online video market sept 2013
DESCRIPTION
Want to build an online video company? Interested in the YouTube MCN space? Learn some lessons from one of the first and largest investors in this space- Mark Suster of Upfront Ventures. The doc will give you guidance on how to build more profitably.TRANSCRIPT
Building An Internet Video Company in 2013
Mark Suster - @msuster
(September 2013)
Background
2
2x Entrepreneur (sold 2nd to Salesforce.com)
Partner, Upfront Ventures (large LA-based VC fund)
First investor in Maker Studios (along with Greycroft)
Lead investor in Epoxy.TV
Looking for more investments in video
Blog: BothSidesoftheTable
Video: http://www.youtube.com/show/thisweekinventurecapital
I’ll cover 5 topics
3
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
There has been a recent chorus of “can you really build a business on YouTube?”
Jason Calacanis has written a few very articulate posts. But many are saying it private & in the press.4
The core of the problem starts with the revenue share YouTube takes
MCN = multi-channel network, the term given to the group of large YouTube networks aggregating content5
MCN – 55% YouTube – 45%
Mobile App Developers – 70%Apple – 30%
Vs.
And much of the MCN talent takes 70%+
6
MCN – 55% YouTube – 45%
MCN – 30%
Talent – 70+%
So when you really look at it, MCN margin looks like “ad networks” with very similar properties
Ad networks typically have 15-17.5% margins on the ads they broker7
YouTube – 45%MCN – 16.5%
Talent –38.5%
But MCNs have enormous scale & assets. The best can break out if they:
8
Produce content (not just aggregate)
Build direct customer relationships
Develop O&O business
Have business models that aren’t only ad-based
O&O = owned & operated aka your own websites or mobile apps.
You don’t “build a YouTube business.” YouTube is a video distributor. People who make products always have clashed with distributors / channel partners.
9
July 29, 2013
10
Think of YouTube as the Walmart of video
11
If you sold candy bars you could sell at Walmart (at low margins, high volume)
text
12
Or your local specialty shop (fat margins, limited volume)
Walmart is a powerhouse that can command margins.
Source: statistic brain (http://www.statisticbrain.com/wal-mart-company-statistics/)13
$34Billion
Sales / Month
4,253
Locations
1,000,000
Customers / Week
19
World Rank if a Country
8%
% of All US $ Spent
YouTube is a Powerhouse, too.
14
1 billion monthly uniques (40% of global online pop)
6 billion hours per month > 150 videos watched / year for every
human
YouTube has 63% market share in total videos watched (units) per month
15 Source: Nielsen Top Online Destination Video Sites Data, September 2012
YouTube has 4x the uniques of its nearest competitor in the US
16 Source: Nielsen Top Online Destination Video Sites Data, September 2012
17
4 billion video views / month
260 million subscribers
80% audience 13-34
40% mobile
30 engineers
50% international
18
1. Sell at Walmart: build scale & brand awareness.
2. Fulfill at local retailers or your own shop :
Serve more loyal / ardent customers
Better selection
Niche products
Much higher margins
19
Working with YouTube is No
Different
But Don’t Confuse Distribution with Your
Business Model
YouTube is simply the top end of your profit funnel
ARPU = Average revenue per user20
YouTube
Affiliates
O&O
Mobile Apps
Registered Customers
Loyal /passionate customers
Higher ARPU
Higher margins
With less volume
21
The Name of the Game is “Margin Expansion”
You can’t be stuck in a 16.5% world
1. Drive most ardent fans to highest margin channels. Advertisers will covet these viewers.
Note: O&O still has some distribution costs associated with marketing, bandwidth & storage22
YouTube – 45%MCN – 16.5%
Talent –38.5%
Affiliate – 30%
MCN – 31.5%
O&O – 15%
MCN – 46.5%
60%
20%
20%
Operating Margins % Traffic
2. Must produce content & have some formats that are talent independent.
Note: This is not saying you shouldn’t be “talent friends” just that you should also consider formats that are less dependent on talent.23
YouTube – 45%MCN – 16.5%
Talent –38.5% 50%
30%
20%
Operating Margins % Traffic
Aggregated Channels – 35.75%
Non-Talent Formats – 45%
Talent –19.25%
Talent –10%
24
If you’re simply aggregating talent or content you are an ad
network(or a talent agency)
Your business business should be able to achieve average profit margins of 50-60%.
25
Distribution – 20%
MCN – 60%Talent – 20%
Sustainable Operating Margins
Transmedia
Licensing / gaming deals
Internationalization
Then layer on even more revenue:
26
I’d stay where the customers are: YouTube.
Haters Gonna Hate
5 Topics
27
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
28
YouTube’s strategy seems to be ignore the MCNs
(who have no alternatives)
YouTube maintaining split is possible due to incredible market
power; however, it is unwise
Or persuade us how valuable they are by providing us all this great,
free technology
29
You can whack us but it just makes us pop up elsewhere faster
It’s a classic “Innovator’s Dilemma” situation
30
And anyway if YouTube wants a sustainable ecosystem it needs profitable partners
YouTube unquestionably provides value for producers, much not fully appreciated.
CDN = Content distribution network. It moves content to the edges of the Internet to make it faster to consume.31
Storage
The YouTube Stack
Hosting
CDN
Tools (ie annotations)
Ad Sales
Audience Development
Infrastructure
32
The strongest competition for YouTube isn’t going to come from the most likely sources:
Yahoo!, Microsoft, Facebook, Twitter
Or evenHulu, Netflix, HBO
The biggest threat is Amazon, the real online “Walmart” who prices to win.
I reckon Amazon is the most serious threat to YouTube and that few people perceive this today.33
Storage
The YouTube Stack
Hosting
CDN
Tools (ie annotations)
Ad Sales
Audience Development
Storage
Amazon Strong Market Position
Hosting
CDN
Ad Sales
Could launch easily & aggressively given consumer
relationships
Dominates
34
Amazon thrives on“disruptive technology” -
Lower prices, lower margin, win market share
YouTube could choose to stave off competition by emulating
Amazon (AWS) now & take a long view
Amazon is a powerhouse and has already built streaming infrastructure.
Note: Nobody ever asked Amazon to cut AWS prices. They did it to engender loyalty & to keep out new competitors.35
> 30 Million
Estimated Kindle Fire Users
$5.25 Billion
Sales / Month
219Million
Active Users
> 35x
Price Cuts in AWS
$140 Billion
Mkt Cap
36
YouTube can ignore the MCNs,
but ultimately the competition won’t
5 Topics
37
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand
this)
What’s an MCN to do?
Future of Video?
Many VCs are convinced that video is a “hits driven” business given historical model
38
High budgets due to scarcity of time slots
Large marketing budget required to build audience
No customer relationship, no customer interaction
Thus hits driven business, with large failure rate
Production Distribution
Maximize value of limited “slots” + 8 minutes of ads
No ability to run iterative process
Substitute TV stations for movie theaters & same scarcity exists
8:00 – 8:30 PM
8:30 – 9:00 PM
Time Slots
But online is a totally new game. Much more programmable & predictable
39
Production Distribution
99%
Traditional TV = $100,000 / minute
YouTube Video = $1,000 / minute
∞
With unlimited distribution you can test content cheaply
Content can be evergreen, repackaged, repurposed
Audiences become global (ie Gangnam Style)
40
For the first time in history content producers can build
direct relationships with their customers
Content businesses feel more like Gilt Groupe than traditional TV
High costs, “star” founders & high failure rates41
Ironically consumer Internet increasingly
becoming a hits driven business with its own set
of stars
Video Category HH:MM YoY Change
Traditional TV 5:11 1%
Time-Shifted TV (DVR, VOD) 0:26 10%
DVD / Blu-Ray 0:12 -3%
Online Video 0:16 54%
Mobile Video 0:11 9%
People are consuming > 6 hours of video a day. That won’t change. The future of the Internet will be video.
Sources: iab/GfK MultiMedia Mentor April 2013, Video from Nielsen Cross Platform June 2013. 42
Average Daily Media Usage(HH:MM)
6:04 6:16
0:55 1:05
0:48 0:48
2:25 2:33
Consumers are obviously increasing video created & shared. Tolerance for “less produced” video increases with youth
Sources: YouTube, NPD In-Stat Research Report 2012, Onavo 7/201343
5 Topics
44
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
1. Technology is critical. You will not win online without it. Either invest millions like Maker, FullScreen, TasteMade or …
45
Use “tools companies” that are emerging
Important tech components (examples)
46
Analytics & conversion tracking to understand what’s working and guide production & audience development
A/B testing everything & every platform: content drop-off rates, link text, thumbnail images, influencers
Audience development tools to build fans, followers & influencers. Gather email addresses, mobile phone numbers, “likes,” twitter followers.
Asset management to tag video and repurpose for future distribution
Content management systems to build out O&O and mobile businesses
O&O = owned & operated aka your own websites or mobile apps.
47
Epoxy.TV helps with audience development
of individuals who watch a video will watch at least one additional video
48%
CreatorsYouTubers, Brands, Agencies, Networks
Epoxy drives follow-on views, organic growth and audience engagement
ViewersWatch, share and engage with content on preferred platforms and devices
view rates of shares with Epoxy links are over two times the view rate of sharing with a YouTube link
2x view ratefor Epoxy follow-on viewers, on average, over 4 videos are watched at a time
4x exposure
2. Production – Online media companies must have production as well as packaging / programming
48
MCN: 10-30%Talent: 70-90%
These margins aren’t sustainable media company margins, they are “talent agency” margins
Without some production you’re just a middle man, which often get squeezed.
3. Build Direct Customer Relationships – it is the currency of online power
49
Cookies(for targeting)
Email Addresses
Social Follows
Social Integrations
MobileApplication /
Push Notification
Easier to get
More valuable
4. Globalize – no physical distribution limitations so online video businesses can be truly global.
Source: YouTube stats, 201350
YouTube Traffic The best MCNs
will build truly global operations
5. Create non-ad revenue streams such as licensing, gaming & transmedia packaging
Statistic Brain Star Wars Total Franchise Revenue51
70% of Star Wars Franchise Revenue outside of movie sales
Many recent examples of licensing successes
5 Topics
52
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
The Future of Video
The Future of Video
53
Lower quality
Non-linear storylines
Think video games
Mobile
Templatized
Personalized
Who the F knows, but some thoughts …
Thank you
Mark Suster - @msuster
(September 2013)