Why Mark Cuban is Way Off Base with YouTube

Mark Cuban loves to beat up on YouTube. The main focus of his argument is that YouTube is a modern day Napster, steeped in the dark art of copyright infringement and ready to die a painful litigious death. But Mark has it very very wrong. Doubt about the extent of YouTube’s liabilities will certainly depress the price an acquirer is willing to pay, but it certainly isn’t the company’s death knell.

YouTube hosts and streams copyrighted content. No argument. But unlike the Napster days in which there was no evidence that this type of large scale ‘piracy’ actually helped distribution, today the signs are everywhere. Even the marketing departments of most major studios understand this when they upload their own copyrighted material to the site. But YouTube is, in its essence, a massive syndication platform for content. YouTube is not about monetizing this content directly; it’s about getting tons of people to watch a video clip at the lowest cost possible.

This type of massive low-cost syndication of low-quality streamed content is less than a year away from becoming the de facto launch strategy of professional and amateur content alike. While the lawyers may not understand this yet, the marketing guys certainly do. When content owners begin taking down copyrighted materials from YouTube, they become less culturally relevant. Has Jon Stewart’s relevance and consequent profitability to the studio declined as a result of his frequent free appearances on YouTube?

While I don’t have a great deal of confidence in the intelligence of the studio system, the positive impact YouTube is having on the distribution and relevance of quality television programming is soon going to become incontrovertible. Recent deals with Warner are the first indications of this effect. YouTube is quickly being woven into the fabric of a new video marketing and distribution model. The tearing of quilt is not in anyone’s interests, least of all the studios. This is simply about negotiating leverage in the fight over in-stream and localized ads (which I would argue will be minor compared to other revenue sources, but hey, they don’t know that yet.)

I didn’t write about YouTube’s compliance with DMCA rules (which it is almost certainly adhering to as rigorously as possible) because it’s almost irrelevant. This is all about money and value creation and who’s going to capture what kind of value when YouTube starts making real money (if ever). YouTube is where cultural memes are born and raised. And that, Mark, is a very valuable place to sit.

Comments

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[Ajay]

I do agree with you that there will be a lot of informal sharing between consumers that will drive awareness of shows and other content (just as you might loan your DVDs to a friend right now). However, any business that attempts to make this easier, like Napster or the video websites, will be sued out of existence (because of the Grokster decision as mentioned before). Rather, this will be the domain of open source or generic P2P applications that have noone to sue, other than the consumer. The content companies will realize that it's pointless to sue these consumers and will eventually leave them alone, focusing on businesses who don't learn this lesson and who are easier to sue. It's all about controlling when and how their content gets distributed. They will not be able to go after consumers who do this on their own but they will certainly eradicate any business that tries to enable this and become the new middleman.

As for content revenue, I think the split will be the opposite of what you propose. Consumers are not interested in paying for content with their attention, as the proliferation of Tivos/DVRs shows. As a result, content-providers will have no choice but to go to PPV. Only poorer consumers who cannot afford content will be forced to download and watch advertisting through video formats that disable DVRs' fast-forwarding capabilities.

As for your proposed alternative, are you suggesting that consumers will download and watch high-quality, stand-alone video ads to pay for their other video downloads? You're nuts if you think that's ever going to happen.

[Joel Downs]

My guess on the other revenue source would be paid downloads - an iTunes Store competitor. Now that YouTube is established as the place to go for online video, why not add buttons for "buy the full-resolution version here!" (or the like)? I think that this model (in partnership with studios) is is also YouTube's best shot at avoiding lawsuits.

[Alex Rowland]

You make a good point, Ajay. What I meant to actually say was that there was scant evidence that 'piracy' helped drive additional consumption of the PAID version of the asset as well. YouTube is a massive low cost viral marketing machine for good content and reveals the inefficiency of the current studio system that relies upon a few individuals to estimate market demand for any given product (a job that continues to get harder.) If a person is happy to watch a video clip in low quality streamed video and refuses to pay for the content in high-quality (either through attention or actual cash) then they probably we’re going to be a customer anyway. In other words, any business lost by people watching the video through YouTube pales in comparison to the additional paid business created by the awareness YouTube syndication creates. This is also crucial to the role of advertising to the monetization of video…

As for the alternate source of revenue, my argument is actually that advertising will be a growing portion of the revenue pool for content (probably on the order of 80% vs. PPVs 20%). I just think that the primary venue for that advertising is going to be in high-quality video ads downloaded (and eventually streamed) to the consumer. The reason why the CPMs will get astronomical in comparison to existing low-quality in-stream advertisements is the high quality of the deliverable.

[Ajay]

Actually, Mark's right, it's exactly like Napster. What do you mean Napster didn't help distribution? It distributed music to everyone, for free. And why would someone pay to watch Jon Stewart on iTunes when they can watch the funniest segment of that show on one of these video sites? Effective removal of copyright infringement is crucial to all these video sites. Right now, they're all doing the easy part by distributing the videos, they will all get sued out of existence because of the Grokster decision, like all the p2p music software businesses did. There is no question that content is going to be distributed over the internet, but you have to have effective methods of licensing content and policing infringement.

Your most interesting statement to me was the one about other revenue sources. I too think advertising will be relegated to a minor role in funding online content. What do you think the revenue sources will be?