Net Gains: Video’s New Equation

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Evan and Gareth thought they were in dreamland. They were told to pick up girls. As many as they could. And they’d get paid for the effort — $25,000 total.

Yes, Evan and Gareth are in a dreamland. They live online, in a video diary produced by the Heavy.com (www.heavy.com) Web site for a client, Unilever, makers of everything from Ben & Jerry’s ice cream to Dove soap.

In this case, Unilever promoted its Axe body spray. And it didn’t just offer $25 grand in play money to two recent college grads. In May — months before Apple Computer Inc. and The Walt Disney Co. drew headlines for their deal to offer ABC’s Desperate Housewives to iPod owners — Heavy.com allowed visitors to its site to download Evan and Gareth episodes to Sony PlayStation Portable game machines, along with a game called “Mojo Master.’’ In it, players are encouraged to seduce 3D women.

It’s the digital equivalent of stereo vision — and head-on commercialism. In the first week the game was available, 150,000 copies were pulled off the Web. And the Unilever deal exemplifies why Heavy.com — which is not a TV channel or a system operator or a communications-service provider — will post $10 million in revenue this year.

Heavy.com has even been approached by more than one major cable operator — Carson is not naming names — about turning his video service into a 24-hour cable channel.

But he has declined all offers, maintaining that delivering programming — on demand — via the Internet is a superior strategy. The speed of viewers’ Internet connections are only getting faster. And he doesn’t have to pay anyone to get his “network” carried, as might be the case with traditional cable or satellite distribution.

“In this day and age, to actually start a digital-cable channel seems almost futile,” said Carson. He cited the $70 million that it took former Vice President Al Gore and his partners last year to acquire Newsworld International, which gave Gore enough cable homes — about 20 million — to effectively relaunch the channel as Current TV in August.

With media buyers shifting a large chunk of advertising dollars from television to the Internet, Heavy.com is just one small player looking to grab a slice of the pie. Zenith Optimedia projects that Internet ad-sales will generate $9.5 billion in 2005, up from $8.7 billion last year. National cable networks are expected to post $12.5 billion in ad revenue in 2005, compared to a projected $17.9 billion for broadcast networks, according to Zenith Optimedia.

Those looking to use the Internet as a basis for becoming a network, über-network or switching post for ever-escalating amounts of always-at-hand video content include everyone from independent producers armed with little more than $300 digital camcorders and laptop computers to multimillion-dollar Web content organizers and creators such as Yahoo! Inc., Microsoft Corp., America Online and Google.

Traditional media companies are also getting into the act. Time Warner Inc. is licensing video clips from Cable News Network to the Web portals of America Online (which Time Warner also owns) and Yahoo! Viacom Inc. is distributing music videos and news programming through the ad-supported MTV Overdrive Web site. And Time Warner is reportedly interested in selling stakes in America Online to cable giant Comcast and search engine Google (see page 6).

While some forms of video have been available on the Internet since the mid-1990s, when Mark Cuban’s Audio.net morphed into Broadcast.com, delivering video over the Net has never become a really big business. Bandwidth constraints have kept video from occupying anything but small windows on computer screens. Even then, the images can be shaky.

But there may soon be a business in delivering video to homes worldwide, over the Net. Here’s why a tipping point may be at hand:

  • The number of U.S. homes with access to high-speed Internet services broke 35 million in the first quarter, according to Leichtman Research Group. At speeds of 1 million bits of data per second — which can be reached by both cable and digital phone-line services — viewers can play movies back on a 25-inch screen at near-broadcast TV quality, according to Interactive Media Strategies of Arlington, Texas.
  • Barriers to entry are falling for content producers. Any would-be producer with a digital camcorder and a laptop with editing software — total cost: less than $3,000 — can produce video. And, like storing e-mail, companies such as Google are giving Web surfers the ability to post an unlimited amount of video on the Internet for free.
  • Content creators don’t also have to create sales and distribution teams. New one-stop-shop firms such as Brightcove offer both big media companies and individual producers ad-sales and content syndication services, in exchange for a cut of the advertising and subscription revenue generated by the suppliers of digital video programs.
  • More media buyers are buying ads on these video Web sites, and advertisers, like Unilever, are backing the creation of programs that integrate their products into the plot. Because the clips are in digits, advertisers can see — as it happens — exactly how many people are watching the videos that contain their goods or services. And they can track when they see them.

CATCHING A VIRUS

Even though some video Web sites such as iFILM (www.ifilm.com), which agreed last Thursday to be bought by MTV Networks for $49 million, and Big-Boys.com have taken advantage of viral marketing to reach a wide audience — Web surfers send links to funny videos from the sites to friends — that does not mean the smaller sites, as they proliferate, can easily attract viewer attention through the Internet.

“I think it’s very, very difficult for anybody that’s an independent or standalone entity to have anything break through or establish itself outside of a traditional, large organization, using its reach to market things,” said former E! Entertainment Television and Liberty Digital CEO Jarl Mohn.

Not every digital video is going to be on par with The Sopranos or The West Wing at their peak, either. Much of the Web content is going to be created by Web users.

Carson said half of Heavy.com’s content is generated from submissions from Web surfers, such as parody music videos that run on Heavy’s “Empty-Vee” channel. Heavy.com doesn’t pay anything for first-time submissions, but pays $250 to $500 per video on average to individuals who supply repeat videos that the site uses, he noted.

Executives at Current TV, which operates a channel that reaches 20 million homes, said about 30% of the video content on its TV network comes from individuals that produce and submit their own videos. CEO Joel Hyatt — the founder of Hyatt Legal Services — said Current TV originally expected that just 3% of its content would come from individual producers, who receive up to $1,000 for their three- to five-minute videos.

A decade ago, video on the Net did not take off, because data could not be transferred quickly enough to home-computer users and due to the high cost of storing video on Web servers .

But, this year, Google removed the storage barrier. The Mountain View, Calif.-based digital-information organizer began accepting an unlimited amount of video from both individual content producers and large media companies for its Google Video service. Now, Web users can browse thousands of video clips there, ranging in length from a few seconds to more than an hour in length on such topics cliff jumping, random home videos or appeals from UNICEF for humanitarian aid funds for Ethiopia.

Separately, Cambridge, Mass.-based Brightcove — in its role as a distributor of content — is preparing to launch a new service next month in which it will store, distribute and sell digital video files, in addition to selling ads for their producers.

Brightcove, backed since March with $5.5 million in funding from venture capital firms General Catalyst Partners and Accel Partners, has built a data center in Los Angeles which CEO Jeremy Allaire said can expand “to really any level.”

That allows both established media companies and individuals who are just beginning to create video programs to reach viewers via the Internet without investing in their own sales and distribution teams, he said.

The company’s customers include Oxygen Media, which has scaled back its Internet operations and cut employees in recent years, as well as Viacom Inc. and A&E Television Networks. Brightcove also works with individual producers and smaller production companies such as Automotive Lifestyles Inc., which has supplied programs to networks such as Discovery Channel and National Geographic Channel, as well as Dan Myrick, who produced The Blair Witch Project on a shoestring budget with camcorders.

“We’ll attempt to work with anyone,” said Allaire.

Beyond distributing content to search engines or online video services, the company is also offering to archive videos for traditional media companies such as Viacom and A&E Network, for resale to Web sites that are looking for video content. In effect, Brightcove could be to videos what The Bettman Archive, owned by Bill Gates’s privately-held Corbis, is for still images.

Allaire said his company recently added a few former cable network ad-sales executives to its staff of 35, but he declined to name them or discuss which companies they worked for previously.

THE BIG FOUR

The video content available on major Web sites Yahoo.com, AOL.com, MSN.com and Google.com varies greatly. AOL’s video library includes “Weird and Wacky” videos from the Associated Press and Reuters, including a segment on a cricket spitting contest, along with movie trailers and previews for traditional TV shows like CBS’s The Amazing Race.

Some AOL content, such as video from the swimsuit edition of Time Warner Inc. sister magazine Sports Illustrated, is available only to AOL subscribers. But executive vice president Jim Bankoff said the company will look in the future to offer most of its video content to Web surfers for free.

“Right now our focus is certainly advertising-supported content,” Bankoff said.

AOL generated $320 million in ad revenue in the second quarter.

AOL may be the Internet version of a programming network. But to get there, it’s also trying to piggyback on the success of established programmers, Bankoff said.

“We really do want to embrace brands that are out there, and we have a business model and a consumer model that’s about partnering with best-of-breed brands — CNN, CBS, and partnerships with most of the major media outlets out there,” he said.

But the amount of programming that is broadcast-quality video is meager. And broadcast networks themselves are just trying out the new Internet networks, to see if they can extend the viewership of their programs.

Earlier this month, Google ran the premiere episode of UPN’s Everybody Hates Chris on Google Video for four days. UPN had hoped the Google promotion would drive more viewers to the second episode Oct. 6, but 6 million viewers watched the second show, down from 7.8 million for the premiere.

Then again, UPN faced competition from the premieres of ABC’s Alias and The WB’s Smallville the night the second episode of Everybody Hates Chris ran.

While Google Video relies on automated filters to block adult content, users may be surprised at what they run across on the site. Recently, the first random video offered on Google Video was a home video of a cock fight in Puerto Rico, in which one rooster was bloodied.

Google executives said the company wants to amass a huge content library of short and long-form programming from independent content producers and large media companies.

“Our goal with video is to make as much video content accessible and useful to the world,” said Google Video senior product manager Peter Chane. “We have videos uploaded to us everyday, and we have videos from individuals, from smaller organizations and fairly large organizations like UNICEF. Our policy is that if you do own the rights to your content, including the audio and video, you can upload it to us and we will give you free distribution and free hosting.”

Google doesn’t yet pay content producers for their video segments, but Chane said the company is looking at ways for producers to make money from those assets, including subscriptions, ads and sponsorships.

MSN.com contains video content mostly from partners such as MSNBC and Fox Sports, while Yahoo! is beginning to add original programming, including video, text and audio reports on hot spots around the world, from itinerant war correspondent Kevin Sites.

The company also has deals with CNN, ABC News, the Associated Press and National Public Radio to supply videos for its news section.

BYPASS

Some big media companies may be bypassing cable video-on-demand platforms to distribute content directly to viewers via the Internet, which offers them a wider audience. Apple and Disney are first out of the gate, with plans to charge $1.99 for single episodes of ABC’s Lost and Desperate Housewives to consumers with new video-enabled iPods (see page 4).

And popular shows from some broadcast and cable shows are already being pirated by Web sites. For example, a Google Video search on “Adult Swim” leads to an 11-minute segment from the Cartoon Network spin-off that can be found on a blog at MySpace.com (myspace.com/jimmymitchell).

A spokesperson at Cartoon parent Turner Broadcasting System Inc. said the Adult Swim clip’s appearance on the blog constitutes piracy, but declined further comment. Google spokeswoman Sonya Boralv noted in a prepared statement that Google does a “preliminary review” of uploaded videos and does its best to avoid videos that contain adult content or violate copyrights, but said the system is “not bulletproof.”

REFRAGMENTATION

The emergence of cable TV led to viewer fragmentation for ABC, CBS and NBC in the 1980s, and the splintering continued to occur after digital-cable networks rolled out in the late 1990s. With thousands of Web sites offering Web surfers video, further viewer dispersion will likely occur.

But Turner vice president of business development Bill Stratton said he believes Turner’s broad reach and brands, such as CNN and Cartoon Network, will help it compete for viewers that begin to rely on Web sites for video programs.

“I think we’re at the very beginning stages of us programming to a consumer on a multiple-platform basis, and I think the true brands and the creative energy in companies like ours, that’s a great opportunity,” Stratton said.

As a result, individual producers may be able to reach Web surfers through the television, with the rollout of digital set-top boxes containing modems, video recorders and video burners.

Most cable operators are constrained by the amount of 6-Megahertz channels that they can squeeze into a 750-Mhz or 850-Mhz pipe. The amount of channels varies, depending on how an operator breaks down a lineup into analog, digital and high-definition channels.

But new Internet-protocol television platforms such as Verizon’s FiOS TV could allow pay TV providers to offer an essentially unlimited amount of TV content, since they simply serve up a program when a customer asks for it, rather than transmitting every channel and program to all subscribers.

Microsoft TV director of marketing Ed Graczyk said IPTV technology stuffs packets of different types of content into the same digital pipes. That allows suppliers like Verizon and other telephone companies to offer viewers more niche programming, such as high-school sporting events, he added.

“In this kind of world, IPTV enables that edge type of programming. It’s not bandwidth-constrained,” Graczyk said.

THE EDGE OF NIGHT — AND DAY

Still, cable, satellite and broadcast TV channels are not dying.

Current TV uses its Web site (www.current.tv) to market its cable-TV channel and encourages viewers to upload their own videos to it.

But the company relies on ad revenue generated by the 20 million cable and satellite viewers of its TV channel to actually be able to operate its business.

The company has incorporated some traditional Internet features on its shows, including a bar on the bottom of the TV screen that indicates how much time is left in a segment. This is similar to the interface Web users see on Microsoft’s Windows Media Player. Sony Corp. sponsors the bar, with a small logo.

Current TV chairman Gore said TV distribution remains crucial for the company.

“The Internet is playing a growing role, but for the foreseeable future, the relative impact of television over cable and satellite compared to television over the Internet is still weighted tremendously in favor of cable and satellite platforms,” Gore said. “When that tipping point comes, we live right on that edge.”

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