Digital Studios Discover Middle Man Still Is King

Jordan Levin, CEO, Generate

Jordan Levin, CEO, Generate

February 13, 2009 – It wasn’t meant to be this way, but a growing contingent of digital studios borne from the philosophy that the Web could democratize television by eliminating the middleman is discovering the road to success leads through the very power houses these low-budget upstarts meant to bypass.

Hollywood’s need to energize the new broadband medium with appealing content has given digital studios the opportunity to achieve mass reach and ROI, setting in motion a new business infrastructure that is breathing fresh life into Web content. Moreover, this is a two-way street where the cross-pollination between digital studios and Hollywood brings with it a potential to transform the TV viewing experience as well.

“Digital studios have the potential to do many things,” says Brent Weinstein, CEO of 60 Frames Entertainment, a venture-funded startup whose shows were viewed more than 50 million times in 2008. “We combine the creative output of an elite group of artists, actors and producers with support from national brand advertisers to create franchiseable media, some of which is migrating to TV and film.”

Digital studios are new media replicas of traditional studios – they’re smaller, faster and more nimbly run, but they play the same role in the digital world. They create programming. And they’ve figured out that for their Web shows to make money they must embrace Hollywood, ink deals with traditional networks and studios and adopt old media’s best practices.

Many of these companies have been built by executives, producers and agents with Hollywood pedigrees, such as writer Brent Friedman’s Electric Farm Entertainment and cable executive Rob Barnett’s MyDamn Channel. Wienstein, before founding 60 Frames, was a senior executive with talent agency UTA.

There are also new production shops and distributors for Web-only shows such as For Your Imagination, Revision3, EQAL and On Networks, among others. They’re joined by digital media efforts from networks themselves, including CBS and NBC, the most aggressive of the broadcasters in pursuing Web originals.

Studios, too, have established digital destinations for original shows, such as Sony Pictures Television’s comedy site Crackle.com and its online network The Minisode Network that carries shortened versions of classic TV shows. Warner Bros. Television launched TheWB.com last year as an online destination for former WB and Warner Bros. shows, such as “Buffy the Vampire Slayer” and “Friends” as well as online originals like “Rockville” and “Sorority Forever.”

They’re setting up digital shops because audiences are migrating to the Web. By late 2008, half of online Americans had watched a TV show on the Internet at some point in the past, double the rate in the fall of 2006, according to research firm Solutions Research Group. That figure is even higher for younger people. About 70 percent of 18 to 34 year-old online Americans have watched a TV show online at some point in the past, while 15 percent visit a network Web site once a month specifically to watch a TV show online.

Of course the lion’s share of viewing still goes to Web originals, including user-generated content. In December, Internet users in the United States viewed a record 14.3 billion online videos – including Web shows, viral videos and TV shows – up 13 percent from the month before, reported online audience measurement service comScore.

The quick scale of Web video is attractive to digital studios, which are eager to cash in on the explosive growth and the new advertising opportunities in reaching those Web-viewing consumers even in a tough economy. eMarketer predicts online video advertising spending, the dominant revenue stream for Web video, will grow 45 percent this year to $850 million. That’s a nice growth trajectory, but it’s still a relatively small overall number, which is why many of the digital firms are hedging their bets by developing multiple revenue streams, from advertising to license fees to international distribution.

Here’s a look at how some of the leading digital studios fared in 2008, especially when it comes to ad deals:

Next New Networks is venture backed to the tune of $23 million and has landed ad deals from Lionsgate Films, Janome, Windows Vista , Starburst and others. The online TV studio just re-upped with Janome this year and also recently ran an online campaign for Warner Brother’s latest “Friday the 13th” installment. Next New Networks is best known for its “Barely Political” network, home to Web superstar Obama Girl. The network earned about 300 million views for all its shows last year.

MyDamnChannel is a scrappy startup with only $3 million in funding, but the company has churned out award-winning Web hits like “You Suck at Photoshop” and “Wainy Days.” Most of the shows on the site cost about $7.000 per finished episode, says CEO Rob Barnett. The company was on track to break even late last year and to turn a profit this quarter because of its lower cost model.

Revision3 has developed some of the most successful tech and lifestyle-centric shows online, such as the popular “Diggnation,” “Tekzilla” and “Scam School.” Those shows helped Revision3 draw 41 million complete views in 2008 for all its shows, translating into 1.2 billion minutes of engagement for the year. Advertisers include Netflix, Virgin American and Bank of America and EA.

For Your Imagination distributes shows such as “DadLabs” and “Real World Green,” which are luring targeted advertisers in Baby Bjorn and Primo Water. FYI relies on ad dollars but also makes money by operating in a work-for-hire capacity to produce Web shows for media companies.

ManiaTV is well funded with $26 million, but the company slashed staff in the fall after investing too heavily in its own hi-def studio and facilities. Mania’s sponsors include Doritos, Coca-Cola, Adidas, Nike, AT%26T, Showtime, Ford, Pepsi, P%26G, Motorola and Wrigley.

Electric Farm Entertainment has produced the profitable Web shows “AfterWorld” and “Gemini Division” and makes money from brand integration, distribution deals, network partnerships and international licensing.

60 Frames Entertainment, with successes like “Douchebag Beach” and “Who What Wear TV,” landed ad deals with marketers such as McDonald’s, Sprint, Saks and Procter %26 Gamble. Late last fall, 60 Frames partnered with NBC to produce Web shows for NBC’s digital studio.

The 60 Frames-NBC deal underscores the growing need for digital studios to link arms with traditional Hollywood. TV networks and studios have deeper pockets, and producers need money to make their shows look good, whether they’re seen online, on mobile phones or on-air. Also, TV networks can amass an audience, and the digital studios need viewers to make their ad deals work. “Sometimes we can’t provide that on our own, so we partner,” Weinstein says.

Getting into business with a network helped Electric Farm’s “Gemini Division” land some of its ad contracts, says Brent Friedman, one of the founders of Electric Farm Entertainment and the executive producer for “Gemini Division.” That show ran in the fall online and has turned a profit for Electric Farm through multiple revenue streams, including advertising deals with Cisco, UPS, Acura and a distribution deal with NBC.com to carry the show.

“By having NBC as a partner with us it made it a lot easier to go to some of these premium brands,” Friedman notes. “Even though NBC wasn’t a proven commodity in the digital space, everyone knew who NBC was and that helped to bring on high level brand sponsorship deals.”

In today’s economy producers need to spread their bets. Former WB CEO Jordan Levin is doing that by inking deals across all mediums for his production shop Generate. Most recently Generate struck a multiyear television development and production deal to create scripted broadcast and cable series for 20th Century Fox Television, a move that helps Generate expand further into the television business.

The company has already established itself as both a Web producer, with online successes like “Pink: The Series,” and as an emerging TV producer, with shows like Comedy Central’s “Chocolate News.” A traditional TV development deal represents another revenue stream for Generate in addition to advertising, Levin says.

It also is a smart move because it shields Generate from the risks of producing for just one medium.
“The focus right now is really on studios and partnerships with distributors to create an environment for advertisers” he explains.

Digital studio EQAL is also pursuing a multi-pronged strategy. The company that stealthily built the first true Web hit in “LonelyGirl15” is now focusing on production deals with networks. As an example, EQAL is creating a companion Web program for the CBS primetime series “Harper’s Island.” The Web show will be called “Harper’s Globe.”

EQAL’s partnership with CBS brings marketing support and upfront production dollars to the digital studio, says Greg Goodfried, one of the founders of EQAL. For “Harper’s Globe,” the network will drive tune-ins to the Web show on-air. “For us that’s a huge advantage, because I can’t buy that kind of audience,” Goodfried says.

The digital studio is also keen on international distribution. The company licensed a new show in the “Lonelygirl15” saga to Polish producers Agora and A2 Multimedia. The producers will create more than 100 episodes of the new show, “N1ckola,” each one running one to five minutes, with new installments debuting four to five times each week. The show premiered in January with sponsors including Microsoft, Hasbro, Polkomtel and Samsung.

The licensing agreement reflects an international distribution push by EQAL. “It was always our hope to expand the ‘LG15’ universe into new countries through full-format licensing deals like this one with Agora,” Goodfried says. EQAL will pursue more deals like the one for “N1ckola” in other countries as part of the company’s efforts to diversify its revenue sources.

Long a staple of the television business, foreign sales is drawing the attention of many other digital studios as they seek to drive revenues for their Web content. Electric Farm Entertainment, for example, scored international deals for its 2007 Web show “AfterWorld” via a partnership with Sony Pictures Television International, which handles the foreign rights for Electric Farm’s programming. “Gemini Division” is rolling out in Australia online and on-air on the Sci Fi Channel there, one of many pending international premieres for the digital series. Launches will follow in the United Kingdom, Canada and Germany across broadcast, cable, mobile phones and online portals.

Electric Farm’s Friedman notes the revenue from both ads and international deals makes it possible to produce at a higher level and to attract stars such as Rosario Dawson in “Gemini Division” and Jon Heder, who is fronting Electric Farm’s “Woke Up Dead,” slated for a 2009 release.

One of the first Web studios to pursue international licensing is Michael Eisner’s Vuguru. His company secured foreign rights deals for its Web shows “Prom Queen,” “Sam Has 7 Friends,” “Foreign Body” and “Back on Topps” in countries including Australia, Brazil, Canada, France, Germany, Japan, New Zealand and Scandinavia.

Disney-ABC Television secured an international distribution deal for its original Web series “Squeegees” and “Voicemail” with Microsoft’s MSN in Europe in October. Warner Bros. International Television Distribution licensed TheWB.com’s original digital series “Sorority Forever” in a number of international territories via deals with Bebo in the U.K., MSN in Canada and in France on mobile and video-on-demand with media company Orange, among others.

With the economy in turmoil, digital studios are fighting to survive. That survival will increasingly depend on Hollywood deals and a continued cultivation of multiple revenue streams.