Dan Rayburn - Online Video is a cost center....maybe....

Dan Rayburn from Streaming Media and the Business of Video has a new post that attempts to put into perspective the reality of the online video business for most companies.

" for the vast majority of content owners, online video is a line item cost, not a revenue generator"

While it is absolutely true that many companies who are building ad-supported online video businesses are doing it at a loss today, it is not entirely true, and also, I believe, requires a more nuanced understanding of how media organizations and non-media organizations evaluate their online investments.

First, explicitly for media companies, we are absolutely seeing many companies who are generating positive contribution margins from online video.  These tend to be premium brands who have meaningful aggregated traffic and who have strong existing advertiser relationships because of their existing online and offline ad sales.  These range from music companies, to news companies, to magazine companies to TV networks.  We have seen CPMs remain stable, though down some walking into 2009, but for most of these the cost of production is either low or zero (re-used content), and the continued commoditization in CDN costs combined with the ease of launching these initiatives using online video platform services, has made it reasonably cost-effective.

For 'Torso' or 'Long-Tail' publishers of video, it is an entirely different story, and something that i have recently written about here.

However, I believe whether media companies are generating a net profit from video streams or not misses a larger point and context, which is that most media companies don't think about whether 'Video' is profitable or not, they are looking at the overall value of their online media properties.  Media companies operate their online media properties as holistic P&Ls, and are looking for overall profitability and growth from those overall businesses.  Over the past few years, most media companies have taken approach of investing ahead of revenue -- ie. deficit financing the growth of their properties through increased investment in content/editorial, new end-user features, new technology, etc. -- understanding that like any new media property that there is an investment phase of x$ and y years to get a media business to a certain scale and profitability.  There are well understood financial assumptions about this in any media market -- starting a news paper, a TV network, a cable network, a radio station, a magazine -- all require several years of deficit financing until they reach sufficient scale to extract either repeatable ad sales or subscription dollars.

The salient point here is that to be competitive as an online media property in the broadband era you need to have compelling video content -- it is a cost of doing business.  Having video keeps users in your sites longer, and creates additional opportunities for re-circulating users in a site.  Video has very high pass-along rates relative to text content, so is a strong organic traffic driver.  Video also happens to be the best medium to support brand advertising with the highest CPMs, so it can also be profitable (again, depending on some of the criteria above).

Not every web publisher uses video as effectively as the next -- we see huge variances in the quality of execution with video, ranging from how it is integrated into a site, the kinds of content/editorial focus, their application of video SEO techniques, and the advertising execution with video.  You can find one publisher with identical content (e.g. licensed AP or Reuters video feeds) who is failing to monetize and drive usage, and the identical content with another publisher who is surfacing it in creative ways and executing well on ad sales.

The final point I'd like to make is that for non-media companies, video is, of course, by definition a cost center, typically a cost of marketing, sales or education/training.  But increasingly, organizations and corporations that are embracing online video for marketing and communications will become more focused on the ROI of the use of video, especially in the current economic climate.