purple motes

YouTube's Video ID technology points to an important new business model.   Video ID finds copyrighted content that has been uploaded to YouTube.  It then gives the copyright holder the choice to block, promote, or monetize that content.  Copyright holders benefit from being able to exploit free, decentralized distribution and promotion of their work.[1]  Google/YouTube benefits from leveraging the value of its search expertise and advertising platform.   Most importantly,  much value is created by allowing licensing decisions for content to be made for small units of value quickly, at low cost, at high frequency, and with directly relevant economic data.[1]

Content pricing and licensing systems are extraordinarily inefficient.  Consider, for example, that the U.S. Copyright Act of 1909 included a provision establishing a two-cents per song royalty for mechanical recordings of musical compositions.  This provision was designed to give player-piano companies equal access to music for their machines.  The two-cents royalty subsequently applied to musical phonorecords.  Because the companies making the records paid the royalties, radio stations could play recorded music without having to negotiate or pay any royalties to music copyright holders.   The two-cent royalty remained law until Dec. 31, 1977.[2]  Thus this government-established price was in effect for sixty-eight years through large changes in music recording and playing technology.  This situation reminds me of iron pot that a fellow graduate student from the former Soviet Union showed me in the early 1990s.  Cast into the metal of the pot was the pot's price.  This Soviet approach to pricing kitchen pots was probably less inefficient than the two-cents royalty established by the Copyright Act of 1909.

YouTube's new search-choose model is a much more efficient business model for licensing content.  Copyright holders make licensing decisions for specific copies with knowledge about circumstances and amount of attention the copy is attracting.  Policy rules can easily be established and changed for these informed licensing decisions.  Compared to traditional licensing approaches, the search-choose model provides much more relevant information for licensing decisions and much lower transactions cost for those decisions.   This is a major, under-appreciated value of the search-choose model.

Free, decentralized distribution and promotion of content potentially has great value for copyright holders.  Attracting attention to content is expensive.  Movie producers, for example, often spend more promoting a movie than they do in making it.  Peer-to-peer diffusion of information and actions among social networks has always strongly affected aggregate patterns of behavior.  Online social networking tools make social networks even more powerful. Attempting to suppress persons' natural propensity to share, discuss, and promote content mainly pushes such behavior underground and alienates potential customers.  The search-choose model transforms a unsolvable problem into a significant business benefit.

The search-choose model better suits web video than web text.  ISPs might attempt to insert text ads into copies of copyrighted textual content found on webpages.  Web mail providers could insert (additional) advertisements in copies of copyrighted textual content found in emails.  However, ISPs don't have businesses structured to serve ads, and inserting ads into webpages problably would anger ISPs users.  Web mail providers, on the other hand, have little incentive to insert additional advertising with shared revenue.   In contrast, web video providers have an incentive to address the licensing problem, and they can do so in a way that's not likely to anger their users.

Having a lot of video on a common platform makes finding instances of copyrighted work easier.  It also makes inserting ads easier.   YouTube thus already has big advantages in offering a search-choose model to copyright holders.

Note:

[1] Google recently stated that 90% of its 300+ Video ID partners have chosen to monetize found content rather than block it.  Companies choosing to monetize found copyrighted video include major media companies such as CBS, Universal Music, Lionsgate Entertainment, and Electronic Arts.

[2] Historical versions of U.S. copyright acts are helpfully available at copyrightdata.com.  The U.S. Copyright Act of 1976 raised the royalty to  2.75 cents.  Broadcast radio stations in the U.S. have retained to the present the right to play recorded music without the need for negotiating a license or paying a royalty.  The situation is much different for Internet radio.  Copyright royalty rates in the U.S. are now typically established through the Copyright Royalty Board (CRB) for periods of four to ten years.  That CRB's price-setting process is far from simulating that of an well-functioning, decentralized decision mechanism.

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Nico Nico Douga is a Japanese video sharing site that has rapidly gained popularity in Japan. Nico Nico Douga was launched in mid-December, 2006. A little more than a year later, in mid-January, 2008, the site had about 5 million users. As of October, 2007, the site's Japanese users amounted to 27% of YouTube's Japanese users, but Nico Nico Douga's users had 43% greater video viewing time and 49% greater number of visits per month than YouTube's Japanese users.[1] Nico Nico Douga has been astonishingly successful in rapidly acquiring a large number of relatively active users.

A signature feature of Nico Nico Douga is that users are able to add text comments within videos. Much research and analysis supports the value of integrating sensory modes of communication (but I'm still waiting for a show-and-tell mobile communicator). Other sites, however, have not been successful with this feature. Mojiti, one of several sites that has provided commenting within videos, disappeared. Hulu, an NBC-News Corp joint venture, is rumored to have purchased Mojiti, but Hulu does not currently offer commenting within videos. Part of the problem may be rights issues. Adding comments within a video might arguably be creating a derivative work, or be a violation of the creator's moral right to the integrity of her or his video work. So perhaps the reason that Nico Nico Douga has successfully implemented in-video comments, and popular U.S. video sites have not, is that the U.S. has many more copyright lawyers than does Japan.

Nico Nico Douga's revenue comes mainly from premium membership fees. The site, which requires users to register to view videos, offers free membership and premium membership. The number of free members granted access to the site is limited during the prime usage hours 7pm to 2am. Premium membership costs 525 yen (about 5 USD) per month. Premium membership gives the user unrestricted access time, more bandwidth, more storage, mobile services, and other additional customization options. Premium members account for only about 3% of total members. But premium membership fees account for about 67% of the site's revenue. The remaining 33% of revenue comes roughly equally from banner ads and an affiliate program.[2] Nico Nico Douga' business model thus contrasts sharply with video sites that emphasize video distribution and advertising.

Many video sites are currently struggling to generate ad revenue. YouTube's U.S. (ad) revenue for 2008 was recently estimated at 90 million USD. Some estimates put total U.S. online video ad revenue for 2008 at 0.5 to 1.4 billion USD. Perhaps 50% of that ad revenue will be from display ads on video play pages, 40% from pre-roll video ads, and only 10% from in-video ads. Online video ads confront some significant challenges. Most fundamentally, unless online video ads work significantly differently from other types of traditional advertising, the size of the total ad market will be limited to perhaps 1.5% of GDP. In that scenario, online ad revenue will come only from winning tough competition for attention with traditional media.

Nico Nico Douga's annualized revenue in January, 2008 amounted to about $25 million USD.[3] That's not bad for a business in operation for a little over a year. Profitability for online video sharing and social networking sites is possible. But betting solely on advertising-supported business models probably isn't a good idea.

Notes:

[1] These data are from Fumi Yamazaki's review of Nico Nico Douga on Joi Ito's Lab Blog. From the linked Nielsen/Netratings source (in Japanese), and other data I've inferred the specifications of the numbers.

[2] These figures are based on figures in Fumi Yamazaki's review. See that review for underlying data and sources. For business model description, see Section IV of Tokyotronic's review.

[3] Calculated by scaling up Y 101 million revenue in Nov. 07 with 86,000 premium members to 174,000 premium members in Jan. '08.

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