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After the gold rush

12/10/2000 07:00:00 PM Eastern

When the streaming-media industry last gathered at Streaming Media East in June, the troubles of Digital Entertainment Network (DEN) were still fresh headlines. Many were unsympathetic to DEN's plight, blaming the company's failure on corporate excess and its poor management style. But in the months that followed the show, DEN's failure became an industry cliché-a dotcom feed-money hungry for revenue that never came.

"It's clear that you need a viable business plan with diverse revenue streams and that you don't just focus on a business-to-consumer play," says Brian Burke, Atom Films director of business development. "The key for us and for anyone playing in this market right now is to have solid revenue channels."

The problem facing the industry is what exactly are those revenue channels? DEN, Pseudo and Zatso all had what their company executives said were different revenue models and partnering structures to help ease the financial burden of content creation. Yet they all fell victim to lack of funding and revenue. And entertainment streaming sites such as POP, which had names like Steven Spielberg, David Geffen and Jeffrey Katzenberg behind it, stopped the bleeding before it really had a chance to start.

"POP, in many ways, made the responsible decision," says Eric Scheirer, analyst with Forrester Research. "They had the money in their pocket, and they looked at the market and asked if there was a market for what they wanted to do. They looked at it, said no, and closed up shop, spending a relatively small portion of the money available to them and returning the rest to investors. To me, that's a very responsible way to run a business."

The broad brush of public opinion, however, paints all of the dotcom woes with the same brush: executives with too much money and too little experience promising to change the world. The reality is that each of the companies has had its own problems, but there are some unifying factors.

The Factors

"They didn't bet on broadband," says Jonathan Klein, president and CEO of The FeedRoom. "You cannot be in the streaming business and bank on 56k, nickel-sized windows to inspire anyone's imagination. That isn't where the viewing numbers are going to be delivered."

But not betting on broadband when many of the companies in the streaming-media market took flight may have been a safer short-term gamble. At the time many of the online entertainment companies began, broadband had been deployed in less than 2 million households. In the chase to reach maximum viewers, technical infrastructures were put in place to reach them at any speed. Klein says that approach would have been similar to a company in 1951 creating TV content that was essentially radio because everyone had a radio but they didn't have a TV.

"What you don't want to do is create a streaming company that offers up a low-quality product. And the only way you can ensure quality is to bank on broadband," Klein adds. "But those companies were afraid to bet heavily on broadband, so you have interfaces that are walls of text that have a little tiny video player. But you've got to look at where things are going, not where they are."

The other common thread was that they were all in a market that simply couldn't support the number of players that existed.

"Like most things on the Web, there is no room for 10 companies in a category," says Steve Stanford, CEO and co-founder of Icebox, an animation Web site. "It usually consolidates, and there are usually four or five players in a category, with the No. 1 player tending to have a disproportionately large market share."

Stanford believes that by the end of 2000, there will be three or four companies that will have a meaningful market position in the online entertainment market: iFilm, Atom Films, Media Trip and Heavy.com. The possibility of new companies joining seems pretty remote given the current climate.

"It would be hard for us to come in today and create what we created when we started in November 1999," he adds. "Because of the skepticism of the business models. I don't think we're seeing a lot of new venture capital being poured into companies like this."

Scheirer concurs that the shakeout will continue. "A lot of the companies that are pure video plays will not be around by 2003. There will be some, and streaming video will continue to penetrate, but it'll be in a parasitic kind of way. And what I mean by that is it will be video that is already in the can for offline use-for example, it will be part of a CNN or Warner Bros. online strategy that has a mission bigger than just bringing video to the Internet."

Web vs. TV

The problem Scheirer sees with the online content space is that there is only a marginal Web-based business model compared to a TV-based business model. One of the challenges facing the early players in a new medium is that they often apply the old-economy revenue models to the new economy. In addition, consumers need to catch up as well. And, at this point, it appears that the old-economy habits and revenue model have yet to succumb to new-economy opportunities. "For a lot of these businesses, there is no business until people can start to watch the content on television, because that's where people have their sofas."

Scheirer believes the number of consumers watching online content through the TV will hit critical mass sometime in 2004. "The question is whether there is a business model in the interim for some of these other kinds of content. And their next question will be whether they can make the right kind of deals to get themselves onto the television set."

The industry, however, has focused on the deployment of broadband, hoped that the increased speeds will make the online streaming experience better-thus driving viewership. But it'll be a while before penetration remotely resembles that of television.

"If you're looking at anything that can be compared to television-size audiences, you're looking at 2010. But a respectable audience will be around 2005," says Atom Film's Burke. "By then, there will be enough of an audience out there that the market for the well-known brands will be huge."

So the goal for many of today's content providers is getting from today to a still-to-be-determined tomorrow. And the hunt is already on for revenue streams. Atom Films, for example, has already turned to syndication as a form of revenue, with about 60% of its revenue generated from syndication to television outlets such as HBO, Sundance Channel, Canal Plus and Delta Airlines. The other 40% is advertising.

"The key is that we are selling our shorts-our short-form content," adds Burke. "We own the exclusive rights, so we're also looking for the possibility of incubating these properties online to eventually be taken offline, possibly as a whole series."

The Flash Effect

Another key driver seems to be finding a niche. For example, online animation seems to be separating itself as a new medium rather than just another form of streaming. The reason for this is the popularity of Flash animation and Shockwave, which essentially rely on sending instructions to the viewers computer to create the content rather than having to send the actual content. The result: The ability to offer quality-of-service, a concept that has held the Internet back.

"We're almost seeing a new development of a genre around a technology, which is interesting, although I guess not too unusual," says Scheirer. "Historically it has always been the case that, when new technologies come out with particular strengths and weaknesses, that art form mutates to take advantage of the new technology. And that's what we're seeing with Flash animation."

By basically sending instructions to the computer and then having the computer "create" the content, artists have a chance to have their content delivered in a way that looks good and gives a reasonable experience to people. "They're finding that Flash is a reasonable medium for them to work in," adds Scheirer. "Colors are flat, and huge regions have the same color so it's easy to transmit, whereas video has subtle gradations and requires a lot of bandwidth."

For Stanford, that reasonable medium has resulted in Icebox, started with three TV producers: John Collier, co-executive producer of King of the Hill;
Rob LaZebnick, co-executive producer of The Simpsons;
and Howard Gordon, who was executive producer of The X-Files
and now has a development deal with Fox.

Stanford says that the lack of a quality technical experience and bad storytelling has been the primary reason for low viewership of streaming content. But the approach taken by Icebox, where animation rules, is an attempt to address the technology limitations.

"Anything we're doing now that is comedy-oriented really has to be animation, because the Flash is a download technology that doesn't end up with buffering issues," he says. "You lose comic timing if you're trying to stream, and a lot of people didn't think about that. Even people who are creating shows didn't think about that."

With the technical consumer experience improved, Icebox then turned to the storytellers. "We have the people who created many of the best shows on television. And the idea was that's how you're going to end up with the best stories, particularly if we're doing serialized entertainment. It doesn't matter if it's three, five or 22 minutes-a story is a story."

But even with the storytelling part and the technology part solved, animation still faces the problem that all streaming content faces: revenue. "We look at this like the early days of cable," says Stanford. "Then, because of the cost structure, you had to be able to find different revenue streams. Even today, cable [networks] still make their money through subscription fees they get from the MSOs."

The Revenue Hunt

Stanford acknowledges that the road to profitability will be more difficult for an online entertainment company than for cable. But he does believe Icebox and, in turn, other Web sites, offer something for the advertiser. "We're providing a couple of things. One is a place where the audience can see cutting-edge entertainment, because we can take creative risks that people can't take on television. Our bandwidth isn't constrained, so we don't have to worry about losing our Thursday-night audience by putting on a risky show."

Of course, that's the kind of claim that was heard from DEN and Pseudo-that consumers will flock to cutting-edge content in high enough numbers to attract advertising. The difference might be that the ad market for the Internet is as soft as it's ever going to be, or so says Scheirer.

"Sites that can organize and attract audience attention are going to find it much easier to make money from advertising starting in late 2001, middle of 2002. And the average online consumer spends an hour a day there. So if you're an advertiser, either you advertise online to chase those consumers or you give up on them for that hour."

Klein believes that advertising revenues will take off in 2001, and at a figure high enough to grab ones attention. "Advertisers are looking to discover what is going to work online, because banner ads have been so discredited that they aren't going to want to continue throwing good money after bad. And they're very interested in what is going to work. So what we're engaging advertisers with is a partnership to take advantage of all the tools that broadband has to offer, and in particular the tools a place like the Feed Room has to offer."

Those tools include enhanced targetability that will enable advertisers to move from shouting at consumers to a conversation. "Advertisers won't be standing in the middle of a stadium hoping that five out of 85,000 people will hear their shouting and want to make a purchase," Klein says. "Metaphorically, advertisers are going to want to be led down into a room and allowed to have a one-on-one conversation with a viewer. The cost per lead is better, and the quality of the experience the user has of the product is going to be fundamentally different." And, he believes, better.

"We're bringing new forms of storytelling to the advertising community. And I think it will be very fruitful for our advertising partner," Klein adds. In addition, there is the potential for programs to migrate from online to on TV. Icebox recently signed a licensing deal with Fox for a live version of its program Zombie College, the company's second such deal. The other was for Starship Regulars, a property that will become a live-action, half-hour program on Showtime in the summer of 2001-and there may be more.

"We're negotiating for about four other shows," adds Stanford. "Again, because the creators of the shows are guys who have created TV shows before, we have a willing audience to look at them and hear our pitch."

There's a certain amount of irony attached to new-media companies being proud of attachments to old-media companies. After all, it wasn't too long ago that investors were so enamored with dotcoms that television and radio seemed passé. But it just might turn out that new- and old-media companies may find the best way to move forward in a world where media is everywhere, is to continue working together to hunt for viewers.

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