Signs of Healthy Competition in the Online Video Market

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A March 10 article in Variety by Todd Spangler discusses recent competitive trends in the sector of the online video market that has long been dominated by Google’s YouTube platform.  Its main theme is summed up by a quote from Peter Csathy, CEO of investment and consulting firm Manatt Digital Media, who sees “a critical mass of threats that represent real challenges to YouTube’s complete dominance for the first time.”

As one would expect in a media industry trade publication, Spangler’s long and informative piece approaches the subject mainly from a “who’s winning and who’s losing and why” perspective.

If there could be said to be a poster boy for YouTube, it may well be Freddie Wong. Known online as FreddieW, the 29-year-old is the creator of “Video Game High School,” a comedic sci-fi series…But when the time came for Wong’s digital studio, RocketJump, to shoot his next project, he says YouTube didn’t exactly jump at the idea…Unsatisfied with YouTube’s offer, RocketJump and Lionsgate Television steered the project to Hulu, where the untitled eight-episode series will be available exclusively…

Hulu is not the only company complicating life for YouTube these days. It’s bad enough that social-media giants like Facebook, Twitter and Snapchat have upped efforts to bring video to their services — and plan to more aggressively compete with YouTube for advertising dollars. But there are also upstarts like Vessel and IAC-owned Vimeo, which, like Hulu, are signing deals with some of YouTube’s homegrown talent, and promising creators bigger bucks for their work in exchange for exclusive rights.

As Spangler notes, YouTube’s competitors are pursuing a range of business models.

Per the well-publicized terms of YouTube’s standard revenue-sharing agreement, content owners typically receive 55% of ad money. Vessel is already offering a 70% ad split to creators, while Vimeo pledges to pay 90% of transaction fees back to partners…

Meanwhile, there’s a separate set of rivals using a subscription business model that aims to lure top talent and producers, skimming the cream off the top of the massive base of more than 1 million YouTube creators who make money on the site…

Moreover, there’s yet another class of YouTube rivals, represented by companies looking to license or fund content for reasons unrelated directly to selling ads or subscriptions. Samsung Electronics, for example, last fall launched Milk Video: a proprietary shortform mobile vid service available only on its Galaxy smartphones and tablets.

Spangler notes that while YouTube, over its ten year history, has grown into a “a multibillion-dollar advertising juggernaut…its profits may be negligible — or nonexistent.”

Last year, the service pulled in about $4 billion of revenue, up from $3 billion in 2013, according to a Wall Street Journal report citing anonymous sources. However, YouTube basically broke even, after accounting for content and infrastructure costs.

The broader significance of the industry dynamics reviewed by Spangler from a more academic and policy-oriented perspective is that there appears to be a strongly competitive and innovative ecosystem emerging in the online video marketplace.

Though Google’s YouTube remains the 500 lb. gorilla in key respects, the relative ease of market entry in the online video platform arena (for example, as compared to the wireline access market) is spurring competition and innovation that are pushing Google to continue investing and innovating rather than channeling cash flow into dividends and stock buybacks.

Value creation vs. value extraction

The latter tendency (channeling profits into dividends and buybacks rather than investment and innovation) was the focus of an article by William Lazonick, Professor and Director of the University of Massachusetts Center for Industrial Competitiveness, and President of The Academic-Industry Research Network.  The article, published in the September 2014 issue of the Harvard Business Review was entitled “Profits without Prosperity” and referred to this corporate trend as a shift “from value creation to value extraction.”

This trend was also the focus of an Oct. 6, 2014 piece at BloombergBusiness entitled S&P 500 Companies Spend Almost All Profits on Buybacks.  It noted that:

CEOs have increased the proportion of cash flow allocated to stock buybacks to more than 30 percent, almost double where it was in 2002, data from Barclays show. During the same period, the portion used for capital spending has fallen to about 40 percent from more than 50 percent.

The reluctance to raise capital investment has left companies with the oldest plants and equipment in almost 60 years. The average age of fixed assets reached 22 years in 2013, the highest level since 1956, according to annual data compiled by the Commerce Department.

This makes me wonder whether the rate of innovation, investment and value creation in other sectors of our economy (including the wireline access market) could benefit from some of the competitive pressures we’re seeing in the online video sector.  I invite readers to share their perspectives on this question, as well as the broader trends and issues to which it is related.

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