Online Exclusives

October 2008

The statistics speak for themselves. While there’s no single source of data to illustrate the growth of Internet video, a quick glance at reports from companies that compile such information reveals staggering growth.

Internet measurement company comScore reported that 142 million people in the U.S.—representing 75 percent of all Internet users—went online last July to watch an average of 80 videos each. That adds up to a total of 11.4 billion videos viewed on the web, with the average viewer spending 235 minutes with such content. The viewing of Internet video in the U.S., says comScore, is growing at an annual rate of 45 percent.

Data from the U.K., with less than a quarter of the population of the U.S., is equally impressive. In June 2008, 27.4 million British Internet users viewed 3.2 billion videos online. The average number of videos per viewer in that territory was a whopping 118, the highest of any country that comScore measures.

Such numbers, naturally, appeal strongly to advertisers. According to Forrester Research, which studies marketing in the technology sector, advertisers spent $471 million in the U.S. on web video in 2007, with that number certain to rise significantly this year, and expected to reach about $7.2 billion by 2012. In fact, many studies predict that within a few years, online advertising will surpass all other forms, including television, radio, newspapers and magazines.

That potential, and the money it will produce, would explain the recent explosion in the creation of online-video websites by both traditional media giants and Internet-only startups. And even though the landscape is still foggy as various players experiment with program genres, lengths, formats and technologies, it’s becoming clear that this new world of Internet content is here not only to stay but perhaps to dominate.

A good case study for the startup group is EQAL, the company behind two of the Internet’s most successful video series, lonelygirl15 and KateModern, which have had over 150 million combined views. EQAL is about to launch its third series, LG15: The Resistance.

Like many online video pioneers, EQAL’s founders did not come from the world of television. Co-founder and CEO Miles Beckett graduated from medical school and studied cosmetic surgery, and co-founder, president and COO Greg Goodfried was an attorney. Their online activities began with Beckett’s idea for a video podcasting service featuring local Los Angeles comedians.

Beckett turned to Goodfried for legal advice in early 2006. The two became friends and soon came up with the idea for lonelygirl15, a series based not on traditional television but on the nascent YouTube culture.

“It didn’t come from having a previous idea for a movie or TV show and trying to stick it online,” says Beckett. “The original idea was that there’s a girl out there on YouTube and she’s posting videoblogs. She seems kind of nice, doesn’t really reveal much about herself, and her parents are strict.”

But as the story unfolds through multiple short daily episodes—or webisodes—it turns out the girl’s parents “belong to a weird religious cult and are preparing her for a creepy ceremony,” Beckett continues. “We told the story in a way you could not do in any other medium. The way we conceived it, executed it and shot the video lent itself to the Internet.”

EQAL’s production costs were “super low” at first, according to Goodfried. Small family loans and actors’ deferred compensation kept the company afloat. But as the episodes grew more popular and started garnering advertising revenue, “We scaled up our production and now it’s night-and-day more expensive,” he adds, with four full-time actors, plus editors, directors, writers and producers.

KateModern, set in the U.K., represented an overseas leap for EQAL, which opened a production office in London for the venture. “The idea was to build a larger mythology in order to do localized inter-national versions of the show,” Goodfried explains.

Funny Or Die, an online comedy site that attracted an investment from HBO this year, takes a different approach. Like the lonelygirl15 sites, it is an online-only service, but it has developed partnerships with major comedy names like A-list actor Will Ferrell, director Adam McKay and producer/director/ writer Judd Apatow.

Lately, Funny Or Die gained wide recognition as the site that exclusively featured the short Paris Hilton video responding to U.S. presidential candidate John McCain’s political commercial comparing rival Barack Obama to frothy celebrities like Hilton and Britney Spears.

“As soon as that commercial aired, Adam McKay said, ‘Oh boy, Paris should spoof this,’” says Dick Glover, the president and CEO
of Or Die Networks, which owns the Funny Or Die site. “He reached out to her with the idea. We would write, she would edit. She said, OK. We shot it in a couple of hours with a one-man crew on a Sunday afternoon, and by Tuesday it was on the site.”

The video went viral (helped, to be sure, by mainstream-media publicity) and got 6.2 million views in two days, marking the busiest period in the company’s history.

SOURCING CONTENT

Funny Or Die takes a multitier approach when it comes to sourcing content. The first tier, says Glover, consists of equity partnerships with high-profile comedy stalwarts like Ferrell, who produce material for the site, supported by a small in-house production staff. This includes those partners’ “friends and family,” an extended network of professional and semiprofessional comics. “Sometimes they bring us an idea and we produce it for them. Other times, they produce it themselves and we post it on the site,” Glover says.

“The next level of content we get is from professional sketch artists and stand-up comedians who want their work to be seen in this environment,” he continues. “They produce something, put it up there, and if it finds an audience it works for them, and it works for us.”

A lower tier includes semiprofessionals, whom Glover defines as “someone who has not yet established a career but has ideas, has written some things, produced and acted. It’s a great place for them to get their work seen and discovered.

“At the bottom of our content pyramid, we have user-generated content,” Glover adds. “Anybody can post a video up to our site, and we get 1,500 every week. As people view them, our automated funny-or-die mechanism adds up the votes. The best stuff gets voted up, and the stuff that’s voted down goes to the ‘crypt.’”

Funny Or Die, EQAL and dozens of other sites are ingenious startups that have made significant inroads in online video, which is all the more reason for the big media companies to enter the same space.

And that’s exactly what they’ve done. Last year, CBS Interactive purchased Wallstrip and started MobLogic. Sony Pictures Television secured rights to distribute and sell ads for the online series Rocketboom. NBC Universal recently launched Digital Studio to create web content, working with Electric Farm Entertainment on the thriller Gemini Division with Rosario Dawson. And Disney-ABC Television Group has established Stage 9 Digital Media, whose first project, Squeegees, launched on YouTube and ABC.com with Toyota as a sponsor. Similarly, Warner Bros. Television has launched its Studio 2.0.

FremantleMedia has entered the online space through its Atomic Wedgie venture. “Atomic Wedgie is our exploratory program for making content purely for digital media,” says Keith Hindle, the executive
VP of licensing for the Americas at FremantleMedia Enterprises (FME). “We decided to target the comedy space and go for short-form content—which is the kind and length of content our research has shown to have the most traffic.”

OLD MEDIA TO NEW

Just as in the early days of cable in the U.S., when many broadcast executives jumped from broadcast television to what was then a new medium, many of today’s TV toppers are migrating to online media.

The most prominent, perhaps, is Michael Eisner, the longtime powerful head of Disney, who stepped down in 2005 and soon thereafter started the investment firm The Tornante Company, which in turn launched the Vuguru “studio” in 2007 as a producer and distributor of video for the Internet, portable media and mobile devices.

Similarly, Herb Scannell, former vice chairman of MTV Networks and president of Nickelodeon, switched to new media when he left that company in early 2006. About a year later, he announced the founding of Next New Networks (NNN), an online media company, of which he is chairman.

Scannell likens today’s environment to the early days of cable. “It feels like 1985 again,” he says. “Back then, there was an opportunity to be creative. The broadcast nets had become closed shops, and it was hard to get a job there. Cable opened up the doors. I think this is now happening again.”

While creating online content may cost less than producing for television, it still costs something—content still has to be produced, either in-house or via contracted producers.

FremantleMedia produces some material itself, says Hindle, at times taking its existing TV content and changing it to fit the new medium. “For example, we make amusing clips out of the Baywatch content.”

But such self-produced, repackaged and amended content accounts for just 20 percent of what FremantleMedia puts online, Hindle adds. “About 80 percent of what we do now is commissioned from third parties. We sit down, we have pitches from producers coming in, and if we like them, we say, ‘Go ahead and make 20 clips for us.’”

Hindle continues: “At first we expected the pitches to come largely from the people we knew, but there’s this wealth of new creative activity from people who just want to make content for the web.”

Hindle adds that this community does not think like TV producers. “The production costs are dramatically lower, so they’ve got to produce material at a much cheaper level. People who do this have to be of a mindset very far away from TV.”

Similarly, Next New Networks constantly seeks new sources of content. Like other Internet entrepreneurs, Scannell strives to connect with “that new generation of talent coming of age. We want to capture them and bring them into the company.”

NNN has had some success doing that with the creators of one of its most popular series, Barely Political. “There’s talent out there that wasn’t getting a chance. We provide access for them.”

Scannell adds that this new wave of Internet content mavens “has a different tool kit than traditional producers. They know how to write, produce, direct, host and market. We call them five-tool players, and that’s what the Internet requires.”

Practically all Internet video ventures, be they the creation of a small startup or a media conglomerate, follow an economic model based on advertising support and brand integration.

ECONOMIC MODELS

“For each show we identify two to four sponsors, then we go out and get them,” says EQAL’s Goodfried. “Instead of doing generic product placements, we do some pretty cool things, like taking a brand and integrating it through the narrative so it’s generic to the storytelling.”

In addition, EQAL sells “substantial amounts” of advertising on its lonelygirl15.com site and related sites, says Goodfried. “We also syndicate the video files to various partners like imeem, MySpace and YouTube, and advertisers get display advertising on those sites as well.”

Almost everything online is ad-supported, says FME’s Hindle. “We use two buckets. One is run-of-site advertising, which is sold by online distribution portals like YouTube and MySpace, and as the content provider you get a share. At the moment that revenue stream is small, but emerging.”

The larger revenue stream, Hindle continues, comes from “bringing on a specific sponsor around that specific piece of content or channel. We say to advertiser X, ‘Look, we’ve got this great piece of content we’re going to produce, it’s totally targeted to your brand, we’ll integrate your brand, let’s discuss the value of that to you.’ And they’ll buy against that particular piece of content. That’s vastly more profitable, and makes a lot more sense for now.”

Just as it has discovered new talent in the production community, FremantleMedia reaches out to new players in the advertising world—a search that’s not always easy. “Some brands have dedicated digital agencies, but many don’t,” Hindle notes. “It’s confusing. For us, finding out who is the decision-maker on digital ad investment is a critical achievement. A lot of times the agency understands the client’s brands, but a lot of times not, and you have to go directly to the client, the brand itself, to discover what they’re trying to achieve in different media.”

Advertisers, of course, need demographic data on which to base their decisions, and while the Internet has great ways to measure aggregate numbers of users and page views, it falls short when it comes to determining the age and sex of its users.

“We don’t have as much information as we’d like to,” acknowledges Hindle. “From what we’ve seen, the demographics skew male, but less male than you would expect. And young, but not as young as you’d expect.”

Hindle adds that some simple formulas always seem to work on the youthful, male-skewing Internet. “One mantra is that chicks get clicks,” he says. “Literally anything where you put an attractive woman on the thumbnail gets tried out. It’s quite ridiculous.”

Next New Networks, perhaps reflecting Scannell’s days in the U.S broadcast-cable warfare trenches, strives hard to provide accurate information to advertisers.

“New technologies are helping to make accounting better,” he says. Scannell adds that NNN averages between 20 million and 30 million views per month, with the most prominent destination being the satiric Barely Political. “That site can be red hot when there’s something in the culture,” he says. The NNN audience skews male and is aimed at the 12-to-34 group.

Bucking the male trend, audiences of lonelygirl15, which focuses largely on a teenage heroine and young-adult issues and relationships, are 60 to 65 percent female, according to EQAL’s Beckett; the average age is 19. KateModern, which contains more action while still maintaining a strong female lead, is more evenly split between female and male.

FREEWHEELING SPACE

While some traditional media executives may long for the old days of a finite number of channels and appointment viewing, theirs is an exercise in pure nostalgia. Today, on the Internet, video files get passed from site to site, with content removed only occasionally after complaints from copyright holders. And even if violations are taken down, they may still reside on countless hard drives and—uncontrolled and unregulated—get passed around via e-mail and social networking.

“It’s a free world out there,” says NNN’s Scannell. “The cat’s out of the bag. People want media their way. Rather than try to fight it or sue people over it, we should accommodate them, and make it clear what the basic rules are with regard to advertising.”

Such acceptance of new paradigms appears to be a key to success in online video.

“We’ve succeeded because our approach is different,” says Eqal’s Beckett. “We didn’t come from traditional media backgrounds, so there wasn’t any format of formula in our heads for what would work online.”

lonelygirl15 broke new ground, blurring the lines between fiction and reality in a way that couldn’t have been done on traditional television. When the show started, many people thought it was the video diary of a real girl.

“In the early days, because of the unique nature of the Internet, anyone could create a YouTube profile and start uploading videos,” says Goodfried. “You didn’t explicitly come out and say, ‘Hey, this is fictional.’ People had no idea whether this person was real or not, but they immediately got hooked into the story that was unfolding organically. Over time they realized it was too neatly told every couple of days to be real.”

And yet, old media, with its deep pockets, has a way of co-
opting the new. For example, in May EQAL signed a first-look deal with CBS that puts the network at the head of the line when it comes to developing certain concepts created by EQAL.

Per the agreement, EQAL will “work with CBS writers at the script and production level to write, produce and direct online narratives that tie directly into the television series and promote the network telecasts.” That sounds like a marriage of the old and the new—and perhaps that’s the great synthesis the entertainment industry is looking for.