Drama 2.0’s Online Video Predictions

The following post was contributed by Drama 2.0. I have enjoyed reading his or her comments (along with many others) across the various tech blogs. Drama 2.0 has just started his/her own blog and is very much worth a RSS subscription. I told Drama 2.0 that if the name was not revealed to me, I would send some goombas over there, but no go. So for now, the mystery of who is behind the name Drama 2.0 remains a mystery.

There's arguably no hotter sector in Web 2.0 than online video. Spurred on by Google's blockbuster $1.65 billion acquisition of YouTube, entrepreneurs have flocked into the market and venture capitalists have had no problem funding them. There's no doubt in my mind that online video is and will continue to be the most important part of the surging Internet consumer market in the near future, however I do believe that the froth has reached a level where it's time to step back and take a hard look at where the market is and where it's going to be.With that, I'm going to go out on a limb here and make some online video predictions.

The Shakeout Occurs

Venture capitalists have invested a staggering amount in online video startups. The rationale is obvious: online video is one of the hottest sectors in the revitalized consumer Internet space so an online video startup is almost a portfolio necessity. Take a look at the portfolio of any top-tier venture capital firm and one is likely to find one or more of these startups, many of which mainstream consumers have probably never heard of.

In 2006, YouTube, arguably the hottest consumer Internet property, reportedly generated only $15 million in revenues. These revenue numbers should be cause for concern for investors. If you are an investor who has put even a small amount into a startup in the space, you might want to ask "If YouTube, the most popular online video service, only generated $15 million revenues, is it possible that we have overestimated the size of the market and the amount of monetization that is possible?" The only logical answer is "yes!"

Clearly, the market is still fairly immature and business models are still being experimented with, but the truth is that there are far too many online video startups that lack significant differentiation and smaller players will not be able to survive. The YouTube revenue numbers hint that these players will not generate anywhere near what their investors most likely projected, and with the number of startups greatly exceeding the number of potential acquirers, the future for many of these startups does not look promising.

Therefore, it's inevitable that a shakeout will occur, probably within the next year. Of course, I'm not the only one who has predicted this shakeout (Om Malik predicted one last June in Business 2.0), but I will go so far as to say that some will end up being surprised at how willing many venture capitalists will be to prop up online video investments which any rational person would realize have failed. This will make the shakeout more painful or amusing to watch, depending on who you are.

Professional Content Wins Out

In general, there are two forms of video content: professional and user-generated. There are some who argue that user-generated content is displacing professional content. I touch on this briefly in my blog post "Will Silicon Valley Own Hollywood?". I believe that user-generated content has been overhyped. The sheer volume of copyrighted professional content on services like YouTube seems to indicate that professional content has never been in greater demand.

This does not fit in with the argument that because anybody can now be a content producer, professional content is a thing of the past. If it was, why are people sharing and consuming large volumes of it online? What I do think is clear is that consumers are demanding more flexibility in how they can access the professional content that they love. Being able to time-shift content, for instance, is a must for modern consumers and major content producers are increasingly accommodating consumer demands.

What does this all mean? In my opinion, it means services that focus on professional content will emerge as the most dominant players in the online video space. Joost is the obvious bet at the current time, as it has significant backing and content licensing deals. Whether Joost fulfills its promise and becomes the dominant player remains to be seen, but I'm a firm believer that the mainstream winners in the space will be services able to acquire the best and largest portfolio of popular professional content.

Services which either can't acquire such content or which decide to focus on user-generated content will, at best, most likely be relegated to niche markets. At the end of the day, phrases like "content is king" and "quality over quantity" will be back in vogue.

Hollywood Continues to Leverage New Media as a Recruiting Tool

Hollywood is increasingly leveraging online video services like YouTube to locate and recruit talent. While I personally find the vast majority of user-generated content to be utterly horrific (as Simon Cowell might put it), there are talented people out there who are waiting to be discovered. A growing number of them have been signed by Hollywood.

Some might argue that as online video business models emerge, it will be possible for independent producers of content to stay online and earn a living without having to "sell out," but I still believe that the appeal of Hollywood cannot be underestimated. Why? There are a number of reasons:

1. Success in Hollywood can lead to mind-boggling fame and fortune. Droves of people with big dreams arrive in Hollywood every year looking for their opportunity to make it. Even for content producers who don't desire this, the ability to earn a consistent living from the work they're passionate about is appealing.

2. Hollywood has substantial resources that most independent content producers would never dream of having. Access to these resources is a compelling value proposition when Hollywood comes knocking.

3. While many people claim that "old media" mediums like television and cable are dead, a reasonable person cannot discount the fact that because of their exclusive, closed nature, these mediums are the ultimate pedestal on which a content producer can have his or her work displayed. Anybody can upload his or her video clip to YouTube; not every person can have their work displayed on a major television network.

The bottom line is that while a crop of talented content producers will find an audience and possible living on the Internet, online services like YouTube will serve as the minor leagues for "old media" mediums like television and cable, not as their replacements.

Viacom Wins, Even If it Loses

I personally believe that, barring a settlement, Viacom will win its lawsuit against Google. Without going into the technical details of why I think Viacom has a strong case, I also believe that even if I'm wrong and Viacom loses a court ruling, media companies will lobby Congress to change the law, arguing that the 1998 Digital Millennium Copyright Act (DMCA) never anticipated services like YouTube, which takes advantage of advances in technology and wider access to broadband Internet access to make sharing previously unfathomable volumes of copyrighted material so easy.

If YouTube, for instance, is found to qualify for the Safe Harbor provisions of the DMCA, media companies will have a valid argument that the burdens placed on their businesses to police third-party services would be unfair, unreasonable and more logistically challenging than forcing those services to take an active role in copyright enforcement. Given the significant lobbying presence old media has in Washington, I think these arguments will fall on sympathetic ears.