Internet TV has enjoyed explosive popularity in its infancy but no one is making much real money yet.
Take, as an example, Westwood-based Veoh Networks Inc., an Internet TV network of 500,000 shows and videos. It already enjoys 18 million users on its Web site, which is not yet a year old. Each day over the last two weeks, about 50,000 new users joined the Veoh network, the company boasts.
Veoh is among the top Internet television networks that are heading the infant industry using technology that makes streaming images on computer screens appear more like the quality of television. The others include just-launched Joost of New York, headed by founders of popular free Internet phone service Skype, and Dublin-based Babelgum. NBC is also trying to spin off an online network that would broadcast similar high-resolution shows across the Web.
For all the technological advances, however, the basic conundrum how to replicate TV advertising revenues with smaller, less-committed Internet audiences remains.
Nearly 16 percent of American households that use the Internet watch television broadcasts online, a figure that doubled from last year, according to an October report by the Conference Board and TNS, which surveyed 10,000 households.
However, finding ad dollars to advertise against vignettes of Internet video programming will be a challenge, because online viewership numbers are paltry compared to the average of four hours that Americans spend in front of the television every day.
Online videos are watched roughly six minutes a day. The number increases to about 10 minutes when surveying only households connected to broadband, which is about 40 percent of the population, said Dan Littman, technology and media analyst at Deloitte Consulting LLP.
The shorter viewing time is problematic when considering the amount of advertising revenue that companies are expected to glean from these shows, Littman said.
Internet video revenue, mostly from advertising, is at $2 billion this year and is projected to hit $7 billion by 2010, according to Parks Associates, an industry research firm.
A $7 billion projection would amount to about 10 percent of today’s television advertising market. Ten percent of traditional viewing time would be about 24 minutes, which is quadruple the average amount of time people watch videos online.
“You really can’t break the laws of advertising here,” Littman said. “There are a lot of exciting things happening in the space but the usage is very small and not to the extent that would produce the kind of advertising dollars people are expecting.”
Vuguru, a new media studio being incubated by former Walt Disney Co. Chief Executive Michael Eisner’s media investment company Tornante Co., isn’t too concerned that Americans prefer shorter videos on the Internet today.
It’s about staying in tune with how Internet behaviors change and mature, said Jane Hu, the company’s business manager. For example, when the company launched its first season of the Internet show “Prom Queen” in the spring, it had no idea how viewers would react to an 80-day series. “Prom Queen” attracted 15 million views during that time.
A Japanese version of “Prom Queen,” currently under production, may be longer because Japanese tend to consume longer content on cell phones and on the Internet, Hu said.
In the next series, Vuguru will experiment with 7-minute episodes of a comedy show about a rock band traveling across the country called “All-For-Nots.”
“We want to straddle between professional grade, story-driven content and the user-generated content all about the cat blowing out birthday candles,” Hu said. “The big challenge is finding ad revenue to support the production costs.”
Quality over quantity?
Television on the Internet should not leave viewers squinting at short, grainy videos on computer screens, said Veoh founder Dmitry Shapiro. “There would be a lot of sad consumers who invested a ton of money on surround sound stereos and plasma televisions.”
The company was started in 2004, a few months before YouTube debuted and was initially buried under the country’s fascination with user-generated content on YouTube and similar file-sharing sites.
It has only recently enjoyed cash infusions from high-profile media industry giants, such as Eisner and former Viacom Chief Executive Tom Freston, along with financial services veteran Goldman Sachs.
Veoh sits on what’s called peer-to-peer technology that allows for high-resolution video streaming. It features videos by 100,000 publishers, including Lionsgate, PBS and NCAA Football, along with hundreds of independent producers
In the near future, Shapiro believes laptop computers will be hooked up to entertainment centers, much like cable boxes today, to deliver Internet content to the small screen.
This is just one side of the Internet TV boom content aggregation. On the content production side, dozens of companies have sprouted up, streaming their studio-produced original content through the major social networking sites including MySpace and YouTube and networks like Veoh.
Among the most prominent studios are Los Angeles-based My Damn Channel, headed by Rob Barnett, former president of programming at CBS Corp., and Beverly Hills-based Vuguru, led by Eisner.
These companies are founded on the idea that people are not satisfied with the 500 plus channels on their cable and satellite TV today and want the option of choosing programming among millions.
“I’m one of those people that don’t want more channels,” Shapiro said. “I want better channels. What Internet TV allows people to do is find the 12 channels perfectly tailored to their liking.” For Shapiro, a self-described tech geek, this includes an online show called Google Tech Talk, which streams presentations of entrepreneurial ideas pitched to Google executives.
All this content can be free, Shapiro said, because there is no physical plant to maintain, no satellite or cable box to produce and install. Costs can be kept low because the Internet is sitting on larger server networks with cheaper distribution channels compared to the past.
“We joke here that the cost of running our site is less than the cost of renting an apartment in New York City,” said Warren Chao, chief operating officer of My Damn Channel. The studio is only about a couple months old, and has already been nominated as one of the four best comedy Web sites by TV Guide’s online video awards this year.
Content quandaries
However, there’s another potential financial setback: As the Internet begins streaming more studio-produced content and less of the user-generated fuzzy video clips, copyright infringement issues are likely to get battled in court.
Last month, Universal Music sued Veoh for inducing users to post unlicensed music videos, stating that “Veoh follows in the ignominious footsteps of other recent mass infringers such as Napster,” in a complaint filed in a federal court in Los Angeles.
Universal has also previously sued MySpace.
Veoh’s Shapiro believes “new rules” must be established by the traditional and new media because traditional media models that controlled distribution are dying.
“In the world that’s emerging, viewers are taking charge, so it’s almost impossible to have control over distribution in the way traditional media did before,” he said.
Last week, CBS Corp., Dailymotion, Fox Entertainment Group, Microsoft Corp., MySpace, NBC Universal, Viacom and Disney made a joint statement on a set of “collaborative principles” that would foster the growth of user-generated content online while respecting the intellectual property of the content owners. They include implementing a filtering technology that would block copy-righted uploads by users and promoting original content.
The budding industry just beginning to lay down its ground rules is likely to leave only a handful of major players within the next few years, said analyst Rob Enderle. These companies would have figured out a way to access enough content to advertise against and harnessed a technology that would stream the video through any television and music network.
“It’s too early to declare the winners and losers at this point,” he said.
