The Upside to Video Uploads

Set apart from the file-sharing rebels by copyright cooperation and ad income potential, user-created video sites will continue to flourish

Over the past six months, a new generation of video Web sites has captured the attention of Internet users, the press, and investors. Revver, YouTube, Grouper Networks, MetaCafe, and Guba—along with more established players such as Google (GOOG), Yahoo (YHOO), iFilm, and Microsoft's (MSFT) MSN—are all jostling for attention in the user-created video space. Even AOL (TWX), seldom a leader, implores its subscribers to "break out your video cam and fill us in." This explosion in user-generated video led some analysts to predict recently that the video site "bubble" is ripe for collapse.

While this segment will undergo consolidation and specialization, a mini dot-com implosion is simply not on the horizon—and especially not for the reasons being cited by some pundits. Predictions about this collapse have focused on two issues: the lack of a business model and persistent problems with copyright, as many of these sites—even the esteemed Google—have run afoul of content owners by hosting copyrighted content without permission.

First, this segment is being driven by multiple factors that are fundamentally growing the capacity for everyone to create video content. While the online revolution began with music, it still takes talent and hard work—or at least a lot of fancy engineering, overdubs, and a hefty marketing budget—to create music that attracts and holds the interest of a substantial audience. Your boss may want to hear himself sing in the shower and maybe even his kids and mother like to hear him belt one out, but the rest of us could probably skip owning the MP3, even if his shower has great acoustics.


  Video, on the other hand, is different. A video clip of your boss singing in the shower might be one of any number of well-known genres of entertainment—farce, tragedy, comedy, or horror—with the fewer rehearsals, the better. (And, for those who prefer drama, when the board of directors sees the clip, it might be career-ending.)

Not only is amateur video often captivating in a way that music is not, but the means of video production and distribution are spreading. A surge in broadband connections, the widespread availability of video editing software, price declines for lower-quality video cameras, the increasing availability of high-definition video cameras, and the rise in media-centric PCs are putting the tools of production in the hands of those with the time, inclination, and patience to expose their ideas, quirks, and talents to the world.

As for the business model, there are a number of alternatives. On the supply side, much of the content spills forth for free. Many behind the camera are happy to have their work seen, with exposure of their magnum opus serving as sufficient compensation for their time and trouble. For Web sites that want to gain a competitive edge by actually paying contributors, there are options that won't break the bank or deplete investors' cash. For example, under the model used by Revver, income from ads appended to content is split 50/50 with content providers.


  Another alternative is to create an after-the-fact income pool for contributors—fixable at a percentage of net profits and allocated based upon viewership. Still, a third option would be to host a contest—with only the most viewed, or most highly ranked, content earning cash and prizes. By enticing content providers with potential cash, the sites will be able to compete for content while at the same time controlling costs.

On the income side of the ledger, the picture is more complicated, but options abound. Viewers and advertising dollars continue to migrate from broadcast television to the Web—and, perhaps more important, there is a crisis of confidence in television advertising, with sponsors looking for new opportunities. According to a survey earlier this year by the Association of National Advertisers, more than three out of four advertisers—78%, to be exact—said they have less confidence today in the effectiveness of TV advertising than they did two years ago due to ad clutter and technologies such as DVRs.

As a result, advertisers are looking for new ways and places to deliver advertising. Sites that allow users to share their own content are at the edge of that trend, with some of the top sites generating viewership of more than 40 million videos per month for a wide variety of content meta-tagged with just about every possible kind of descriptor. These sites are poster children for market fragmentation as well as the associated income streams—contextual ads, recommended content, attached commercials, and more.


  Finally, the issue of copyright looms large. These sites not only host user-created content, but user-generated content—clips taken from television—commercials, sports, television shows, as well as content in that in-between place, which incorporates, or is based upon, copyrighted content and then modified. One NPR commentator earlier this year opined that these sites are just like the file-sharing systems that large media companies have battled, stating "…some people predict it's only a matter of time before, like Napster, [they] get shut down." But there are substantial differences between these new services and peer-to-peer systems—differences that not only will make it less likely for the new video services to find themselves in court, but differences that could play in their favor if they recognize and play their cards right.

Much has changed since Napster. Subsequent legal cases have clarified that a system operator's intent is a crucial consideration in arriving at a finding of copyright infringement. In fact, while copyrighted content does exist on these newly emerging systems, most have explicitly been established as for the sharing of original user-created content. Unlike in the past—when peer-to-peer systems argued that they weren't liable for infringement, or that all activity on their systems was legitimate—these new system operators have taken a more nuanced approach, taking pains to comply with copyright law by stating their intentions, agreeing to take down infringing content, and asking contributors to affirm that they have all necessary rights.

At the same time, many of these systems display cross-sections of their content—by popularity, by type, by posting date—and it is apparent that they are much more than repositories for ripping off the works of others. Thus, while copyright owners will find it easy to attack the use of a specific work on one of these sites, attacking the whole site becomes a much riskier proposition.


  In fact, the field of copyright is full of accommodations and gray areas. Battles over the definition of "fair use" have been waged for decades. Large media companies routinely decide how much infringement they will tolerate when they decide how many resources to put into combating it. A fan-based site using copyrighted content may be tacitly accepted by copyright owners, while a similar critical site might be challenged. It may well be that those systems that are most proactive in demonstrating their intent to be good copyright citizens have crossed far enough into the gray to have effectively shielded themselves from the types of broad legal attacks that brought down peer-to-peer systems—even though considerable amounts of copyrighted content will remain accessible on the new sites.

Corporate owners of copyrighted content, however, will find such a situation unsatisfactory, and will want systems to do more—to self-police aggressively, to block content with certain origins, to use meta-data, content marking technologies, and other resources to guard against infringements—all of which could be done, but at a cost. The dialogue over what additional steps should or can be taken, and at whose expense, offers a chance for conversation, negotiation, and even partnership.

The online video boom will continue. Business models will be sifted out, and the copyright issues may even play to the advantage of the sites, as the smart ones adopt a cooperative approach to leverage their growth, acceptability, and alliances, rather than the adversarial approach that doomed peer-to-peer file-trading companies. The only question for investors is to decide which particular execution holds the most promise—and for consumers to pick their favorites.

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