By Basab Pradhan 

The old adage “Content is king” doesn’t seem to be borne out by the post-bubble resurgence of new media. The three companies that have benefited by this resurgence the most are Google, Apple and YouTube, which is now part of Google. None of them create content. In the post-bubble period the market values created by the three companies are as below:

1. Google – $144 B (Google was privately held before their IPO in August 2004).
2. Apple – $51 B (incremental since March 10, 2000)
3. YouTube – $1.7 B for an 18 month old startup.

On the other hand, Time Warner has lost a whopping $197 B in market cap from its high in March 2000. CBS, Viacom and Universal haven’t done too well either.

The thing that is common among Google, Apple and YouTube is the way they have created their gigantic market caps – on the backs of other people’s content. Don’t get me wrong – to pull this off takes great talent and effort and they deserve every bit of it. But it also turns the conventional wisdom from the last century on its head. Distribution of content, apparently, is king.

In this three part series, I will look at each of these companies and what their business models mean for the industry or the primary content that they feed off of. In Google’s case that would be the text in all the websites of the world. In Apple’s case it would be music. And in this post we’ll look at YouTube and the television industry.

YouTube has been in the news a lot in the past two weeks. This time it’s not because of their huge acquisition by Google. But for reasons that might call into question the very high price that Google paid for YouTube. Apparently, much of the traffic on YouTube is of people looking for copyrighted video from major TV studios and not so much for home-videos of pet dogs doing tricks. And now it seems, the copyright owners, the major TV and film-making companies, have a problem with that.

On February 2nd, Viacom asked Google to take down its videos from YouTube. Information Week article here. Viacom and Google had been negotiating on how to share advertising revenue arising from the viewership of Viacom videos. The negotiations weren’t going anywhere, when Viacom pulled the trigger.

What is YouTube? If you remove all the Web 2.0 related noise, YouTube is a marketplace. It brings producers and viewers together. eBay is the best example of an online marketplace that brings buyers and sellers together. This works really well with eBay because the buyers and sellers are both small actors. eBay brings great efficiency to what would be a very expensive buying or selling process.

YouTube is an “attention marketplace”. Viewers come there to watch videos and they are shown advertising. Advertising is paid for by marketers. If this was like TV, most of the advertising revenue would go to the studio and very little to the network TV station. I expect Google has different ideas about the sharing of revenues which is why they can’t come to terms with Viacom. Google also knows that the Digital Millenium Copyright Act does not make hosting pirated content on one’s website immediately illegal. It just requires the owner of the website to pull down the pirated content as and when the copyright owner asks. And that’s what Viacom has now done.

Another interesting sidebar to this whole thing is that YouTube has been talking the talk on implementing anti-piracy technology on its website but has not been walking the walk. The YouTube founders said last year that they would implement such technology by the end of last year. Can’t blame them for missing their deadline – the more they prevaricate the better for them. This article in New York Times lays out the shadow boxing around this issue quite nicely.

In the meanwhile, Viacom has signed up with Joost to distribute its content through the internet TV startup’s platform. NYT expects the terms to be favourable to Viacom (65% revenue share). Article here.

So where does that leave YouTube? They are the dominant species in the land of user-generated video. There is no other website that Viacom can go to that will generate the kind of traffic that YouTube does. Traffic creates ad-clicks, clicks generate revenue. Such revenue on YouTube would be an order of dimension more than on any other social video site. Ditto Viacom’s share of that revenue. And so one might think, Viacom has no option but to take an unfavourable deal. Viacom thinks otherwise, and I think they are right.

YouTube has no entry barriers except one – the network effect. Jason Calcanis claims that YouTube is a “silly little business that one can set up in a week”. As technology goes, YouTube’s technology is no entry barrier. But, boy do they have traffic. More than all the network TV sites in the US combined. That is what creates the network effect. This is different from their parent Google whose search and advertising technology are simply the best products out there.

Unlike eBay, YouTube is dealing with two kinds of producers – viewers as producers and the studios. The studios’ content, regardless of the fact that it is pirated and posted by a private individual, is what draws a great deal of the traffic into YouTube. They create traffic not just for their own content, they also create traffic for others. The YouTube edifice is made up of many small bricks and some very large slabs (studio content) that are in or near the foundation. Viacom is one of those large slabs. If you pull too many of those slabs out, the foundation becomes weak.

YouTube has no option but to retain Viacom content on its website. Just to prevent this from snowballing into something bigger. If all the big media companies pull out of YouTube, it will unquestionably impact its viewership. If their content is then made available on other video sharing sites, viewers and video producers will desert YouTube like rats from a sinking ship. The virtuous cycle will turn vicious.

Does YouTube have a business without big media content? Sure it does. It can dominate the user-generated video space because the network effects work in its favour. Big media content, on the other hand, is almost like a different industry altogether. I can’t see YouTube retaining that too long without parting with a lion’s share of the revenue. All it takes is one credible competing platform to YouTube and the market will work its magic.

Long live the king!

Cross-posted in Basab’s blog 6 AM Pacific