Internet Outsider

Will Radio, TV, and Print Save Google's Growth Rate? No.

To hear people talk about Google's moves into offline media, you would think the company is on the verge of capturing all the profit in the media industry.  It isn't.  And not just because Google's success in its offline efforts is far from guaranteed.

The important point is that Google's radio, TV, and print initiatives are the offline equivalent of its AdSense product, not AdWords.  Why is this important?  Because , for every dollar of advertising spent on AdSense, Google captures only a tiny fraction of the profit that it captures for every dollar spent on AdWords.  When an advertiser buys a $1 per-click AdWord keyword, Google generates $1 of revenue and about 60-70 cents of operating profit (very rough numbers).  When an advertiser buys a $1 per click AdSense keyword, meanwhile, Google generates $1 of GROSS revenue but only about 40 cents of net revenue--and only about 10-20 cents of operating profit.

Google's revenue and profit share of offline advertising placements, moreover, is probably even less per dollar of gross revenue than it is for AdSense.  Why?  First, because Google has nowhere near the leverage in offline media that it does online.  Second, Google's targeting and optimization systems are not as sophisticated offline as they are online (and won't be for the foreseeable future).  Third, because a public company in a similar ad sales and placement business suggests that the margins in the automated radio and TV placement business are downright horrible, at least with limited scale.

A small company called SWMX, which just reported its Q4 results, is making good headway in generating radio and TV placement revenue through electronic marketplaces (Q4 revenue grew 58% year over year).  The company is very small--only $16 million in placements and $2.5 million in revenue in 2006--but the early margin picture is not encouraging for those banking on Google's offline initiatives to save its long-term growth rate. 

SWMX generated about a 50% gross margin (on net revenue) in 2006.  The gross margin on its hypothetical GROSS revenue, meanwhile--the revenue stream that would be equivalent to Google's gross revenue for AdSense--was only about 10%.  Again, this 10% gross margin per dollar of advertising compares to the 90% gross margin per dollar of advertising that Google generates on AdWords and the 40ish% gross margin on AdSense.  SWMX's operating margin, meanwhile, is even less encouraging: The company lost $9 million last year on $2.5 million of revenue.

Would Google's offline margins be better than SWMX's?  Yes, probably.  Would they come close to matching the already (relatively) low margins that the company generates from AdSense?  Probably not.

So how much TV, Radio, and Print spending would Google have to capture to, say, double its current operating profit?  (Assuming no further growth of the online businesses, which obviously should continue to grow quite nicely).  Google generated about $3.5 billion of operating profit last year.  To generate this much from an offline TV, radio, and print placement business, assuming a generous 10% operating margin (very generous, I think), Google would have to place $35 billion of gross advertising.  This compares to about $4 billion it generated from its wildly successful online ad rep/placement business, AdSense, in 2006. 

The conclusion?  It seems safe to say that, even if everything goes perfectly, it will be a while before Google's offline initiatives contribute significantly to the company's bottom line. 

So...YouTube's Toast?

Some traditional content companies finally got their act together and announced a communal video distribution site.  So is YouTube toast? 

No.

How is it not toast?  Let us count the ways.

First, there's the smart point that Fortune's Adam Lashinsky makes in his piece today: Hobbling YouTube would be a tough enough job for an as-yet-to-be-named-built-or-launched site run by ONE big media company.  So imagine how hard it will be when each of SIX big media companies is fiercely looking after its own interests, pointing fingers, spreading blame, demanding changes, etc., before the site even gets up and running. 

Second, big media video content is NOT the only kind of video that Internet users want.  On the contrary, a recent review of Vidmeter, YouTube's most popular channels, and compete.com's analysis of what happened to YouTube's traffic when the 100,000 Viacom videos were deleted (up 14% in two weeks, per the NY Times), suggests that Jon Stewart et al clips comprise a far smaller percentage of total online video content than most people think.

Third, online video will NOT be a winner-take-all game.  Even if BIGMEDIAVIDEO.com actually gets up and running--a real "if," in my opinion--and even if YouTube chooses not to license or otherwise distribute the content, there will be plenty of room for multiple players.  The experience and know-how that YouTube has developed over the past two years, moreover, will continue to give the company a major operating advantage, especially at scale. 

Fourth, unless BIGMEDIAVIDEO.com 1) maintains a chokehold on ALL professionally produced content--something that sounds next to impossible, given that many companies have yet to join the consortium--and 2) builds a powerful consumer brand, YouTube will still be the first stop for many Internet users interested in video clips.  Although Viacom probably assumes otherwise, many Jon Stewart fans probably have no idea what company produces his show (and, therefore, don't think to look on comedycentral.com).  By now, however, most consumers think that youtube=online video, the same way that google=search, so youtube may always be the first stop for many of them.  And once it decides to aggregate links to all online video, there is nothing to stop YouTube from employing--and making a lot of money off of--the same model that has made Google the most powerful media company in the world: sponsored search.

Prediction: Google to Buy Spot Runner

Spot Runner CEO Nick Grouf presented today at OMMA Hollywood.  Spot Runner provides a simple, quick way for local businesses and national corporations with local offices to create, buy, and place highly targeted local TV advertising.  If Google's M&A team is not already driving down to LA with truckloads of money to buy the company, they should.  And if they don't, Microsoft or Yahoo should.

Accordingt to Nick, Spot Runner reduces the cost of creating a decent TV ad from $500,000 to $500 ($499 to be precise).  It reduces the time necessary to plan and buy a TV campaign from 6 weeks-12 months to 24 hours.  It allows thousands of local businesses and franchises that would never have been able to employ TV advertising in the old media world to do so--and target the campaigns by zip code. 

UPDATE

Two readers argue (see comments) that what Spot Runner is offering is nothing new--that cheap creative has been available since the Dark Ages, that you can target by zip code, etc.  The impression I got from the presentation was that Spot Runner seriously streamlined the process (and reduced costs).  Any Spot Runner customers out there care to weigh in?

UPDATE 2

One reasonably happy Spot Runner customer weighs in (see comments).  Any others out there?

Google to be "King of All Media"?

In a debate at OMMA Hollywood today, I will argue that Google will NOT become "king of all media."  Although my esteemed opponents will no doubt come packing heat, it seems to me that theirs is a losing proposition.

Five points:

• First, we must define terms, because if "King of Media" means richest, most powerful company in the media sector, Google's already there.  (Sorry, Sumner.)  If "King of ALL Media," however, means the company that creates, produces, and monetizes all media, forget it.

 

• Traditional media content--journalism, linear storytelling (in TV and movies), music, talk shows, comedy--is not going away. Google currently does not produce traditional media content, and won't unless it radically changes its business. What Google does do--extremely well--is organize, distribute and aggregate media.  As a result, it is a major threat to traditional media distributors, but not (in most cases) to media creators.  (For the purposes of this debate, I'm going to assume that to be "King of All Media" one can't just be a distributor).

• Google generates the vast majority of its profit (profit, not revenue) from the one content product that it does produce: search results.  Some fear/assume that Google's recent initiatives with print and radio will result in these and other media industries being subsumed into a Googleplex.  This is ludicrous.  In its offline initiatives, Google is acting as little more than a technology enhanced ad-rep firm--one that takes a small cut of the profits (and, with big partners, after overhead, the cut is small), in exchange for selling ads.  If Google's offline efforts are successful, it will likely become a good partner for media companies, not a competitor.  (Which isn't to say that other online companies aren't assaulting traditional media).

• Even Google can't win three wars at once.  Yes, Google has, so far, crushed its online competition.  It will only continue to do so, however, if it keeps its eyes on the ball.  In addition to keeping its Intenet competitors at bay, however, Google has also indicated that it wants to destroy Microsoft Office--a move that probably will not cause Redmond to just wave the white flag.  To become "king of all media", meanwhile, Google will have to go about destroying newspapers, magazines, cable companies, radio networks, TV studios, and other entities not known for just rolling over.  If Sergey, Larry, Eric, et al, are as smart as they appear to be, they won't be dumb enough to try to do this.

• Believe it or not, Google does have some online competition.  Although Yahoo was knocked flat in the early rounds, it has recently staggered back to its hands and knees.  Now that Microsoft's core business is under attack, meanwhile, it may finally begin to get its Internet act together (unlikely, I know).  But if Google really does try to "attack" traditional media, these two companies and others will be waiting with their arms open--a fair, reasonable Internet partner who doesn't want to doesn't want to see the media glory days come to an end.

Now, will Google, Yahoo, and others eventually become single-destinations in which people can go to find and use ANY content?  I sure hope so.  Before that happens, however, a lot of revenue-sharing, copyright, security, and other issues are going to have to be worked out. 

Also, some content (though not all) will always be king--and the people who create and produce it will always get a big cut of the profit.  For such content, no Internet company will ever have the gate-keeping power of, say, a cable company.  If a user wants to view Superbowl clips, he or she will go to whichever site is hosting them.  That site, in all likelihood, will be whatever site wants to pay the most for the privilege.

Viacom's Redstone Just Hedging Google/YouTube Bets?

One massive old media conglomerate, Viacom, is so outraged about Google's "willful copyright infringement" that it is suing Google for $1 billion.  Another massive old media conglomerate, CBS, finds Google so easy and fair to deal with that it has struck a major clip-distribution deal.  Is this strange?  Only because both conglomerates are run by the same man.

Possible interpretations:

1. Sumner Redstone really has gotten absent-minded in his later years.
2. Les Moonves actually does run CBS.
3. Phillippe Dauman actually does run Viacom.
4. Sumner Redstone still is a clever fellow...one who wants to continue to gather as much information as possible while he decides what to do about YouTube.

Interpretation 1 is possible, but unlikely.  Interpretations 2 and 3 are inconceivable.  So my money's on No. 4.

Vidmeter: Big Media Clips Not So Popular

Following up on yesterday's post about Vidmeter's "Top 200" video rankings, a reader suggested I look at "daily" numbers instead of "all-time" numbers, because most of the Big Media clips might show up in the latter.  So I scanned the daily numbers.  And I didn't seen any Viacom stuff there, either.

Again, the goal here is to try to get a sense of how popular Viacom (and other Big Media) content is on YouTube, and, thereby, determine who has the upper hand in the Google-Viacom negotiations.  The consensus is that Viacom's content--Jon Stewart, Colbert, etc.--accounts for a huge percentage of YouTube's total views.  As I described yesterday, however, I have seen no evidence that supports this. 

When I scanned Vidmeter's Top 200 "all-time" most popular videos, for example, I did not find a single clip that was obviously Viacom's (see yesterday's post for details and caveats).  This morning, I did the same scan of the Top 200 clips from March 16th, and, again, I didn't see any that I knew to be Viacom's.

Now, this may just be because Viacom's clips aren't available anywhere but on the Viacom site--which Vidmeter doesn't track.  (And unfortunately, the Vidmeter rankings don't go far enough back to easily check the pre- and post- YouTube removal.)  Viacom's fans will no doubt favor this latter interpretation.  Working against it, however, is the fact that the Vidmeter listings don't include many clips from other Big Media players, either--even ones that GooTube has licensing deals with (there are a couple from the BBC, for example, but not dozens).  In short, if Big Media content dominated online video views, I would expect to see some evidence of this in the Vidmeter listings--and I don't. 

 

Source Calls Skype Post "Dumb"; Says Co "Turning Profitable"

Got a frustrated note from a source who had several interesting things to say about Skype...in response to yesterday's post (in which I questioned two new product announcements and the company's future). 

The most interesting point?  Skype is "turning profitable."  The source is in a position to know, but if anyone else can confirm this, I'd be grateful.

The source also had this to say about Skype Find, the new service that allows you to post and access local restaurant/product reviews: 

Maybe reviews haven't got so popular cause no one has done it right.  As far as I'm concerned I don't care about someone in the midwest's opinion.  I care about what my friends and personal relatives have for best places to shop and eat.   So now that skype provides this I can get rid of all the crap content and trust my friends.

I'm still skeptical of the new products, especially of the monetize-yourself expert marketplace (SkypePrime), but I'll keep an open mind. 

Attention Web 2.0 Start-Ups: Party May Be Ending

Who says Wall Street firms are always bullish?  According to Reuters, Merrill Lynch published a report today suggesting that housing market woes could drag the economy into a recession and that, if it does, investors can expect a drop in the S&P 500 of at least 30% from the peak.  Even if there is no recession, and the market just does a head-fake, we should expect a drop of about 20%.

How will a public-market stumble affect Web 2.0 start-ups?  The same way the market crash in the fall of 2000 did, albeit to a lesser extent:

• Money will get harder to raise.  (Because VCs will be feeling pressure from their clients, and exit valuations will be lower).

• Financing and exit valuations will be lower.  Because the stocks of acquirers and comparably public-market companies will be lower.

• Investors will get impatient for start-ups to develop businesses instead of "products" and "communities."

• The growth rate of online advertising will slow dramatically.  In tough times, advertising is one of the first expense lines to get cut (by big businesses and small).  What's more, some start-ups that are currently buying advertising will cut back or cease to exist. 

In short, being a Web 2.0 entrepreneur or employee may soon get more difficult and less fun.  Hit the bids while you can!

UPDATE

Oh, well.  Merrill Lynch's economist David Rosenberg just blasted Bloomberg for mischaracterizing his report and said he is merely suggesting that we could have a "growth recession," meaning that the economy's growth rate could slow, and this only if the Fed doesn't cut interest rates.  So that's still bullish.  For what it's worth, I am calling for a real recession, in which the economy shrinks and the stock market tanks, regardless of what the Fed does. 

Viacom vs. Google: Who's The Daddy?

The key question in the Viacom v. GooTube war is who-needs-whom more?  The best way to answer this question is to study the percentage of "views" on YouTube that consist of Viacom (and other big media) content.  If the percentage is low, Viacom's hardball tactics will fail.  If the percentage is high, Google will probably have to make some major concessions. 

Importantly, the critical fact here is not the percentage of clips posted, but the percentage of clips viewed.  If Big Media content accounts for only 5% of the clips, but 95% of the views, then Google will need to have its attitude adjusted. 

The first data point suggesting that Big Media content does NOT account for anywhere near this percentage of views is that the folks at Google know exactly what the numbers are...and they are not morons.  If YouTube really needed Viacom's content, the GooTube folks would presumably be down in LA sucking up to Sumner and his fish.  Instead, they're acting the way someone holding a full-house does when bullied by a guy with three-of-a-kind.  (And remember: Google knows exactly what hand Viacom is holding; Viacom, meanwhile, is just guessing).  Is Google bluffing?  Could be.  But I think this is unlikely.

Second, Google has already struck distribution deals with several other big media companies and hundreds of small ones.  Big Media's best chance to create a command-and-control Internet media economy is to unite.  But Google has already done an excellent job of fragmenting the opposition.

Third, although I haven't yet seen detailed YouTube stream data (again, I'd be grateful if someone would pass it along), at least one external data source suggests that the Big Media percentage of online video views is nowhere near as high as many observers think.  A company called VidMeter tracks the top videos across all the top sites, and presents the results on both a "daily" and "all time" basis.  Based on a quick analysis of the top-200 all-time videos, I think it's likely that Viacom's content may actually represent a very small percentage of YouTube clips viewed.

One problem with such analyses (and with online video clips in general) is that it's often difficult to tell who owns the copyright of a particular clip, and because I don't spend much time getting familiar with Viacom content, I may be under-counting.  So let me say up front that my count is very much a back-of-the-envelope estimate and that, for all I know, VidMeter's methodology and counts are wildly inaccurate.  Please feel free to peruse the list yourself and weigh in.

VidMeter's Top 200 all-time videos range from the "Evolution of Dance," which has been viewed 54 million times, to an Anna Nicole Smith clip viewed 3 million times.  Of these Top 200, I did not see so much as a single clip that I was certain was Viacom content.  (The only Jon Stewart clip in the top 200 was his appearance on Crossfire, which I assume is Time Warner content). 

I saw plenty of music videos and movie trailers, which I hope the copyright owners aren't dumb enough to lock behind a license agreement, and I saw plenty of talking cats, lonelygirl-wannabes, and other predictable stuff.  I saw some FOX clips.  I saw a lot of mash-ups, which I assume (hope) are legal.  I saw a lot of stuff that obviously originated on TV and may or may not be licensed.   In short, I'm sure there's some Viacom content on that list, but if so, it didn't jump out at me.   

The upshot?  Based on a scan of the VidMeter list, I see nothing to change my opinion that, in this negotiation, Google is the Daddy.   

Thanks to Niki Scevak of Homethinking for suggesting Vidmeter.

Happy Ending For HP's Patricia Dunn

Cooler heads prevailed in the HP spying scandal: All charges against former Chairman Patricia Dunn were dismissed, and the charges against the other defendants were knocked down to a single misdemeanor apiece (and in September, even those charges will disappear).

This is as it should be.  The HP scandal was a major embarrassment for the company, one that showed myopia and poor judgement on the part of Dunn and others.  But there's a big difference between a bad business decision and a crime, and Dunn, at least, should never have been charged with the latter (let alone multiple felonies).

Even as she breathes a sigh of relief, of course, Dunn will presumably be asking the same question that many executives savaged by an emotional rush to judgment have asked: "Now, where do I go to get my reputation back?"