Commercialising Online Videos & Other Digital Media

Should startups push for end-user adoption or sign exclusive deals with media distributers like Walt Disney Studio and Sony Pictures?

According to ComScore, 3 billion videos were streamed on YouTube in January 2008. YouTube has not released the cost of streaming these videos, but here are the facts in Google’s 2007 Annual Report.

“We have yet to realize significant revenue benefits from our acquisitions of dMarc Broadcasting (Audio Ads), YouTube or Postini.” – Item 1A – Risk Factors. Pg 21.

“We have also had copyright claims filed against us alleging that features of certain of our products and services, including Google Web Search, Google News, Google Video, Google Image Search, Google Book Search and YouTube, infringe another party’s rights.” - Item 1A – Risk Factors. Pg 23.

Shooting for a profit in online video

Many companies have tried or are trying to commercialise videos online. The fallout point is not a shortage of investment. The market is still in search for a sustainable model that works better than Google Adwords and Flash banners.

Celtic House, EdgeStone, and Tech Capital are backing a startup in Ottawa, called Overlay.TV, which goes about video advertising in a different way. 

It provides a platform to overlay data on top of web videos – think VH1/MuchMusic’s Pop-up Video, but for the web. 

Success will require not only the blessing of the content owners but also risk-taking from the retail sector.

The obvious application is to tag and link items to online stores from Amazon to Zara. Success will require not only the blessing of the content owners but also risk-taking from the retail sector.

Two ways to monetize

There are many strategic decisions to be made for companies looking to commercialise online video, two stand out:

1. Should startups push for end-user adoption, or;

2. Sign exclusive deals with media distributers like Walt Disney Studio and Sony Pictures? 

There are benefits and drawbacks to both.

1. Detail then Retail: The end-user adoption model

An end-user adoption approach would shorten development time by engaging the end-user early in the product cycle, validate the market research, and give dividend to free word-of-mouth marketing on the blogosphere.

To date, YouTube has yet to convince major media companies to license copyrights on its platform.

However, opening the platform to raise awareness and drive adoption may be less appealing to media companies wanting exclusive partnerships due to reduced marketing potential and reduced perceived control.

2. Retail then Detail: Partnering Up

Working with content owners and forming a revenue-sharing relationship is a more pragmatic approach to organic growth. 

With sufficient financial backing and the right connections, a deal with media companies and retailers could mean a new business model for online videos – one providing the same analytics as  ROI-obsessed businesses enjoy with Google Analytics.

The focus for me is less whether there could be successful exits for startups that enter the space of commercializing online videos, but rather, how successful these exits will be

One thing to keep in mind is that once such technology is out in the open, it can’t come back due to high imitation competition and low switching cost.

Breaking an old broken model

The major misperception with startups like Overlay.TV is that media companies continue to see them as new channels that supplement existing advertising revenue.

Currently, media companies look to acquire more URL landing pages so that more eyeballs turn into clickthrough which in turn convert to sales. It works, but how effective is it? 

In my vision of Web 3.0, the media companies and content owners themselves become the advertisement.  Consumers see goods in dynamic action, not static text. 

The business is blurring between the movie/music industry and the fashion industry in terms of marketing and customer experience. 

The earlier media companies realise it, the earlier they will loosen DRM Terms of Use and convert some of the lost revenue from BitTorrent into higher quality redirects that link to real, tangible, desirable goods with higher revenue per click. 

This would be a disruptive change for media companies who prefer the business model of selling more newspapers.

Not ‘will it sell’, but ‘for how much’

The focus for me is less whether there could be successful exits for startups that enter the space of commercializing online videos, but rather, how successful these exits will be. 

I believe the critical factors will depend more on choosing an audience and the “LinkedIn” networks of the investors – and less technical (like perfecting the technology to consume less bandwidth)

If done right, the purpose of video overlay ads may eventually be an unobtrusive call to action. That call may be completing an impulse purchase or joining a social movement. The length of the call may be that of a music video or that of Al Gore’s “An Inconvenient Truth”.

Counting on The “Panic” Buy

In my opinion, media companies and web giants are starving for innovation in the advertising space and the burn rate of their existing digital properties like MySpace and YouTube will rush them into making an acquisition before fully understanding their opportunities and challenges. 

For this reason, there may be multi-million dollar opportunities (and challenges) for the next wave of media entrepreneurs.

I leave you with this question: 

With a platform that enables tagging for videos, should efforts go into tagging music videos first or full feature-length movies first  Why?

Thank you for reading. 

About Tim Tang

Tim Tang is an analyst on the Market Research & Intelligence team at MaRS. He provides business and strategy planning for emerging technologies in digital media, software, web apps, mobile apps, wireless, and clean energy.