How to Build an Online Video Business and Avoid Platform Dependence

Posted on Sep 17, 2013 | 25 comments


In my last post I pointed out that many of the media commentators who have criticized the YouTube video network companies as not having strong businesses were mistaken.

The main thrust of the post is that with YouTube taking a 45% of revenue and talent taking 70% of the remaining revenue, YouTube Networks didn’t have sustainable businesses unless they invested heavily in technology as a tool to increase margin and provide defensibility.

This post looks at how the best in industry are moving well beyond the 16.5% margin range to more sustainable 50-60% margin businesses.

3. MCN Margins

The best “MCNs” are in fact building strong technology businesses with rapid growth and strong, defensible assets.

[To be clear before I start (since people now starting to misquote me) … I DO believe in building most of your business on YouTube. I hope that was clear in my previous post and this one. I don’t believe you can simply migrate audiences en masse. My point is that if you don’t start to build online video assets in multiple locations you have platform dependence, which is never smart. Nor is it smart to have talent dependence.]

So why is online video such an attractive market to build a startup?

As I point out frequently, people want to consume video. As humans we are storytellers and our preferred form of story is visual. We like sight, sound & motion.

When I tell audiences that Americans consume 6 hours of video per day people seldom believe me (thus I publish the data). Europe is roughly the same as the US.

10. Video Consumption Data

These markets represent about $600 billion of total spend between them, leaving tons of opportunities for startups to disrupt and grow large.

People aren’t going to fundamentally change their media consumption patterns just as consumers don’t fundamentally change their diets.

And if you accept that premise then you have to accept that the future of the Internet will be dominated by video. Much of it already is.

But wait!

Content is a “hits-driven” business that makes it unattractive to investors – remember?

11. Tradional TV Distribution

Not so fast.

Traditional video had very high costs of distribution due to limited time slots of broadcast TV (we only had enough spectrum to support 3-4 channels). The number of channels grew with cable & satellite TV but we still have limitations that makes distributing content high.

As a result it only makes sense to produce the highest quality video and to market it like hell to consumers since if it doesn’t capture an audience when it runs then losses are incurred. Much of network television can cost $100,000 / minute to produce.

Film is no different since you’ve historically been limited to movie theaters which have physical limitations, too.

12. New Video Distribution Dynamics

But distribution is now unlimited. Infinity. Evergreen. Time independent. And global.

This has allowed the largest online video content producers like Maker Studios (where I am a large investor) to produce videos for 99% cheaper than traditional TV.

That is the definition of Disruptive Technology.

Traditional studios have suffered from The Innovator’s Dilemma.

So what happens when production is reduced by 99% and distribution bends to infinity?

  • Content goes global (of Maker Studios 4.4 billion video views / months 55% are international)
  • Content can go viral – the highest quality stuff is shared
  • Producers can cost-effectively test formats and build fans as they go
  • Content isn’t required to fit into pre-defined time slots. In fact, it may be preferable that it does not.

And importantly for the first time in history content producers have direct relationships with their audiences.

How?

For every fan who watches your show you have the ability to ask them to subscribe. You can ask them to come and watch your videos at your owned & operated websites (O&O) where you can make higher margins as well as ask directly for more meaningful customer information such as Facebook connections, Twitter oAuths, email addresses and the like.

And with mobile you even have the ability to message your users when new content is released which leads to much higher consumptions rates.

So content distribution in the future looks more like an eCommerce business than a traditional media one.

And ironically many consumer mobile apps are more of hits-driven businesses than video is today. Video production & distribution is becoming much more programatic.

So how can you build a more valuable and sustainable business?

1. You need to focus on Margin Expansion
16.5% margin isn’t sustainable for a large, growing business. It’s why many talent agencies or ad networks struggle to get scale advantages.

13. Margin Expansion - Distribution Mix

As a YouTube network you simple MUST move some of your traffic to distribution sources outside of YouTube. I’m not advocating turning off YouTube. That would be like selling physical consumer products and deciding not to sell at Walmart.

But you must work hard to develop alternate distribution at websites like Yahoo!, MSN & AOL. You must find ways to get some distribution through other online partners like Hulu or package up shows for distribution on Roku or Xbox. This type of “affiliate” traffic might represent 20% of your overall traffic.

You also need to develop an O&O (your own websites) strategy. I don’t personally believe each individual artist needs to have their own website or mobile app. Consumers would struggle to find these content producers at a scale that makes sense. But one strategy we’re employed at Maker is to build related types of content into “networks” that are branded and can attract loyal audiences.

Think of the Internet, short-formate equivalent of Discovery, NatGeo, E! or ESPN. The talent benefits as well by being clustered as newer acts can be discovered by fans who are searching for more familiar content. A laudable goal over time should be to get O&O to 20%.

And the important thing about O&O traffic is that these are your most loyal fans making it easier to package up ads at higher rates (10x YouTube) and sell other products like subscriptions, merchandise, music and the like.

14. Margin Expansion - Talent Mix

The next part of the margin mix online video companies must get control of is talent margins. I’m not saying networks shouldn’t be talent friendly – of course they should. But a market in which every network competes to sign up the largest talent by throwing rev share deals at them is also stupid.

So the goal should be to have some formats that require talent who have become large in their own right and can demand rev shares of 70-90%. But these can be no more than 50% of your overall traffic in the long-run if you want to build a profitable online video business. Your “anchor talent” helps attract audiences that in turn want to discover new artists.

You need to roll up videos into aggregated channels, “networks,” that are 30% of your views in the long-run. The benefit of networks is that you can hand curate the videos that run in the network providing higher-quality, better control and more brand-safe content for advertisers. This helps get CPM rates higher – even within YouTube.

In a network you can have a mix of content from some “celebrity” content to attract audience to shows that you product customer for the network to make it unique. You might fill the balance with interesting curated content from great producers who are not yet famous.

Finally, if you want to build a successful online video company you must have some formats that are independent of talent altogether. The most obvious example is “American Idol” where the singers who start out unknown and emerge as stars. Where talent shows up unknown you don’t have huge revenue splits and you benefit them by helping them build audience / fame.

Other examples are blooper videos, game shows, some cooking shows, reality TV, etc.

9. Online Video Healthy Margins

Ultimately your goal must be to build a more sustainable margin business. But you don’t need to abandon YouTube or ditch your famous talent to be successful.

2. Technology is Critical
As I argued in this widely read piece, Hollywood content producers who don’t understand and develop technology prowess for the online & mobile media will fail to succeed in the future.

15. Technology is Critical

Technology is everything to your online video success. I meet way too many Hollywood producers who tell me, “I just signed X, Y, Z talent and we’re putting a bunch of videos on YouTube. We’re going to kill.”

Good fucking luck.

Online works differently than distributing on broadcast TV.

The best companies look at data to know what time to post. They understand that posting video is as much about activating your fan base to share socially as it is about marketing & promotion. The best companies A/B test everything including headlines, thumbnails, video length, etc. and understand that each distribution source (iTunes, YouTube, Facebook, Instagram) performs differently. In fact, entire businesses like UpWorthy are built by people who understand this precisely and don’t even produce any content.

And while Maker Studios has almost 50 engineers now, it isn’t the only MCN with tech chops. FullScreen has long been investing in technology to support content producers. As have BigFrame and Machinima. I would argue that the strongest visionaries have been TasteMade, who were originally running video at Demand Media. I’m studying TasteMade to form my own views of the future.

They have gone one step further than anybody in the industry by not only having distribution tools but they’ve also built really clever tools for higher quality capture and production of some videos using your mobile phones.

So you either need to invest millions or partner with a “tools company” designed to help you promote and distribute video.

One of the best I have seen in the market is Epoxy.TV. And while I’m an investor so I may seem biased, I’m an investor there for a reason. The team from Epoxy spun out of Robert Downey Jr.’s digital studio. It’s a team of Stanford engineers with direct video distribution skills. They don’t aim to be a content producer at all so the unbiased tool set gives comfort to those that want to use them.

Epoxy’s tools are designed to help video producers distribute content across the social internet, driving consumption increases through Facebook & Twitter. It helps producers track fans and activate audiences. And the company is now working on tools to also help producers figure out how to compete in a world where video is moving toward even shorter formats designed to be socially shared.

So to win at online video you must either invest in tech or borrow tech from a tools co.

3. You Must Produce Your Own Videos
Many of the online video companies started by aggregating content from other people. That does work to gain scale quickly but if you don’t produce content and you don’t have an end destination where customers consume video then you are nothing more than a video broker.

16. Production

And while brokers & agencies have value they’re not worth anywhere near what scalable tech companies are worth.

To build a successful online network you must have some hit shows and then you can aggregate the rest. Think of the television model where networks have hit shows like Mad Men or Breaking Bad to attract audiences to the network and drive revenues through carriage fees and ad rates. But the networks also fill the airwaves with shows that they didn’t produce themselves, which may actually have higher overall margins due to no production costs. But if you didn’t produce your own shows that attract audiences you have no leverage in the first place.

And production is where Hollywood beats Silicon Valley. To produce content that people want to watch takes unique skills:

  • Writing
  • Make-Up
  • Costumes
  • Set design
  • Lighting
  • Sound
  • Post-Production
  • Acting
  • Music
  • etc.

You simply can’t replicate the world-class skills of LA through technology. And production matters.

4. Build Direct Relationships with Customers
The most important currency of online businesses is customer information. It’s what allows you to continue to market your products cost effectively to customers.

17. Direct Relationships with Customers

In the old days this was email addresses. But increasingly other assets are as valuable if not more so. For example, if you get a Facebook Connect integration you not only get the ability for your viewers to socially share video but you also get access to their email address, demographic data and social graph.

If you can get customers to download your mobile apps you have the right to push videos to them.

5. Build a Global Business
I know it should go without saying that in 2013 you should be thinking about building a global business.

Yet many of the startups I see are very US centric.

18. Globalize

In the video space with no distribution limitation it’s not acceptable to write off the majority of your customer base as “remnant inventory” as most startup video companies do.

The future battle grounds will truly be global, which is why I believe the winners will be billion dollar businesses. We already know that audiences are consuming global content in large numbers.

When you look at global tech businesses like WhatsApp and the immense value they’re creating you can see the scope to build bigger, better businesses on video. It’s no accident that we recruited Ynon Kreiz, an Israeli who lived in London, to run Maker. His last company was built in Europe and sold for several billion dollars.

6. Build Non-Ad-Based Revenue
Finally, to build successful online video businesses you need to think much larger than just ad revenues.

19. Non Ad Businesses

Licensing merchandise is an obvious area where you could learn from traditional video companies. Star Wars, for example, made 70% of their total revenues outside of the first-run movie business. And Angry Birds has built a franchise by extending beyond video games.

We encourage online video company to consider all forms of alternate revenue streams including: packaging shows that can be output on traditional TV (see Awesomeness TV as an example), support music sales that become popular through your videos, do licensing deals and you even have the opportunity to drive eCommerce sales for other companies.

There are many opportunities to expand margins beyond the traditional brokerage business of YouTube networks. The biggest and best MCNs have understood this for years and are building much more sustainable businesses than people on the outside understand.

  • http://www.hypedsound.com/ jonathanjaeger

    Good point, the winner is not just a talent game. Because one company will be able to turn a million views into twice as much money as someone who can’t create a longer lifecycle out of their viewer.

    I think this is (perhaps only somewhat analogous) to the Zynga story. Gaming company hits it big getting users off of Facebook, but when Facebook turned off the hose Zynga needed to have users care about Zynga as a destination. User acquisition suddenly got a lot more expensive. I think, and this goes along with your increasing margin section, that video companies can build an audience on YouTube but ultimately need to get every last viewer into their funnel (via email and social that eventually get them into the premium channels — higher CPM with less of a revenue split with YouTube or selling premium content/access to other goods/etc.).

  • http://bothsidesofthetable.com msuster

    re: games & videos … ultimately nothing is compelling or sustainable unless you have great content.

    re: funnel … you will always have casual fans and ardent fans. I see you on my blog a lot so … THANK YOU! Your casual fans will view you on larger aggregation sites and your ardent fans will come direct to your website. We view the challenge on YouTube to convert the ardent fans to direct customers but we’re still very happy to have consumption at large on YouTube itself for most people.

  • http://robertsaric.com/ Rob Saric

    Hey Mark, thanks again for sharing your insight. I haven’t read anything that even comes close to explaining the opportunity for online video companies as well as you have. We are producing our own online videos for a niche learning MCN and your last two posts couldn’t have been more timely and motivating. :)

  • Michael Anderson

    Building out to multiple revenue streams is a lesson we have learned the hard way in developing our network, especially when you go into a VC meeting excited about an ad-only revenue model…

    One thing I am not seeing anyone do is package content alongside videos. There is a lot of opportunity to make video experiences richer through bringing various content types together with the video as a foundation/anchor.

  • Jan Renner

    Thanks Mark. GREAT playbook. Coming from the cable business and now in online video, this resonates: “Think of….short format equivalents of of Discovery, NatGeo, E! or ESPN” …. some great disruption opptys with many cable nets, especially the tier 2s.

  • David Cohn

    Wondering if readers out there think that the next wave may be web based, synchronous video interaction (1 to 1, 1 to many, and many to many). Yes, it is a different animal, but I’m betting the farm we’ll see this come in a big way across many industries. I’d love to hear any of your thoughts on this nascent market.

    – David
    Founder, Regroup Therapy

  • http://bothsidesofthetable.com msuster

    great to hear. and eduction / teaching are great categories. good luck

  • http://bothsidesofthetable.com msuster

    Hmmm. Need to think about that. I haven’t seen that done effectively either. What do you see the primary use case being?

  • http://bothsidesofthetable.com msuster

    I’m certainly seeing people try. Mostly on mobile. Haven’t seen one in particular standing out.

  • Coxy

    Fantastic read, thank you.

  • Gergo Szabo

    Thanks Mark, great read again. I am pleased to hear about some views on the international perspectives, which as you say is usually ignored by US companies. This of course creates opportunities for others who are focused on non-English-language content.

    What is your view of non-English-language content on YouTube and it’s monetization?

  • Eli Hooten

    Are you referring to something like web-based video collaboration?

    Example of the moment: https://www.sqwiggle.com/

    Or “instant” interaction between users by sharing/uploading/discussing videos that have already been recorded?

  • David Cohn

    I’m referring more to companies like Powhow and LiveNinja.

  • Kenny Grant

    great post!!

  • Michael Anderson

    This approach lends itself really well to the gaming space, specifically the “Let’s Play” videos that are taking over YouTube gaming channels.

    Since games are an interactive entertainment medium, bundling video and game progress files enables entirely new ways to experience a producer’s content. Users could download the save files and pick up where the gaming broadcaster left off.

    The huge pain in the process is that it is actually very difficult to find and share game save files. It isn’t simply a post video + post-a-link-to-a-zip-file-in-dropbox solution. Over the past 12 months, we have bootstrapped a cloud-based system that finds and syncs game saves as a utility for PC gamers (GameWisp.com). Once we got that working we realized users could couple this game save content to videos. Imagine PewDiePie attaching saves to his Let’s Plays, and you can see the immediate impact this tech has as a funneling mechanism on millions of gamers, driving traffic to an O&O site.

    You can check out an example of our MVP approach to content+video bundling here: https://gamewisp.com/play/29 . The videos are all linked in one place, as well as the game save files associated with each video in the series. Users can quickly pick up where the video creator left off in their own copy of the game. It is a much richer experience than just watching someone play through a game on YouTube.

    Examples in other industries are attaching code, Photoshop files, or 3D printer schematics to tutorial videos (then having them automatically loaded to your Dropbox). The important part is the combination of video + the cloud piece that enables people to easily and intelligently take the experience deeper than just passively watching a video.

    Would love to talk to you more about what we are up to.

  • Matthew O’Connor

    Hi Mark, terrific post, and blog. I work in the video tech space currently and am preparing a start up with similar ambitions.

    One thing that isn’t in the margin mix when attempting to migrate users from Youtube onto your own platform is the associated costs of doing this. There are a number of terrific OVPs that you can use at varying price points but taking on the cost of video delivery from Youtube, at scale, is not cheap, despite the cloud/SaaS model.

    Do you have any thoughts on the best way to set up to be able to do this and what would you factor in as cost % on that margin?

    Youtube of course could prevent this by creating better deal structures with MCNs who scale and strategically if it wants to be the global video platform that can aggregate effectively, as content quality on the platform increases, its going to need to do it. Web cam videos doing low millions can cope with that % of ad revenue going to Youtube, professionally produced content will be difficult to sustain.

    Also, how do you see Youtube CPMs increasing to any significant degree at Makers and in general? Tough revenue share deals are a lot easier to swallow especially on major traffic properties if ad revenue gets anywhere near to even the lowliest cable channel.

    Cheers

    Matt

  • Eli Hooten

    Ah ha! Thanks for the examples.

  • BrianPC

    Great post. What about content accessibility and search? There are almost 2 billion people on the planet that have some level of english fluency, who also happen to be the folks with $$. High quality searchable captions can not only extend reach, but drive content discovery. Timed transcripts create a crawlable index which can get picked up by the search engines. In the next few years, all media will be accessible and searchable just like any web page.

  • CMKelly

    I really like the idea of crawlable transcripts, which could be even better than user-generated tags for letting people find relevant videos. It doesn’t have to be just in English–already people are voluntarily translating web content and supplying subtitles to videos. That opens you up to 5 billion people not fluent in English, and lets you bring their content to the English speakers, as well.

  • BrianPC

    Yes, once you commit to producing timed transcripts there are many other opportunities to enhance ROI including semantic search: “people who like this content also like this content”. As a bonus, you are on the right side of the equal access issue for hearing impaired (Dept of Ed and FCC like that). As far as foreign language content, we agree and support timed transcripts in all the major languages. Subtitling (translating) is a different can of worms because it is so expensive. But costs are coming down.

  • CMKelly

    Thank you, Mark! You’ve just made it easier to make the case that content + technology can be a billion-dollar business, especially if the content is what drives people to the technology in the first place.

    Wouldn’t it make sense to aim for YouTube + broadcast–upfront–if you’re creating low-cost but professional content? You gain several benefits: 1) either an ad split at far higher CPMs than online, or a broadcast license fee that covers your production costs; 2) exposure to an audience of millions without the difficulty of attracting users to an unknown website; 3) free ads during the week for your show (and by extension, your brand); 4) a network show that amounts to a subtle infomercial for your brand, meaning you get paid to advertise your brand and drive people to your website; 5) more people are inspired sooner to produce their own content for your website, because they want to be on TV and TV is still the big time; and 6) you can sell downloads of the TV show or even physical companion products (a la PBS).

    I know getting a network deal isn’t easy, but isn’t it worth trying? Even if you don’t get a deal at launch, you’re primed to get it more easily later.

  • Sofia Fenichell

    Mark, this is one of the most intelligent posts I have read in a long time. Dare I call it a post it so comprehensive. Thank you for taking the time to compile and share this so clearly. ITS BRILLIANT!!!!!!

  • Holly McIlwain

    Mark, ditto on the compliments from others on the post and the obvious research and time that you invested writing it. My question is related but different topic, using video for launching a new start up. You mention it is a must to work hard to use multiple distribution outside of ‘Walmart’ Youtube. Would you say that also applies for branding? What is your opinion of the Q&A format like Jay Adelson’s Youtube channel? I’ve been head down for a year creating videos for a start up launch and looking for the best strategy to use them. Thank you in advance for your time to answer.

  • John Ford

    Very interesting and useful analysis. Thanks.

  • Edson Mackeenzy

    Hello, Mark
    Thank you for compiling so many valuable information in a single post.