Online video market sept 2013

Building An Internet Video Company in 2013 Mark Suster - @msuster (September 2013)

Background 2  2x Entrepreneur (sold 2nd to Salesforce.com)  Partner, Upfront Ventures (large LA-based VC fund)  First investor in Maker Studios (along with Greycroft)  Lead investor in Epoxy.TV  Looking for more investments in video Blog: BothSidesoftheTable Video: http://www.youtube.com/show/thisweekinventurecapital

I’ll cover 5 topics 3  Why the Haters are wrong about YouTube  Why YouTube is wrong about the Haters  Why video is the future of the Internet (& why most investors don’t yet understand this)  What’s an MCN to do?  Future of Video?

There has been a recent chorus of “can you really build a business on YouTube?” Jason Calacanis has written a few very articulate posts. But many are saying it private & in the press.4

The core of the problem starts with the revenue share YouTube takes MCN = multi-channel network, the term given to the group of large YouTube networks aggregating content5 MCN – 55% YouTube – 45% Mobile App Developers – 70% Apple – 30% Vs.

And much of the MCN talent takes 70%+ 6 MCN – 55% YouTube – 45% MCN – 30% Talent – 70+%

So when you really look at it, MCN margin looks like “ad networks” with very similar properties Ad networks typically have 15-17.5% margins on the ads they broker7 YouTube – 45% MCN – 16.5% Talent –38.5%

But MCNs have enormous scale & assets. The best can break out if they: 8  Produce content (not just aggregate)  Build direct customer relationships  Develop O&O business  Have business models that aren’t only ad- based O&O = owned & operated aka your own websites or mobile apps.

You don’t “build a YouTube business.” YouTube is a video distributor. People who make products always have clashed with distributors / channel partners. 9 July 29, 2013

10 Think of YouTube as the Walmart of video

11 If you sold candy bars you could sell at Walmart (at low margins, high volume)

text 12 Or your local specialty shop (fat margins, limited volume)

Walmart is a powerhouse that can command margins. Source: statistic brain (http://www.statisticbrain.com/wal-mart-company-statistics/)13 $34 Billion Sales / Month 4,253 Locations 1,000,000 Customers / Week 19 World Rank if a Country 8% % of All US $ Spent

YouTube is a Powerhouse, too. 14  1 billion monthly uniques (40% of global online pop)  6 billion hours per month  > 150 videos watched / year for every human

YouTube has 63% market share in total videos watched (units) per month 15 Source: Nielsen Top Online Destination Video Sites Data, September 2012

YouTube has 4x the uniques of its nearest competitor in the US 16 Source: Nielsen Top Online Destination Video Sites Data, September 2012

17  4 billion video views / month  260 million subscribers  80% audience 13-34  40% mobile  30 engineers  50% internationa l

18 1. Sell at Walmart: build scale & brand awareness. 2. Fulfill at local retailers or your own shop :  Serve more loyal / ardent customers  Better selection  Niche products  Much higher margins

19 Working with YouTube is No Different But Don’t Confuse Distribution with Your Business Model

YouTube is simply the top end of your profit funnel ARPU = Average revenue per user20 YouTube Affiliates O&O Mobile Apps Registered Customers  Loyal /passionate customers  Higher ARPU  Higher margins  With less volume

21 The Name of the Game is “Margin Expansion” You can’t be stuck in a 16.5% world

1. Drive most ardent fans to highest margin channels. Advertisers will covet these viewers. Note: O&O still has some distribution costs associated with marketing, bandwidth & storage22 YouTube – 45% MCN – 16.5% Talent –38.5% Affiliate – 30%MCN – 31.5% O&O – 15% MCN – 46.5% 60% 20% 20% Operating Margins % Traffic

2. Must produce content & have some formats that are talent independent. Note: This is not saying you shouldn’t be “talent friends” just that you should also consider formats that are less dependent on talent.23 YouTube – 45% MCN – 16.5% Talent –38.5% 50% 30% 20% Operating Margins % Traffic Aggregated Channels – 35.75% Non-Talent Formats – 45% Talent – 19.25% Talent –10%

24 If you’re simply aggregating talent or content you are an ad network (or a talent agency)

Your business business should be able to achieve average profit margins of 50-60%. 25 Distribution – 20% MCN – 60% Talent – 20% Sustainable Operating Margins  Transmedia  Licensing / gaming deals  Internationalization Then layer on even more revenue:

26 I’d stay where the customers are: YouTube. Haters Gonna Hate

5 Topics 27  Why the Haters are wrong about YouTube  Why YouTube is wrong about the Haters  Why video is the future of the Internet (& why most investors don’t yet understand this)  What’s an MCN to do?  Future of Video?

28 YouTube’s strategy seems to be ignore the MCNs (who have no alternatives) YouTube maintaining split is possible due to incredible market power; however, it is unwise Or persuade us how valuable they are by providing us all this great, free technology

29 You can whack us but it just makes us pop up elsewhere faster It’s a classic “Innovator’s Dilemma” situation

30 And anyway if YouTube wants a sustainable ecosystem it needs profitable partners

YouTube unquestionably provides value for producers, much not fully appreciated. CDN = Content distribution network. It moves content to the edges of the Internet to make it faster to consume.31 Storage The YouTube Stack Hosting CDN Tools (ie annotations) Ad Sales Audience Development Infrastructure

32 The strongest competition for YouTube isn’t going to come from the most likely sources: Yahoo!, Microsoft, Facebook, Twitter Or even Hulu, Netflix, HBO

The biggest threat is Amazon, the real online “Walmart” who prices to win. I reckon Amazon is the most serious threat to YouTube and that few people perceive this today.33 Storage The YouTube Stack Hosting CDN Tools (ie annotations) Ad Sales Audience Development Storage Amazon Strong Market Position Hosting CDN Ad Sales Could launch easily & aggressively given consumer relationships Dominates

34 Amazon thrives on “disruptive technology” - Lower prices, lower margin, win market share YouTube could choose to stave off competition by emulating Amazon (AWS) now & take a long view

Amazon is a powerhouse and has already built streaming infrastructure. Note: Nobody ever asked Amazon to cut AWS prices. They did it to engender loyalty & to keep out new competitors. 35 > 30 Million Estimated Kindle Fire Users $5.25 Billion Sales / Month 219 Million Active Users > 35x Price Cuts in AWS $140 Billion Mkt Cap

36 YouTube can ignore the MCNs, but ultimately the competition won’t

Many VCs are convinced that video is a “hits driven” business given historical model 38  High budgets due to scarcity of time slots  Large marketing budget required to build audience  No customer relationship, no customer interaction  Thus hits driven business, with large failure rate Production Distribution  Maximize value of limited “slots” + 8 minutes of ads  No ability to run iterative process  Substitute TV stations for movie theaters & same scarcity exists 8:00 – 8:30 PM 8:30 – 9:00 PM Time Slots

But online is a totally new game. Much more programmable & predictable 39 Production Distribution 99% Traditional TV = $100,000 / minute YouTube Video = $1,000 / minute ∞  With unlimited distribution you can test content cheaply  Content can be evergreen, repackaged, repurposed  Audiences become global (ie Gangnam Style)

40 For the first time in history content producers can build direct relationships with their customers Content businesses feel more like Gilt Groupe than traditional TV

High costs, “star” founders & high failure rates41 Ironically consumer Internet increasingly becoming a hits driven business with its own set of stars

Video Category HH:MM YoY Change Traditional TV 5:11 1% Time-Shifted TV (DVR, VOD) 0:26 10% DVD / Blu-Ray 0:12 -3% Online Video 0:16 54% Mobile Video 0:11 9% People are consuming > 6 hours of video a day. That won’t change. The future of the Internet will be video. Sources: iab/GfK MultiMedia Mentor April 2013, Video from Nielsen Cross Platform June 2013. 42 Average Daily Media Usage (HH:MM) 6:04 6:16 0:55 1:05 0:48 0:48 2:25 2:33

Consumers are obviously increasing video created & shared. Tolerance for “less produced” video increases with youth Sources: YouTube, NPD In-Stat Research Report 2012, Onavo 7/2013 43

1. Technology is critical. You will not win online without it. Either invest millions like Maker, FullScreen, TasteMade or … 45 Use “tools companies” that are emerging

Important tech components (examples) 46  Analytics & conversion tracking to understand what’s working and guide production & audience development  A/B testing everything & every platform: content drop-off rates, link text, thumbnail images, influencers  Audience development tools to build fans, followers & influencers. Gather email addresses, mobile phone numbers, “likes,” twitter followers.  Asset management to tag video and repurpose for future distribution  Content management systems to build out O&O and mobile businesses O&O = owned & operated aka your own websites or mobile apps.

47 Epoxy.TV helps with audience development of individuals who watch a video will watch at least one additional video 48% Creators YouTubers, Brands, Agencies, Networks Epoxy drives follow-on views, organic growth and audience engagement Viewers Watch, share and engage with content on preferred platforms and devices view rates of shares with Epoxy links are over two times the view rate of sharing with a YouTube link 2x view ratefor Epoxy follow-on viewers, on average, over 4 videos are watched at a time 4x exposure

2. Production – Online media companies must have production as well as packaging / programming 48 MCN: 10-30%Talent: 70-90% These margins aren’t sustainable media company margins, they are “talent agency” margins Without some production you’re just a middle man, which often get squeezed.

3. Build Direct Customer Relationships – it is the currency of online power 49 Cookies (for targeting) Email Addresses Social Follows Social Integrations Mobile Application / Push Notification Easier to get More valuable

4. Globalize – no physical distribution limitations so online video businesses can be truly global. Source: YouTube stats, 201350 YouTube Traffic The best MCNs will build truly global operations

5. Create non-ad revenue streams such as licensing, gaming & transmedia packaging Statistic Brain Star Wars Total Franchise Revenue51 70% of Star Wars Franchise Revenue outside of movie sales Many recent examples of licensing successes

5 Topics 52  Why the Haters are wrong about YouTube  Why YouTube is wrong about the Haters  Why video is the future of the Internet (& why most investors don’t yet understand this)  What’s an MCN to do?  The Future of Video

The Future of Video 53  Lower quality  Non-linear storylines  Think video games  Mobile  Templatized  Personalized Who the F knows, but some thoughts …

Thank you Mark Suster - @msuster (September 2013)