“I thought the analysis of content vs other video companies very convincing. But I’m curious: the content game hasn’t worked out so well for AOL and Yahoo. Audiences are fickle. Are you predicting a rosier future?” – reader comment in Is Tech a Zero-Sum Game?.
Infrastructure, Platforms & Content
Today, the Web’s infrastructure is built, and we’re filling the pipes with content — mainly free, ad-supported content.
It might seem like the real opportunities are in user-generated content and aggregation, but anyone who’s worked in those fields recognize their limitations: Simply put, marketers want to advertise alongside professional content. Tim Armstrong left Google (the mother of all aggregators) and joined AOL to remake it into the Time of the 21st century. He didn’t double down on Bebo.
Content is marketing; Marketing as content
Content – video in particular – may be promotional or commercial, in either case it’s a means to an end.
Traditional Media Companies (TMCs) need to make their content commercial; new media producers are leveraging their content as promotional, sometimes giving it away to build value.
However, when it comes to making money directly from commercial content, the genie is out of the bottle, according to Seth Godin: “Who said you have a right to cash money from writing? Poets don’t get paid (often), but there’s no poetry shortage. The future is going to be filled with amateurs, and the truly talented and persistent will make a great living. But the days of journeyman writers who make a good living by the word — over.”
With 60 hours of content uploaded every 60 seconds on YouTube, producers face three challenges:
- 25% of views come in the first 4 days;
- Viewers only watch the first 30-60 seconds;
- The average video generates 500 views throughout its lifetime.
It’s no longer enough to be a good storyteller; you have to cut through the clutter and make the numbers work.
The Economics of Content
“Network television costs $50,000 – 100,000 per minute to produce. Reality shows can be cheaper, with the lowest-end costing $6,000 – 8,000 per minute”, according to GRP venture capitalist (and occasional TechCrunch contributor) Mark Suster. New media producers leverage deflationary economics to produce shows for $500 – $1,000 per minute, on average.
My company does it for $100/minute. Once you cut costs down, the real challenge is revenue.
Fred Wilson’s piece on The Future of Media suggested that the right approach is to:
1 – Microchunk it - Reduce the content to its simplest form.
2 – Free it - Put it out there without walls around it or strings on it.
3 – Syndicate it – Let anyone take it and run with it.
4 – Monetize it - Put the monetization and tracking systems into the microchunk.
“But content doesn’t scale!”
That’s the common critique of content companies from the tech industries. The truth is, bad content scales, good content doesn’t scale – the scale comes from distribution and monetization. Demand Media’s “content farm” model scaled but it has since moved upstream to win over Madison Avenue, realizing that unless your clients are on Wall Street or Sand Hill Road, quality trumps quantity.
Profit is a Short-Term Move; Value is a Long-Term Focus
Content was an art. Today it’s a science as well. It will always be about Influence and Authority.
Bloomberg will lose $20 million on BusinessWeek, Washington Post sold Newsweek for $1 (plus the assumption of debt). That doesn’t imply that there’s no money in content, it’s a reminder that disruptive innovation can come from new content creators who can be more disruptive to TMCs than any technology ever will. TechCrunch, for example, generated less revenue than BusinessWeek and Newsweek combined but sold for more.
Revenues come and go, after all. However, managers typically don’t care that much about long-term value creation because their compensation is tied to short-term profits.
Goodwill is the Driver of ROI
The best storytellers realize content is about Authority, Influence and building a brand. VCs who made their fortune on software and semiconductors can’t wrap their minds around content (“it’s a hits business”). But despite the 1% annualized return that VCs have generated, they will continue to invest in the latest mouse trap and shun content, despite what the experts say.
The Worst-Kept Secret in the Publishing Business
The Web doesn’t just shrink markets, it also kills sacred cows, in particular Warren Buffett’s argument that “the most important news in the newspaper are the ads”. Indeed, Google outsold U.S. newspapers $37.9 billion to $34 billion in 2011. I know, those are global Google revenues — give it a couple of years.
So yes, content may be king, but it’s the throne that retains the value, even if the throne was seized under dubious circumstances, according to an anonymous publisher: “Many of the big wins in digital content have gotten big by stealing other people’s content, and, once they get big enough, they build an original content layer (…) You can make money with quality content on digital. The challenge is it requires expertise in more than just content development.”
Of course, once you build your audience, you realize you don’t need to create content; licensing it is a more profitable short-term bet, but it creates less long-term value. Similarly, ad networks have successfully intermediated between advertisers and publishers, but commoditized themselves in the process.
Why Content Has Stumbled
The TMCs actually get it: online remains small, and the faster they embrace it, they faster they die. The issue is how management has a short-term outlook to maximize profits, instead of being focused on long-term value creation.
The irony is that over time, technology plays come and go: One winner emerges from within a given category and largely kills off its competitors. The real threat to content creators may in fact be emerging content companies with no traditional business to defend. After all, journalism is stronger than ever while newspapers are dying.
But TMCs that have their own content catalogs, producers and brands may not see much value in emerging companies, which remain small until they become category killers, just adding to the tragic fate reserved for most.
While we live in a world of “good enough”, ultimately the company that can i) create the best content at ii) the lowest cost possible will create most value over time.
- AOL is the owner of TechCrunch
- I am not an employee of AOL
- AOL acquired 5Min
- My company WatchMojo has a distribution deal with AOL/5Min and YouTube.
In last week’s Get Rich or Die Trying article, I mentioned that “tech is a zero-sum, winner takes all game”. A reader objected, arguing: “I think that may be an inappropriate use of the term ‘zero-sum’ – one company’s increase in profits (or revenue) does not mean a competitor must see declining profits (or revenue)”.
History suggests that Jack Welch’s philosophy that “a company should be #1 or #2 in a particular industry or else leave it completely” is even more applicable to the tech industry, where the top player can build a sustainable and ever-growing business but everyone else is practically better off getting out.
Examples of market dominance by the #1 that come to mind include:
- Google in search,
- Facebook in social networking,
- Groupon in daily deals, and
- Amazon in e-Commerce.
This doesn’t mean that the:
- #1 player isn’t susceptible to the Innovator’s Dilemma, or
- #2 competitor can’t build a massive business.
Indeed, Microsoft’s Bing or LivingSocial are meaningful #2’s in search and daily deals respectively, but clearly the network effects and economies of scale that come with market share dominance make it nearly impossible for challengers to remain relevant over-time. Monopolies are nothing new and come and go: Google is the evolution of Standard Oil, AT&T and Microsoft in search, you can argue that Apple is next in line in mobile.
What is Zero-Sum Game Anyway?
First, the definition:
“In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s). If the total gains of the participants are added up, and the total losses are subtracted, they will sum to zero.”
Indeed, while the tech sector is huge, within each segment, you see a zero-sum game from each individual purchasing decision out. For example,
- a consumer will buy a Mac or PC; an iPhone or Android device, etc.
- a business will adopt a solution from Oracle or Siebel, for example,
But it’s rare for a consumer to buy or a company to adopt both.
If you repeat this binary-like decision process throughout the industry and economy, you get a zero-sum situation where one competitor’s gains come at the expense of others’ in the industry: Apple’s iPhone sales obviously put a dent in the Blackberry; and its iPads are evidently going to affect PC sales – no matter how much some want to deny it.
It’s Like This in Most Industries, The Only Difference Is Severity
I run an online video content company and categorize video companies into four quadrants:
- Content (creators),
- Distribution (search, distribution),
- Technology (content management systems, content delivery networks), and
- Advertising (ad networks, servers)
Clearly there’s a lot of overlap and how those four interact with one another merits an article in of itself (or hundreds). While technology (with a lower case) enables Content companies, it increasingly underpins Distribution, Technology and Advertising companies.
As such, I see this zero-sum phenomenon every day with the latter three. When TechCrunch’s parent AOL bought 5Min for example, it was a matter of time before AOL stopped licensing Brightcove’s Online Video Platform and instead use 5Min’s player. Seeing how AOL and 5Min were my distribution partners, I kept that thought to myself, but it was a matter of time. Today AOL’s main platform for video is indeed 5Min (note: I am not an AOL/5Min employee).
Content Isn’t a Zero-Sum Game: “I’m Your Pusher”
In content, it’s not really like that. ABC, CBS, FOX, NBC all have meaningful franchises. Sure, if you watch FOX on Sunday at 6pm then you may not watch ABC at that time, increasingly with cord-cutting and time shifting that isn’t the case anymore. In fact, content is so not a zero-sum game that a company like Viacom has multiple brands to address that reality.
Indeed, if you want to travel to Barcelona, you won’t watch one video or read an article, you will read/watch many and I’d argue that content consumption – like a drug – just creates more demand.
But if you want to book a ticket to Barcelona, you will either use Travelocity or Expedia, for example.
Place Your Bets
That makes content a less-risky endeavor, and, with digital media and digital distribution reducing the marginal cost of production and distribution, then content has become a better risk-adjusted bet, though arguably not as scalable and certainly not a winner-takes-all gamble.
It will take an entire generation before investors realize this; though some argue that it’s already started. According to media guru Jack Myers, “VC funds are being redirected away from tech and toward content. Technology-based venture opportunities in the media and advertising space have been largely played out. Bottom line, venture capital funds will be shifting from technology to content, context, commerce and research.”
I’m not holding my breath, even though digital content is effectively the new software.
In Tech, Competition Becomes Blurry Over Time
The same way that the Internet has changed content, it has also changed technology. For one, with consumer-focused technology companies being free, advertising-supported businesses, the prevailing asset isn’t necessarily the underlying hardware or software, but rather, the audience.
This is why tech companies are all seemingly fighting one another:
- Facebook vs Google in search and social networking,
- Google vs Apple in mobile,
- Amazon vs Apple in tablets and entertainment,
- Microsoft vs Google in search.
You get the idea: in tech, everyone morphs into everyone’s competitor… and since the main asset – the audience or consumer base – is so fleeting, tech becomes an even riskier bet.
The Four Horsemen
Whereas initially the Web pitted “content vs. tech”, as the Web matures, it becomes “tech vs. tech” with Content becoming Switzerland amongst Distribution, Technology and Advertising companies.
In the real world, there is no perfect example of a zero-sum game – granted. But whereas Jack Welch argued that a business ought to be #1 or #2 or get out, the network effects that the web has unleashed over time force technology (lower case) businesses to either be #1 or get the hell out.