make this?
If the "truth" is just to invest willy nilly in content, I suggest you invest in Viacom and see how rich how you get (or not).
As before, debate = fine, asinine comments (3x over, no less) = deleted.
Everyone else,
I think you are all making very valid points. The deeper issue here is that it is advertising/branding itself that is going to be redefined, and you all touch on it.
The question then becomes: can YouTube help it happen, before it goes the way of LinkedIn (ie, it is forced to focus on near-term revenue stream at the expense of everything else)?
And, apologies for not being able to discuss in greater detail.
# // Mike Hirshland // 4:13 AM
Hey Mike,
I think your investment in a delivery mechanism in control of content was sound.
Good job.
Oh yah - James,
In your thinking about YouTube's network fx, you are missing a piece of the chain. "They" don't have the users...
Thx for the comments guys.
Hi Anon 4,
You're right to bring up chicken/egg, and about Alexa - it is indeed a bit messy. It's the only public source of data we can all chat about, and I'm not discussing details - I am discussing trends, which should be consistent across datasources.
Hey Anon 5,
I had to delete your comment because it made a personal attack, which was over the line. I thought you had some good points otherwise...
In fact, you might wanna consider the argument that Polaris/Heavy in fact is *not* evidence of your points, because doing a content deal in the first place is pretty revolutionary for typical venture guys.
Guys, if you're going to try and challenge people, that's cool. But:
1) Don't make it personal.
2) Use a name, or at least give us a hint about what you do/etc.
I understand everyone is passionate about this stuff - but let's be civil to each other.
Post a Comment
|
