Google's $1.6 billion deal last week for control of YouTube triggers an avalanche of questions, but one fact is indisputable: There's a new elephant in the control room. Given the ever increasing appeal of online video, and the need to translate this content into sales, Google-YouTube will impact every element of the industry.
Decision makers in the TV business, never much for sitting idly by, will now face new competition in everything from ad sales to production budgets to distribution. Google's wish to be the one-stop shop for information and video makes it an ideal foil for the networks. And as Google-YouTube develops its business model, with a potential to become a richer partner, broadcast-network and station executives may find Howie Mandel's voice ringing in their ears: “Deal ... or no deal.”
“YouTube has been fascinating,” says media consultant Tom Wolzien, “but until someone put a financial model behind it, it wasn't particularly a threat to anybody. With Google, YouTube will have that model.”
Google-YouTube will no doubt face its own growing pains. Both sides began with hip, indie reputations. The combined company's emergence as an established player may repel an audience that once reveled in YouTube's garage-brand attitude.
Still, on paper, Google-YouTube looks to be more of a force than ever, at least in the boardroom. In the wake of the new reality, with everybody deciding how best to react, here are five major arenas where television may never be the same again.
A Bigger War for Ad Dollars
Just when it appeared safe for networks to steam further into the waters of online video content, the Google-YouTube merger has created a giant competitor, ready to sink its teeth into the market.
The TV industry takes in $70 billion annually in ad revenue. According to industry estimates, online-video-ad spending may reach as high as $2.5 billion by 2010. If that ends up taking a big bite out of the network's number, it could affect everything from production costs to the way networks choose what to air.
“Off-line linear television is vulnerable and has been vulnerable to things like VOD and streaming video,” says Tracey Scheppach, Starcom USA VP/director, video innovation. “Advertisers are still looking for the eyeballs and connection with consumers, which is something that potentially Google can offer.”
Advertisers and media companies are tapping into YouTube and MySpace.com as a route to more users. YouTube's business fits Google's strategy of using Internet content as a platform to sell ads.
Given Google's ability to display contextually relevant ads, YouTube is suddenly more attractive to advertisers that may have been skittish about finding their brands next to amateur videos of Coke-bottle/Mentos explosions.
A Google-owned YouTube may not undermine the value of traditional linear-TV advertising. But networks, eager to feed their coffers in this expanding new-media universe, may need to decide whether their strategic attitude toward Google-YouTube should be “beat 'em” or “join 'em.”
“For us,” says NBC Universal Chief Digital Officer George Kliavkoff, “[Google's acquisition of YouTube] means hopefully more advertising dollars spent on television.”
NBC and YouTube signed a deal in June to create a network-branded channel on YouTube to distribute promotional fare for NBC shows. “We assume that results in more folks watching the TV shows and therefore higher ad revenues in television,” Kliavkoff says.
It may, however, become a question of how the revenue pie gets divided. Google has cornered a huge chunk of the user-created online-video market. But will it soon control ad sales on the networks' own Websites as well? Toward that end, Google has been shopping its ad-targeting technology to the networks, executives say. While Google's technology could help in the short term, ceding control of online sales leaves networks' content vulnerable to devaluation. Google could be determining the value of TV content against the vast inventory that exists online rather than against other TV content. That would upset the entire revenue model upon which TV supports the costs of production.
Many media buyers are skeptical. “The networks don't want to lose a revenue stream by any means, so they're going to offer one-stop shopping that makes buying easier for agencies,” says Tom DeCabia, president of media-buying company TSD Marketing.
Networks may also go beyond just offering pre-roll and banner ads and develop sophisticated targeting technology of their own.
“As television networks, we should be proactive in making sure we develop our own tools,” says Albert Cheng, executive VP of digital media for the Disney-ABC TV Group, “and I don't think networks are there yet. It's about maximizing digital technology to deliver value in a way that Google will. We need to come up with the same level of sophistication they have.”
A Goldmine for Stations
Aside from an occasional clip of an anchor's on-air flubs, very little video from TV stations has found its way onto YouTube. That stands to change.
Google's expertise in branding and ad sales is an enticing lure to stations eager to reach a larger audience and collect more ad revenue for video already produced.
The issue for station managers, however, is control. Funneling video to Google-YouTube means letting go the reins on its usage and placement.
Despite some initial talks, no major group has cut a deal to put its stations' video on YouTube or Google's own video site, although several executives have expressed interest. (CBS' recent YouTube deal does not cover its owned-and-operated stations.) Stations have focused largely on building their Websites and using video as a centerpiece to compete with local newspapers.
But once Google-YouTube establishes a business model, more station groups may shift their focus. Several are already experimenting with online syndicates' selling video to third parties, such as NBC's National Broadband Co. But YouTube already has a track record for building a large audience at a good clip. “This is a way for stations to get more people to their content and more users from outside,” says Bill Hague, a consultant with Frank N. Magid Associates. “You can grow a Louisville or Columbus beyond your market.”
Station managers also recognize You Tube's potential. “We have great local content, but we need to take it beyond our sites and monetize it,” says Jason Gould, regional VP for Clear Channel's Internet division Inergize.
Some broadcasters are naturally wary, citing the need for Google to work out a copyright model to protect creators before broadcasters share content. But the concerns will not stall the inevitable.
“Stations need to let go because it is already happening,” says new-media consultant Steve Safran. “What they should try and control is the revenue from distributing their video online.”
The Rights Stuff
Google and YouTube have agreements in place with three of the world's largest record companies to add music videos to their Websites. The new conglomerate will no doubt attempt to license TV networks and other new clients as they come aboard.
But given YouTube's anarchic content, it's safe to say networks will be keeping whole cadres of lawyers on retainer.
It's also a safe bet that part of Google-YouTube's business model will be the creation of copyright guidelines—and a path for where all the money goes.
That won't stop the spin. YouTube has faced complaints before, but with the site poised to better monetize its content through Google's ad-targeting technology, the shouts could get louder. Last week, Time Warner Chairman Dick Parsons vowed to vigorously pursue any copyright complaints against YouTube.
For privately owned YouTube, litigation didn't much matter. Google, with a market cap of $130 billion, is a more vulnerable target.
Brian Baker, CEO of Seattle-based content-security firm Widevine, met with Disney, Universal and Sony last week to discuss how his company's technology could be implemented to police YouTube's use of their content. The issue of copyright infringement by YouTube has clearly become a priority for studios, he notes.
For now, the networks' own online-video efforts offer something YouTube does not: full-length episodes of their series. To protect against these episodes' being posted illegally, YouTube is developing technology that can “fingerprint” and block copyrighted content.
According to Baker, fingerprinting software—such as Widevine's Mensor product—analyzes a piece of content, such as a movie, and creates a small “key” that identifies it. The key technology allows owners to identify the illegal use of their product.
NBC Universal is interested in talking with YouTube about ways to allow content creators to remove copyrighted content rather than having to rely on the site to do so, according to NBC U's Kliavkoff. As long as the site does not post full-length episodes, a Google-owned YouTube does not represent a threat to undermine the value of streaming content on NBC.com. Kliavkoff notes that the company is “actively talking” to YouTube and other video aggregators about how to monetize this “premium product.”
He says, “That benefits both [parties] and, at the end of the day, consumers because they'll be able to get the content in different formats in different ways.”
Some, however, don't trust that even a Google-owned YouTube will efficiently police itself. Says one network executive, “YouTube wants to say, 'Here's the technology. We'll give you this, and you monitor your own stuff, and I can wash my hands of any potential lawsuits.'”
Under a separate deal, CBS will use YouTube's technology to monitor the site for copyrighted network content. User-submitted and network-approved CBS material will remain on YouTube, which will sell ads against it. (CBS will also supply content for a network-branded YouTube channel, selling the ads and sharing the revenue.) Content that the network requests be removed will be taken down. Just what criteria CBS will use to determine whether content is objectionable, the network won't say.
“That's our sole discretion. I'm not going to lay out the exact criteria for you,” says CBS spokesperson Dana McClintock. “If we feel that it has a greater benefit promotionally and financially than it does a detriment to us in terms of copyright violation, then we'll leave it up.”
An Assault on Cable
Today, YouTube's flood of confessing teens and skateboarding bulldogs is no substitute for a 100-channel package from Comcast or Cox. But as networks increasingly put their top shows online, it's not hard to see the day when cable networks become fully available on the Web. And as the Web becomes more and more like television—as storage gets cheaper and compression of video signals better—will subscribers use it to bypass cable?
One major network—Starz—already presents a good test case. The pay movie service puts all the theatrical films it licenses on the Web through its subscription service, Vongo. HBO has for years paid studios to at least secure the same online rights.
But it wouldn't take many more walls to crumble for Google-YouTube to offer bundles of full “cable” channels alongside its free or pay-per-view programs. Cable networks have readily pounced on new avenues of distribution in the past, happily feeding satellite TV's DirecTV and EchoStar in their earliest days, though at higher prices than they charged cable operators.
Established channels wouldn't simply put their feeds on the Net for free; that would risk the billions of dollars in license fees paid by cable and satellite operators. But Google would have the clout and the infrastructure to start selling packages of networks.
Cable operators would still generate revenue from sales of high-speed Internet connections to receive that video but would nevertheless lose on the bottom line.
Not everybody is convinced the threat is real, or technologically viable. “Don't confuse people watching video on the Internet with watching linear television,” says Cox Communications President Pat Esser. “The capacity is not there to do it.” He further cautions, “Don't underestimate what happens when 50 million [customers] change channels on the Internet.”
That didn't keep fear of “Internet bypass” from being a hot topic among cable investors last year. Comcast President Steve Burke called this anxiety one of two forces that depressed cable stocks for all of 2005 and the first months of 2006 (the other force: telco video).
Granted, such a reality is miles down the road. Video is a bandwidth hog, and widespread streaming of live action would tremendously tax the Internet's architecture. Google-YouTube would have little control over the quality of service. Glitches in free clips of Ted Turner's latest outrageous speech are tolerable; a stall in the last seconds of an ESPN football game is not.
Cable's best weapon to keep the status quo may be HDTV. The more consumers become addicted to crystal-clear pictures on the big screen, streaming Web video will pale by comparison. Bank of America media analyst Doug Shapiro doesn't see enough Web capacity for widespread HD video until 2015.
That gives the cable operators at least some time.
New Life For Indies
“Production and distribution are the barriers to entry that have kept studios and networks in power,” says former WB Network CEO Jordan Levin, now a principal in content-production and -management firm Generate. “But those barriers are continuing to come down.”
The Google-YouTube deal marks another step in a shifting balance of power. The emergence of a financial model for tying advertising to user-generated content may force some industry decisions. An expected trickle-down effect has media players eager to cash in.
“This further legitimizes online video,” says Jon Vlassopulos, VP, business development, digital media and strategic planning, for Endemol USA, the independent production company behind hits Deal or No Deal and Big Brother. “We are interested in creating original programming for these platforms. We just continue to see the number of valid partners growing.”
Adds Greg Spiridellis, co-founder of Jib Jab, a successful online producer/distributor, “To be able to tap an entity like [YouTube] to bring advertisers into online video will be a boon for a lot of businesses like ours.”
Although Jib Jab has deals with big-name sponsors, Spiridellis says it had already spoken with Google prior to the deal and is eager to discuss ways to leverage the ad-sales technology.
And while content providers are eager to explore profit potential, Generate's Levin says even the average person may soon be able to make a little money from his or her own content.
“It's not just about getting your stuff out there, but maybe now you can make a little money,” he says. “It's not Hollywood money, but $35,000-$50,000, which is what some content generators are starting to make on sites like Revver. For a kid in Nebraska in his garage, that's probably pretty good.”
And one of those garage kids could turn out to be the next Oprah. Google-YouTube is no doubt banking on it.
Additional reporting by Glen Dickson
