Commentary—Ad Revenue, Distance Learning, and Piracy: Three White Elephants Waiting to be Shot Down
So often we drink the Kool-Aid and “just believe” in businesses propositions.
We are quick to praise relatively useless technology advances. We are fast to focus on competition against features for the sake of features.
We are able to lift public companies’ share prices just by emailing or faxing meaningless press releases, using expressions like “the market leader” or “the best ever” or “the first in the world to” to describe mundane, already-done-by-someone-less-well-known achievements. And yet market analysts sup it all up and make these companies seem so much bigger.
So let me give you a solid glass of cold coffee and sit you down to look at some really big “white elephants” that the entire sector seems to effortlessly ignore:
- - The ad revenue-funded video production business
- - Distance learning models
- - Music piracy
Each of these are conversations that get sidelined when you dig through start-up business plans and proposals addressing these areas. Let’s, for once, stop and stare square in the face of each of these white elephants and see why it is we blinker ourselves to these topics.
Ad Revenue-Funded Production
I see so many businesses start up relying on “getting long term critical mass” and audience scale with their “freemium” models. The logic is always “Google does it,” and so it is assumed that if you can get enough eyeballs you will get ad-deals that pay you to sustain your model.
Sounds brilliant, eh? Well look again. Google is an exception. It doesn’t work in reality. Most of their revenue comes from one product–their ad model around their searches. The rest of what Google does in each sector, ranging from medical research to Google TV, is all very interesting but it lacks the focus that having to derive revenue gives. There is an assumption that advertising or sale of market intelligence will fund everything in the long run. But that’s nonsense. Let me give you an example.
Let’s run a model to try to earn $10,000 from ad revenue:
According to the IAB, the typical cost per 1000 Impressions (‘CPM’ in advertiser speak) ranges from $2 to $18.
This means you need to achieve ($10,000/$2) x 1,000 = 5,000,000 impressions if you earn $2 CPM or a little over 500,000 impressions if you earn $18 CPM in order to cover your $10,000 cost.
Then you must take away the cost of the delivery platform operation. Let’s play with this. Assume your content runs for 1 hour and each user streams 1GB of data in that hour. So for the 5 million user scenario that means the CDN bills you 5 million GB or approx. 5 petabytes. For the 500,000 user model this number is more like half a petabyte. Using Amazon EC2’s published pricing, this means that the distribution cost for this event would be under $0.05 per GB. In fact, Amazon says “call us” once you exceed half TB in any one month, and from my experience pricing will probably drop to around $0.02 at the lowest point, so let’s model with this $0.02.
With the $2 CPM model, 5m * 0.02 = $100,000 distribution cost, or if you are on the $18 CPM model then 500k * 0.02 = $10,000…..
So its vaguely possible to break even if you can get $18 CPM, IF (and note this well) you have NO OTHER PRODUCTION COSTS.
So now we need to find an internet event that will draw a half million viewers, attract a premium sponsor ($18 CPM typically comes from the motor industry) and do all this with NO OTHER OPERATING COSTS in order to break even.
Clearly this is only possible if the production costs are worn by some other vehicle–so for example if this was a motorsports event being produced by a TV company, and they were prepared to provide a profit share-only deal, and in fact they didn’t mind if this didn’t return them anything so long as it didn’t cost them anything. It’s just about feasible that this could happen.
But it strongly highlights that business models focused on producing content for online distribution only, and expecting to be self-sustaining from freemium ad-revenue models, are disastrously off course.
Freemium is NOT an ecosystem. It may work as value-add to drive extra revenue from something already being produced, but it is simply not capable of sustaining production in its own right.
Elephant number 1 hits the deck, has its tusks removed and the carcass is left to rot.
Distance Learning Models
Here’s an interesting one. I thought virtual learning/distance learning and video streaming were a logical marriage made in heaven. I hear about classrooms provisioning thousands of pounds’ worth of technology to enable schools and universities to archive their lectures and make them available to students on their Learning Management Systems.
I had assumed that, given the number of software and hardware vendors selling into this space, that this area was reasonably commoditised, with affordable workflow models proliferating in schools worldwide.
[Elephant image from Shutterstock.]