YouTube vs Viacom: The Return of the King

The old adage “Content is king” doesn’t seem to be borne out by the post-bubble resurgence of new media. The three companies that have benefited by this resurgence the most are Google, Apple and YouTube, which is now part of Google. None of them create content. In the post-bubble period the market values created by the three companies are as below:

1. Google – $144 B (Google was privately held before their IPO in August 2004).
2. Apple – $51 B (incremental since March 10, 2000)
3. YouTube – $1.7 B for an 18 month old startup.

On the other hand, Time Warner has lost a whopping $197 B in market cap from its high in March 2000. CBS, Viacom and Universal haven’t done too well either.

The thing that is common among Google, Apple and YouTube is the way they have created their gigantic market caps – on the backs of other people’s content. Don’t get me wrong – to pull this off takes great talent and effort and they deserve every bit of it. But it also turns the conventional wisdom from the last century on its head. Distribution of content, apparently, is king.

In this three part series, I will look at each of these companies and what their business models mean for the industry or the primary content that they feed off of. In Google’s case that would be the text in all the websites of the world. In Apple’s case it would be music. And in this post we’ll look at YouTube and the television industry.

YouTube has been in the news a lot in the past two weeks. This time it’s not because of their huge acquisition by Google. But for reasons that might call into question the very high price that Google paid for YouTube. Apparently, much of the traffic on YouTube is of people looking for copyrighted video from major TV studios and not so much for home-videos of pet dogs doing tricks. And now it seems, the copyright owners, the major TV and film-making companies, have a problem with that.

On February 2nd, Viacom asked Google to take down its videos from YouTube. Information Week article here. Viacom and Google had been negotiating on how to share advertising revenue arising from the viewership of Viacom videos. The negotiations weren’t going anywhere, when Viacom pulled the trigger.

What is YouTube? If you remove all the Web 2.0 related noise, YouTube is a marketplace. It brings producers and viewers together. eBay is the best example of an online marketplace that brings buyers and sellers together. This works really well with eBay because the buyers and sellers are both small actors. eBay brings great efficiency to what would be a very expensive buying or selling process.

YouTube is an “attention marketplace”. Viewers come there to watch videos and they are shown advertising. Advertising is paid for by marketers. If this was like TV, most of the advertising revenue would go to the studio and very little to the network TV station. I expect Google has different ideas about the sharing of revenues which is why they can’t come to terms with Viacom. Google also knows that the Digital Millenium Copyright Act does not make hosting pirated content on one’s website immediately illegal. It just requires the owner of the website to pull down the pirated content as and when the copyright owner asks. And that’s what Viacom has now done.

Another interesting sidebar to this whole thing is that YouTube has been talking the talk on implementing anti-piracy technology on its website but has not been walking the walk. The YouTube founders said last year that they would implement such technology by the end of last year. Can’t blame them for missing their deadline – the more they prevaricate the better for them. This article in New York Times lays out the shadow boxing around this issue quite nicely.

In the meanwhile, Viacom has signed up with Joost to distribute its content through the internet TV startup’s platform. NYT expects the terms to be favourable to Viacom (65% revenue share). Article here.

So where does that leave YouTube? They are the dominant species in the land of user-generated video. There is no other website that Viacom can go to that will generate the kind of traffic that YouTube does. Traffic creates ad-clicks, clicks generate revenue. Such revenue on YouTube would be an order of dimension more than on any other social video site. Ditto Viacom’s share of that revenue. And so one might think, Viacom has no option but to take an unfavourable deal. Viacom thinks otherwise, and I think they are right.

YouTube has no entry barriers except one – the network effect. Jason Calcanis claims that YouTube is a “silly little business that one can set up in a week”. As technology goes, YouTube’s technology is no entry barrier. But, boy do they have traffic. More than all the network TV sites in the US combined. That is what creates the network effect. This is different from their parent Google whose search and advertising technology are simply the best products out there.

Unlike eBay, YouTube is dealing with two kinds of producers – viewers as producers and the studios. The studios’ content, regardless of the fact that it is pirated and posted by a private individual, is what draws a great deal of the traffic into YouTube. They create traffic not just for their own content, they also create traffic for others. The YouTube edifice is made up of many small bricks and some very large slabs (studio content) that are in or near the foundation. Viacom is one of those large slabs. If you pull too many of those slabs out, the foundation becomes weak.

YouTube has no option but to retain Viacom content on its website. Just to prevent this from snowballing into something bigger. If all the big media companies pull out of YouTube, it will unquestionably impact its viewership. If their content is then made available on other video sharing sites, viewers and video producers will desert YouTube like rats from a sinking ship. The virtuous cycle will turn vicious.

Does YouTube have a business without big media content? Sure it does. It can dominate the user-generated video space because the network effects work in its favour. Big media content, on the other hand, is almost like a different industry altogether. I can’t see YouTube retaining that too long without parting with a lion’s share of the revenue. All it takes is one credible competing platform to YouTube and the market will work its magic.

Long live the king!

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11 Responses to YouTube vs Viacom: The Return of the King

  1. Ram Medury says:

    I disagree with Calcanis claims “YouTube is a silly little business that one can set up in a week”. YouTube built an extremely easy to use platform that fared extremely well compared to Google’s competing Google Video. Second they built a platform that scaled to the planet. [Last year I tried to post a short video to GV and YT and the experience with the latter was far superior].These two differentiators led to the users swarming around their platform bringing in the power of the network. And the network gave them that terrific valuation.

    Quote from a Q&A on Guy Kawasaki’s blog

    #Question: Why did YouTube succeed over Google Video?

    Answer: We suspect the primary reason is something you’re pretty familiar with: entrepreneurial focus. YouTube’s mission was itself. Combine that with a bucket of venture capital to pay bandwidth bills, and YouTube had tremendous advantage. The Google Video product team probably had to navigate the political minefields of a big company with multiple products.

    Second, YouTube won because of a vitally important theme: It democratized data. YouTube made user data transparent while Google Video did not. YouTube exposed data like numbers of views, comments, referrers, as well as most popular referrers, most popular videos, most popular channels, etc. That data helps YouTubers gauge their own popularity and allows the larger community to measure relative popularity, too. Google did none of that out the gate. It democratized data using a piecemeal approach, and it didn’t set any standards along the way. YouTube set all of the standards.

    The third reason was a great user interface. Simple, intuitive and elegant. With apologies to Google, the UI for its video product was clunky, confusing, and inelegant.

    On the revnue sharing argument, an interesting aside here is the Indian mobile industry where the smaller content creators get a tiny share of revenues relative to the platform owners (large mobile telephone companies). Rajesh Jain notes:

    The most important challenge that VAS providers in India face is the revenue sharing ratio in India. Unlike China, Indian mobile operators tend to keep a lion�s share of the revenues accruing from the user. There are also some issues with lack of transparency. From the operator�s perspective, they are making the investments in the network and customer acquisition, and therefore they believe they are entitled to a significant portion of the user payments. This is a debate that is likely to go on for some time.

    What you write very well points to the chinks in YouTube’s armour. But in today’s world when Steve Jobs is arguing about making music free to download, one wonders where the balance of power will eventually lie. With the platform creators or the content creators or both.

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  2. john says:

    Its not just youtube whose traffic is surging. Many of the video content websites have experienced an upswing. It’s interesting to read that Youtube’s early february traffic was greater than the combined traffic of all the network websites.

    Youtube clones like http://www.dailymotion.com are also benefiting from the increased attention paid to these type sites. Interestingly there are even youtube-type free porn videos sites that have popped up to take advantage of this phenomenon.

    We can probably expect the big network websites to offer even more vidoes to try to compete in the future.

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  3. Siddharth says:

    Both, the Platform as well as the Content, are critical to revenue. Only the equation between Investment and Returns has different parameters now. This change is primariliy supported by the emerging Technologies. e.g. scalability was earlier a function of infrastructure, capital, staff etc. Now it is a function of technology, which can be built with lesser resources. Since, the entry barrier on platform is reduced, the benchmark for content has to rise. What stops the slabs to come together and build their own market place, challenging YT? It is inertia. It is easier to bundle hundred or thousands of bricks together than to deal with ten slabs. Getting businesses together eliminates hierarchy, and that increases inertia. It shifts the focus from structure to form. The only bias a form has is Excellence. Isn’t that exciting?

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  4. Neo says:

    this one is a gud conversation.

    look forward to the next series

    Like

  5. Anuradha says:

    I guess the content and platform both need to be balanced as these players go ahead. There will be cycles of content and platform requiring more focus. The key to survival will be constantly innovating and bringing something new for the users, as both the content and the platform are easily replicable.

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  6. Senthil says:

    It will be a fallacy to determine whether content is the king or not just by one single parameter – market capitalization. Here are something’s to consider. My feedback is focused more on the text side of publishing.

    1. The new age media companies have created a general market place for content and by building a new business model have enlarged the playing field. They have not replaced any of the content companies so far.
    2. Publishing is a very niche segment and can be broadly broken in to retail, professional and the new age media companies. If you segment it further, the professional publishing can be further broken in to say legal, science, IT services, etc. It gets more niche and with very few players focusing on a industry vertical. On the professional publishing space, for instance, where the likes off Reed Elsevier, Thomson play, the new age media companies have had minimal impact. Why – It’s because of the rich proprietary content that they have accumulated and their continued focus on this front. It’s not to say Google cannot play in this space, but its needs a huge vertical segment focus and investment, which is not its current business model.
    3. On the retail publishing space (newspapers and magazines), the biggest conundrum very few companies have successfully broken so far, is how to make readers pay for the regular content. This is the place where the new age media companies are hurting the current players, primarily because the readers are not looking for the quality, in-depth analysis, accuracy or authenticity of the content. Some Indian publishers have been more daring in this space – Case in point – India today magazine and a tamil magazine group Vikatan (vikatan.com). In case of India today, if you have print subscription, you get online access. In case of Vikatan, you pay for online access only. Both of them are enjoying reasonable success in getting their online readers to pay for the content. They started charging for online access a long time ago. It will be interesting to get your thoughts on why a select few been successful in this.

    If the publishing companies can create enough value and uniqueness in their content offerings for customers to pay through a transactional or subscription model, new age media comapnies can only partner with these companies as seen by some recent announcements. Retail publishing for most part has not been to solve this issue. Bottom line, content is the king!

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  7. Sudhi says:

    I agree with Sidharth that both platform and content are key for revenue.The VAS segment in the mobile space has few organised players in India.These companies tie up with content providers in various areas, largely Bollywood for India.The revenues generated largely depends on the revenue sharing models adapted.Some companies that operate in the Multi modal space,ie, voice,sms and WAP have been able to garner a larger chunk of the market space vis-a-vis traditional SMS or WAP companies.In a large sense these companies would be potential yahoos in the mobile space!

    Like

  8. Saumitri says:

    Dunno why it takes people a lot of thinking to realise the simple truth that as long as you can design a great user experience (UI design, scalability, engagement, desire) you can beat any competition.

    As a user experience design guy its just a simple truth for me. Business is not about data and money – it never was – it is always about people. And as long as you can satisfy and infact take people to their desires, you have business.

    Like

  9. A says:

    Good conversation, sure. But as far as the 3 billion poor people and melting icecaps in the world are concerned, neither google video nor youtube mean a thing! Wake up techies and captialists. Spend your energies on solving real probs, not writing lengthy blogs.

    Sorry am being a bit harsh, just that the discussion got too analytical (in a very desi way) for me, on too fancy a topic!

    Like

  10. B says:

    A, what are you doing to solve the problems of 3 billion poor people? First let us know that.

    Just because there are 3 billion poor people doesn’t mean that all of us spend energies directly in running a humanitarian aid programme. Capitalism may have its faults, but then if you have your senses in place it provides opportunities to create wealth.

    If you are a socialist, then socialism has not yet been successful anywhere except create miserable revolutions and stagnant economies, and it will not help your 3 billion people anywhere.

    So don’t expect everyone to do charity. Get up and start working…don’t expect alms as a beggar.

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  11. Shankar says:

    We all expected this fight to happen, and it became official on March 13th. Both Viacom and Google are giants, but only the latter has stood up for its users so far.

    Do you have any facts or views to add? Write a line or share a detailed analysis- both will help. Now’s the time, and here’s the place: http://viatube.blogspot.com

    Like

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