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.