Internet Outsider

Interview with SWMX CEO Josh Wexler: Competing Against Google In Radio/TV

A key question on many minds is how much, if at all, companies like Google will be able to penetrate offline media such as print, radio, and television.  If they grab meaningful market-share, moreover, what will this mean for the various bottom lines (both Google's and the traditional media companies')?

This issue has many sides to it, but an important one is the perspective of companies that are competing against Google.  A small public company called SoftWave Media Exchange (SWMX) that I have previously mentioned here does just this.  The CEO, Josh Wexler, spent an hour with me.

The full interview is available on Cherry Hill Research's site (here).  Here's a summary:a

JOSH WEXLER'S KEY POINTS:

a

• Despite investing heavily in its radio and TV placement efforts, Google is badly lagging SWMX, especially in radio.

• In radio, Google sells remnant inventory, but the real business is in regularly scheduled inventory.  SWMX generates more than 80% of its revenue from this.

• Google's attitude--revolutionize the way advertisers buy advertising--has offended many traditional media owners and is hampering growth.  SWMX is growing rapidly because it facilitates existing business practices.

• The current process by which radio and TV advertising is bought and sold is grossly inefficient.  This creates an opportunity for electronic marketplaces.

• eBay's media-selling initiative was considered 'dead on arrival.'

• Companies like Spot Runner, which generate a lot of buzz, focus primarily on content creation and campaign planning.  These companies are complementary to SWMX, which focuses on the back-end.

• SWMX expects to turn cash-flow positive later this year.  Wexler believes the company's current cash position will support its near-term initiatives.

• If Google were to buy a company like SWMX, this would require a change of approach to the radio and TV markets.

• The Google-Echostar announcement is more style than substance.

Read the interview here.

Viacom Disputes Vidmeter YouTube Study

In a Reuters story, Viacom responded to the findings of the Vidmeter study that concluded that Viacom content only accounted for a small fraction of YouTube's video views.  Seconding some of the comments on this site, Viacom said the study's conclusion was misleading because it only accounted for content that has been removed from YouTube at the copyright owners' request.  Viacom says the study undercounts the amount of pirated content "by a significant margin."

That the study undercounts big media content is almost certain.  As the Reuters story notes, South Park and other videos are still available on YouTube.  Given that the study concluded that such content only amounted to 9% of overall YouTube videos and 6% of views, however, the margin of undercounting could be "significant" without being particularly meaningful.  Even if Viacom's content accounts for five times the "1% of YouTube videos" the Vidmeter study reported, for example, Viacom's overall percentage of YouTube videos would still be in single digits.

Also, the fact that some Viacom content can be found on YouTube today does not necessarily mean that it was there before the 100,000 Viacom videos were removed.  Some of this content, no doubt, was "restored" to YouTube after the initial removal.  It is conceivable, therefore, that the total percentage of Viacom-content views on YouTube today is less than it was before the videos were removed (in contrast to what Viacom suggests).

The most likely answer, in my opinion, is that the Vidmeter study undercounts big media content on YouTube, but not by enough to matter.  Even if the undercounting is truly "significant," the percentage of videos owned by any one major media company is likely small.  Google, moreover, has successfully signed distribution deals with a few major media companies and hundreds of small ones.  It will likely continue to sign more--until not having one's content on YouTube becomes even more of a competitive disadvantage than it is already today. 

Vidmeter: Viacom Videos Were Only 2% of YouTube Views

Vidmeter Incorporated has published an in-depth study of the number and type of YouTube videos that have been removed at the request of copyright holders.  Importantly, the study analyzes not only the number of videos removed, but the percentage of total YouTube views that such videos accounted for prior to their removal.

After the Viacom lawsuit, I scanned Vidmeter's "Top Videos" in an attempt to see whether Viacom (and other big media) videos constituted a large percentage of online video views.  This review suggested that they did not--and, therefore, that Google/YouTube had a lot more leverage in the YouTube-Big Media negotiations than was commonly thought.  Vidmeter's analysis (which is based on a sample rather than the whole site) goes far beyond my initial scan, but the conclusions are the same:

• Videos removed at the request of copyright owners accounted for only 9% of total YouTube videos.

• Removed videos accounted for only 6% of total YouTube video views.  This finding is the opposite of consensus, which assumes that Big Media videos account for a small percentage of total videos, but a large percentage of views.

• Of the removed videos, Viacom's accounted for the largest share of views (2% of total YouTube views), and the second-largest share of videos (1%).  Time Warner topped the latter category, also with 1%.

• Most of the videos removed (for Viacom and other Big Media companies) were music videos.  Again, this is in direct contrast to the common assumption that they are Daily Show, Colbert, etc. 

• Disney's most-viewed removed video, with 430,000 views, was "USC Cheerleader extreme wedgie." 

Vidmeter did find that a handful of full length TV shows were removed, but relatively few.  (These also received relatively few views before their removal).

On balance, the Vidmeter analysis supports the following theses:

• Traditional media videos make up only a small percentage of YouTube views.
• NBCFoxTube, the hypothetical consortium, even if successful, won't dent YouTube's growth.
• Online video viewers usually watch short clips, not full shows.

YouTube - Big Media Video: Revenue Splits and the Real Stumbling Block

In Sunday's New York Times, Richard Siklos provided some detail on the contemplated revenue splits for BIGMEDIAVIDEO.COM (the NBC/News Corp. theoretical consortium) and YouTube and its content partners.  He also suggested (as the Times has previously) that the real stumbling block in the Big Media-YouTube negotiations is not money but control: The Big Media folks can't live with the idea that someone else (GooTube) will sell advertising against their content.

According to Siklos, the revenue splits between BIGMEDIAVIDEO.COM and its distribution partners will be 90%-to-BIGMEDIAVIDEO and 10% to the distribution partner.  This is interesting, but it leaves out the most important split, at least w/r/t the YouTube-Big Media negotiations: The split between BIGMEDIAVIDEO and the specific Content Owner.  Will each partner in the consortium contribute the same amount of video?  Will they own the same amount of equity?  Will the revenue splits be the same for all BIGMEDIAVIDEO content providers?  If not, the consortium is especially doomed to failure.  If FOX's videos are more popular than NBC's, why will Fox sit by and allow its competitor to benefit at its expense?  (Sorry, but this BIGMEDIAVIDEO thing is DOA).

Siklos also reports that the split between YouTube and its content owners is 30%-to-YouTube and 70%-to-the-content-owner.  This seems reasonable, especially if YouTube is shouldering the costs of selling and serving the advertising (or perhaps the split is after overhead).  If this split were the only hang-up, every major media would probably rush to do a deal with YouTube. 

According to Siklos, however, the larger issue is control: Big Media folks revere their relationships with advertisers, and they don't want someone (Google) getting between them.  In my opinion, if Big Media wants to survive in this new world, this is something they're going to have to get over.

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.