Online video market sept 2013

Building An Internet Video Company in 2013

Mark Suster - @msuster

(September 2013)

Background

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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

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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%+

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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:

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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.

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July 29, 2013

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Think of YouTube as the Walmart of video

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If you sold candy bars you could sell at Walmart (at low margins, high volume)

text

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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.

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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

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4 billion video views / month

260 million subscribers

80% audience 13-34

40% mobile

30 engineers

50% international

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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

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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

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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%

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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%.

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Distribution – 20%

MCN – 60%Talent – 20%

Sustainable Operating Margins

Transmedia

Licensing / gaming deals

Internationalization

Then layer on even more revenue:

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I’d stay where the customers are: YouTube.

Haters Gonna Hate

5 Topics

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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?

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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

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You can whack us but it just makes us pop up elsewhere faster

It’s a classic “Innovator’s Dilemma” situation

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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

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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

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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

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YouTube can ignore the MCNs,

but ultimately the competition won’t

5 Topics

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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

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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

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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)

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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

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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 …

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Use “tools companies” that are emerging

Important tech components (examples)

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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.

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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

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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

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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

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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

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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)