Weak Online Video Ad Market Portends More Retrenchments in Web Publishing

Screenshot from Generate's series, Pink

Screenshot from Generate's series, Pink

May 18, 2009 – The shakeout in the online video production business has only just begun.The first Web studio to fall was Mania TV in February. Then 60 Frames came tumbling down in early May. That another digital studio will die soon is pretty much a certainty – speculation is rife in the media business about who’ll be the next to go.

As more companies crumble and others consolidate, the silver lining is those that make it will likely be stronger. But the next several months will be strewn with digital wreckage as the reality of ad spending in Web video sets in.

There doesn’t seem to be enough money to go around on the Web. Media firm Magna forecasts the U.S. market for online video will grow by 32 percent this year, rising from $531 million in 2008 to $699 million in 2009. While $699 million sounds like a lot, it’s not enough to support the current ecosystem of producers and distributors.

Digital studios like Deca, Agility, Next New Networks, Electric Farm Entertainment, Revision3 and others are fiercely competing with independent Web creators, YouTube, Hulu, broadcast and cable networks, and online video ad networks for a piece of the action. But there’s not much for them to share.

“Digital studios are obviously challenged,” says Adam Kasper, senior vice president and director of digital media at Media Contacts, the global interactive media network unit of Havas Media. “They sell high-priced creative services without long-term contractual relationships with marketers. Even making a sale does not guarantee them anything beyond that sale itself. Digital studios will need to develop long-term partnerships with marketers to really prosper. And to do that, they need marketers who see the long-term value in branded entertainment, which is a challenge in the current economic climate. Marketers are moving more towards ROI-per-CPX models, which are difficult for brand image-focused media to work within.”

Advertisers have also shown they prefer to back longer form professional content, said Maria Cirino, a venture capitalist with 406 Ventures in Boston.

“Digital studios will have a tough time breaking in unless they can find a fundamental difference between online and offline viewing,” she says. “I don’t believe this is materializing.

“First,” she continues, “only a few of the largest premium content sites have attracted any mass of advertising dollars, because it is still bought on reach/frequency, and digital studios don’t have the content library, marketing budget or audience necessary. Second, the fundamental thesis that online viewing is different than TV viewing has not played out. Projections are showing strong performance online of long-form professionally produced video as well as short-form and UGC. However, the long form is much more familiar and more easily monetizable than the other two, so it is attracting the majority of the ad dollars and seems to be the more sustainable model.”

In most cases, video is too expensive to produce given the risky payoffs, Cirino says. That’s why the digital studios are both banking on diversification and are making less risky upfront bets.

As an example, it can be wise to let brands take the lead in producing Web series, says Alan Schulman, executive creative director for The Digital Innovations Group.
“For content-centric digital studios to stay alive, they should expand their base of business from pure narrative storytelling to weaving other types of narratives like brand-centric edutainment into their offerings,” Schulman says.

His company creates branded entertainment, original series and games. “The narrower you define it, the more you’re likely to become beholden to a format that can’t sustain a staff of writers and developers,” he says.

Web programming, like any content, will either be financed via subscription or ads, says Jordan Levin, CEO of Generate, a multimedia production shop. Advertisers who are willing to invest in Web content generally want to be involved early on so the project can be a true marketing extension rather than just a pre-roll or post-roll buy, he says. Generate creates Web series, but the company also has publishing concerns, talent management and produces for TV and film. That strategy allows for multiple revenue streams

It also helps to own the product and the means of distribution, as Break Media does. The company purchased digital studio HBO Labs earlier this year, but its core business is the distribution network it owns with 60 million unique visitors worldwide, led by Break.com.

“We license content, but we also have distribution, so we can control our own destiny,” says Break Media CEO Keith Richman. “We can monetize, find an audience and create stuff. In an ROI-driven economy, advertisers are focused on getting their ads seen and a media plan that guarantees exposure.”

The pure-play digital studios that remain are adjusting their production costs. Some already have.

Take My Damn Channel. The company has never employed more than half a dozen staffers and hasn’t raised much venture money. As a result, the company is very selective about the shows it produces, investing in inexpensive properties with celebrities attached such as David Wain, Sarah Silverman and Isla Fisher. The company, now profitable, was one of the first digital studios to hit the black.

“We avoided obvious mistakes by not raising too much, not spending too much, and not pocketing too much until proving out the business model,” says CEO Rob Barnett. “We first started with only $500,000 to sign the best possible talent to build a brand dedicated to showcasing some of the highest quality original comedy and music. Premium content, effective branding and marketing grew significant audiences and attracted major advertisers to back it.”

Next New Networks aims to insulate itself from the risks of a hit-driven business by operating like a cable network. “We build brands that are relevant to passionate, underserved communities,” says CEO Lance Podell. “In our world [Next New Networks’] ‘Indy Mogul’ is a network, and if one of the shows under Indy Mogul doesn’t attract viewers, then the other shows will and new shows will be developed under the network brand. We now have more than 25 million consistent views of our programming every month.”

The Denver-based digital network Jookt covers high school sports and has shifted its financing approach to lower production costs. Last fall the network relied primarily on professional photographers and spent about $70,000 each month to create 20 stories. Now Jookt is churning out about 100 pieces a month for about $20,000 by relying on high school and college students and less expensive crews, says Jeff Bennis, the company’s CEO.