Commercializing online videos and music videos

“The Internet will transform the video medium as well… the choice of content and advertising will be under consumer control. Product placement will become an opportunity for viewers to click on items of interest to learn more about them including but not limited to commercial information. Hyperlinks will associate the racing scene in Star Wars I with the chariot race in Ben Hur.”
Vint Cerf, Google Chief Internet Evangelist, September 2008

According to ComScore, three billion videos were streamed on YouTube in January 2008. YouTube hasn’t released the cost of streaming these videos, but in Google’s 2007 Annual Report, they admit that they “have yet to realize significant revenue benefits from our acquisitions of dMarc Broadcasting (Audio Ads), YouTube or Postini.” They also admit to having copyright claims filed against them alleging that features of YouTube “infringe another party’s rights.”

Many companies have tried or are trying to commercialize 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 start-up in Ottawa, called Overlay.TV, which goes about it 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. It’s an interesting idea. It enables crowd interaction and further personalization after production and distribution. One immediate application is to tag every item in each frame and link those 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.

I am interested to see how this space plays out. There are many strategic decisions to be made.

For instance, should start-ups push for end-user adoption or sign exclusive deals with media distributors like Walt Disney Studios and Sony Pictures?

There are benefits and drawbacks for both. An end-user adoption approach would shorten the development time by engaging the end-user early in the product cycle, validate the preliminary market research, and give dividend to free word-of-mouth marketing on the blogosphere. This strategy also enables start-ups to convert more sweat equity to traffic equity before the next round of financing that may lead to an M&A exit.

However, opening the platform may turn away media companies who want exclusive partnerships and control. To date, YouTube has yet to convince major media companies to permit full copyrighted media on its platform.

Working with content owners and forming a revenue-sharing relationship is a more pragmatic approach for organic growth. With sufficient financial backing and the right connections, a collaboration between media companies and retailers through a platform like Overlay.TV could mean a new business model for online videos – one which also provide the same analytics as Google Analytics over time.

As part of the assumed risk that web entrepreneurs take, this important decision will have to be made blind early on. One thing to keep in mind is that once such technology is out in the open, it cannot come back due to competitive imitation and low switching cost.

The focus for me is less about whether there could be successful exits for start-ups in the online video sector, but rather how successful these exits will be. I believe the critical factors will be less the perfecting of technology and more the involvement of the audience and the networks of the investors – at least early on.

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 further rush them into making another acquisition before fully understanding their opportunities and challenges. For instance, they may not realise that television ads are different from Google Adwords which in turn may be different from video overlay ads. The purpose of television ads is to raise awareness. The purpose of Google Adwords is to measure ROI. If done right, the purpose of video overlay ads may be an unobtrusive call for customer action. Such a 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“.

The major misconception about start-ups like Overlay.TV is that they are new channels to supplement existing advertising revenue. In other words, media companies continue to acquire more URL landing pages so that more eyeballs will create more click-throughs which in turn convert to more emoticon sales or “breakthrough” medical prescriptions, for example. It works, but less effectively than it potentially could, likely because consumers want to see goods in dynamic action, not static text.

In my vision of Web 3.0, the media companies and content owners themselves become the advertisement. The business model is blurring between the movie/music industry and the fashion industry in terms of marketing and customer experience – how the asset is promoted, advertised, bought, and sold. The earlier media companies realize it, the earlier they will loosen their 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. For this reason, there may be multi-million dollar opportunities (and challenges) for the next wave of media entrepreneurs. It won’t be easy.

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