One by one, the big media companies and the Internet giants have started to ante up for the big poker game over the future of the video content business. Google started it all with its acquisition of YouTube. Then GE’s NBC-Universal and Rupert Murdoch’s News Corp responded by joining forces to create “NewCo,” which Comcast, the country’s largest cable company, also just joined.

Sumner Redstone’s CBS followed with the announcement of their own independent distribution initiative, called the “CBS Interactive Audience Network.” Standing alongside these big media giants are all the biggest Internet portals, including Yahoo!, AOL, and MSN. What has essentially happened, in a very short period, is that most of the existing Internet and media establishment have lined up on one side of the fence in support of each other, all against GooTube!

Amidst all this reshuffling and realignment, the one player who’s probably in the most interesting position is Redstone. One reason is that Redstone controls not only CBS, but also Viacom/MTV. The other reason is the long-standing media mogul rivalry between him and Rupert Murdoch. This rivalry turned particularly bitter after Murdoch outfoxed Redstone in the bid to buy MySpace nearly two years ago. Given that MySpace has proven to be the next MTV, it’s no secret that Redstone took it all pretty personally.

Fortunately for Redstone, sometimes revenge is a meal best served cold. Since the MySpace deal, the industry-wide realignment around digital video has reshaped the playing field. Although Redstone’s Viacom has also taken the requisite anti-GooTube steps of sending massive take-down notices and going as far as filing a $1 Billion copyright infringement lawsuit, Viacom has yet to fully stand next to its big media brothers on their side of the digital video fence, as his CBS has. And given that Redstone has hedged his bet with CBS, it leaves him open to an intriguing and completely counterintuitive option for Viacom — to jump the fence and form a major strategic alliance with Google instead.

Our modest proposal is that Viacom/MTV should break ranks by striking a broad and comprehensive deal with Google to combine its vast video content libraries with the mass distribution might of YouTube and Google’s Adsense (which is the largest web content syndication network in the world and which Google is gearing up to distribute content alongside ads).

Why Google Needs Viacom
There’s a reason why the big media companies are aligning themselves around video distribution and not video content creation — distribution is all that matters. The battle for control of the digital video market is essentially a race to figure out how to efficiently allocate consumer attention, both through search and browsing/discovery.

Google search is the greatest platform for efficient allocation of attention in the history of media. But its text-based algorithms break down for video content. What Google lacks for the first time, in this new video space, is content. Unlike text content, most video content from major media companies does not exist on the open web, and even where it does, it is not easily “crawlable.” This is why Google acquired YouTube — because it needed an alternative way to aggregate and control the content. Without access to a big media company’s full body of content, Google is limited in its ability to learn what works with digital video distribution and monetization. Google is like a voraciously hungry computer — it needs input. That’s why GooTube was making such sweet revenue sharing offers with all of the major media companies. The less content Google has to work with, the less it can optimize — a salient lesson it learned from its dominance of the text-based web.

By partnering with Redstone, Google gains access to MTV, Comedy Central, and other Viacom content that is perfectly suited for experimentation around new distribution and discovery models, which could lead to breakthroughs in how to connect the right people with the right video content — and how to actually make money doing it. Viacom’s brands are strongest with the Digital Generation, who are at the vanguard of new video consumption habits, AND Viacom’s content works exceeding well in the short, humorous, viral “clip” format that has driven the explosive growth of online video.

Making MTV The New MTV
The opportunity for Redstone is to respond to the threat of MySpace becoming the new MTV by positioning MTV itself to be the new MTV. To go head-to-head with Murdoch, Redstone has to confront MySpace’s powerful social network and the News Corp/NBC “NewCo” robust distribution partnerships. What better way than to align with YouTube’s social networks and Google’s AdSense distribution network?
But how would Google and Viacom make this happen, given the take-downs and the lawsuit? Simple — Viacom should do a complete about-face:

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Text affords Google the friendliest technological and legal environments to apply and optimize its superior algorithms. But what happens in a future where video, not text, is the fundamental element of the web? If Google cannot translate and convert the advantages it had in a text-dominated web into a future web of videos, Google is in trouble. Continue reading

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But if one looks under the hood, there’s also a not-so-obvious reason that played an equally critical role in Google’s success: the fact that the web has been predominately comprised of text. Text affords Google the friendliest technological and legal environments to apply and optimize its superior algorithms.

But what happens in a future where video, not text, is the fundamental element of the web? If Google cannot translate and convert the advantages it had in a text-dominated web into a future web of videos, Google is in trouble.

In a web comprised of text, Google could dominate the market in terms of aggregation, search, and distribution without the need to strike one single agreement with content owners. All Google had to do was crawl and index.

But, in a web comprised of video, Google must deal with content owners and strike licensing and distribution agreements, as neither its technologies nor current copyrights laws enable it to autonomously automate the aggregation of a video library without the explicit consent of content owners.

With that in mind, let me now jump to the big news of last week — the announcement that Rupert Murdoch’s News Corp and NBC Universal would launch an online library of big media video assets that could be licensed by any online distributor, provided they accept the terms and conditions set forth by big media. Towards such ends, the new big media joint venture also announced that Yahoo!, MSN, AOL, and MySpace had signed up as licensees and distributors.

Given the significant difference between a web of text vs. that of video for Google, the big media companies made a very smart move last week. Although not necessarily a checkmate, it was a “check” on Google. If all the other media companies fall in line as well, then it could become a “checkmate” against Google when it comes to big media content.

In other words, Google would have no choice but to accept the demands of the big media companies for the licensing and distribution of their content. The only way for Google to regain leverage against the big media companies, at that point, would be to change the game altogether (e.g. by owning content and becoming a full-fledged media company, as I had suggested they might in my last post).

But at the end of day, it may turn out that both sides of this titanic struggle were merely pawns in a higher-level game benefiting one single player… Rupert Murdoch.

Using Google as the red herring, Murdoch may actually have succeeded in rallying all of his competitors to join forces by contributing their combined digital video assets into one pool (which he has significant control over). But through his ownership of MySpace, Murdoch is in a very unique position relative to all his big media brethren.

Namely, he will be the only one that ends up owning both content (via the new joint venture) and distribution (via MySpace) in any material and meaningful way.

Owning the whole value chain has always been a strategy that has served him well, and by the looks of it, he’s going to continue enjoying such advantages. Not only that, Murdoch could very well have out-maneuvered Google by positioning MySpace to ultimately become what YouTube was supposed to be.

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All such setbacks notwithstanding, it’s still pretty safe to predict that it’s just a matter of time before one of the big media brands caves in and strikes a ground-breaking deal with Google. And maybe not too much longer before Google starts buying programming directly itself.

At the center of such a forthcoming deal will be, of course, money. Specifically, the minimum amount of dollars that Google will guarantee the media company for every year of the deal term. Rumors are that they offered the old media giants as much as $500 million of guaranteed revenues per year, but it wasn’t enough.

Whatever the final guaranteed amount turns out to be, the bottom line is that Google is willing to take a substantial financial risk, upfront, to secure their rights for the distribution of content.

Taking such financial risks is nothing new to Google. In fact, one of the boldest moves they made early in their life was to offer AOL guaranteed revenues, a deal that could easily have bankrupted Google had it not worked out to expectations. Since then, they have used guaranteed minimums as a key weapon in securing every major deal they’ve closed — including the $900 million guarantee they made to MySpace.

But here is where Google’s dealmaking model gets even more interesting. Going back to their efforts with big media companies, Google’s willingness to guarantee substantial revenues further exacerbates the never-ending debate on whether “Google is a friend or foe” to the existing media establishment.

When you look at the big media companies that Google is trying to woo, like CBS, their business model is quite simple. First, they own distribution, which at the end translates into a fixed channel on your TV dial. For instance, I live in Princeton, N.J., so CBS for me is on channel 2. They then buy programming to fill up their channel, like CBS buys episodes of CSI from Jerry Bruckheimer.

Buying programming is the risky part, as CBS must pay the producer in advance often without the comfort of knowing that the program will succeed in attracting a sufficiently large viewing audience. Lastly, CBS will sell advertising against their programming in the hopes that they will recoup their upfront investments in the shows and make a profit.

Given that, let’s now look at what Google is proposing to do. First, Google owns distribution, both at Google.com and now also at YouTube.com. Then, as they negotiate with the big media companies, they are offering to “buy” their programming for an upfront, bankable financial instrument — the guaranteed minimums.

Here, Google is taking a big financial risk as it is very unclear that the guaranteed minimums will prove to be a smart move. And Google will find that out as they sell advertising against the programming they purchased, in the hopes of generating sufficient revenues to cover the guaranteed minimum commitments and make a profit.

The parallels between an existing media company’s business model and the one that Google is pursuing are pretty strikingly similar, aren’t they? And as you click down further, you start to wonder what will stop Google from eventually going directly to the Bruckheimers of the world, cutting out the broadcast networks as middlemen?

In fact, Google is likely to conclude that buying wholesale programming is a sure-fire way to improve margins. After all, in striking a digital video distribution deal with Google, CBS would have handed over the only asset/competency they possessed that would have handcuffed Google: ad sales. But then, Google effectively bought that asset also when they guaranteed minimum revenues.

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And what is culprit? You guessed it… the rise of social media! As Gabler elaborates:

“All of this has been hastened by the fact that there is now an instrument to take advantage of the social stratifications. To the extent that the Internet is a niche machine, dividing its users into tiny, self-defined categories, it is providing a challenge to the movies that not even television did, because the Internet addresses a change in consciousness while television simply addressed a change in delivery of content. Television never questioned the very nature of conventional entertainment.

The Internet, on the other hand, not only creates niche communities — of young people, beer aficionados, news junkies, Britney Spears fanatics — that seem to obviate the need for the larger community, it plays to another powerful force in modern America and one that also undermines the movies: narcissism.

It is certainly no secret that so much of modern media is dedicated to empowering audiences that no longer want to be passive. Already, video games generate more income than movies by centralizing the user and turning him into the protagonist. Popular websites such as Facebook, MySpace and YouTube, in which the user is effectively made into a star and in which content is democratized, get far more hits than movies get audiences. ”

What Gabler calls “narcissism,” I prefer to use the term “digital self expression”. And as I wrote almost a year ago in a piece titled “Social Networks are the New Media”…

“To some extent, self-expression should be viewed as a new industry, one that will co-exist alongside other traditional media industries like movies, TV, radio, newspapers and magazines. But in this new industry, the raw materials for the “products” are the people… or as Marshall McLuhan might say, “the people are the message” when it comes to social networks. So for any player who seeks to enter this industry and become the next social networking phenom, the key is to look at self-expression and social networks as a new medium and to view the audience itself as a new generation of “cultural products”.

In the past century, the creation of cultural products was centered in Hollywood. Now, social networks are broadening the scope of cultural media to include “identity production” (a very appropriate term coined by danah boyd), all the while decentralizing the ecosystem out to the edges. For traditional media companies that are seeking to enter this space (e.g. MTV, Martha Stewart, etc.), it’s critical to follow the audience into the development of this new market by re-focusing core assets that have the capability to deepen the level, and heighten the production value, of self-expression. ”

What Gabler and I both seem to be focusing on is the very real possibility that what is truly disrupting Hollywood is not technology per se, but what the technology is enabling the audience to do and how it’s affecting the public’s “consciousness”. In other words, the future of Hollywood may not ultimately rest on issues like how well the studios transition their business models to adapt to digital distribution schemes or how they handle massive copyright infringement.

Instead, what Hollywood might look like in the year 2020 could have more to do with how studios develop new “products”… much like they did with the advent of television (when they created sitcoms, game shows, movies of the week, etc.). But this time, future Hollywood products will probably have to integrate and leverage the virtually unlimited digital resource of self-expression and social media.

At the end of the day, what we’re talking about is the emergence of a new medium with its own art form. And whether Hollywood will remain at the epicenter of future cultural production is the big question. For the first time, Hollywood should be concerned like never before simply by virtue of the fact that, this time, the means of production are now in the hands of the audience itself. What this implies, at the very least, is that the studios will have to increasingly democratize their business model. What does that mean exactly? Go ask the CEO of Veoh.

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As only he can, Jeff Jarvis eloquently summarizes the general consensus in his latest Guardian column, echoing the prevailing sentiment that Viacom’s move against YouTube represents yet another ill-fated attempt by the old media guard to regain command & control in the ever-elusive new media world.

If you’ve been a regular reader of my writing, you know that I have long been a loud critic of the old media guard whenever any of them have tried (mostly in vain) to maintain the type of control they had become accustomed to pre-web. So while I agree with the overall premise of Jeff’s thesis, as laid out in his column, I have to say that I very much disagree with the conclusion he reached regarding Viacom. In my opinion, Viacom is doing absolutely the right thing and, in fact, they seem to be correcting themselves on many fronts.

Central to my support of Viacom’s recent moves has much to do with something I had written about them back in September of last year, in a piece titled “Murdoch vs. Redstone… Round Two”. The following is an excerpt:

“The first thing Viacom needs to do is try to control where and how the second front of the war is to be fought. What they should not do is to re-fight the first battle by trying to go head-to-head against MySpace (e.g. with one big deal, like acquiring Facebook or Bebo). Instead, they need to move the war to a new front. And in this regard, they need to engage their competitors in an area where they have a clear comparative advantage. This means Viacom needs to bring out the biggest weapon in its arsenal… the vast video libraries archived within MTV, Comedy Central, Nickelodeon, SpikeTV, etc.

“Simply put, Viacom has the richest resource of short-form, high-production-quality videos in the media world… exactly the same kind of “video snacks” that are so popular on online video-sharing sites like YouTube. But given that, the real key to success depends on how Viacom goes about unleashing their video assets onto the Internet… In short, Viacom needs to pursue a strategy that causes death by a thousand cuts.”

Firstly, all mentions of MySpace above should be substituted with YouTube, thus making it relevant to the topic at hand. And secondly, let’s review the *other* announcement that Viacom made on the same day they acted against YouTube, courtesy of this quote from a Reuters story about the news:

You won’t find clips of comedian Jon Stewart’s “Daily Show” and MTV’s “Pimp My Ride” on YouTube any more, but Viacom Inc. is laying the groundwork for its videos to be available to hundreds of thousands of other sites… In the next few months, Web users will be able to grab videos from nearly all MTV-owned sites and post them on their own blogs or Web sites, lessening the need to go to YouTube, the top online video service that Google Inc. acquired last year.

To be fair, Jeff does point to this particular move by Viacom in his column. But his analysis of the implications, which he views in terms of a poor alternative to YouTube’s potential promotional value, misses the boat. As MTV’s newly-appointed President of Global Digital Media, Mike Salmi, put it:

“The move is part of a strategy to bring Viacom’s Web sites up to “Web 2.0″ standards,” Salmi said in the Reuters article. “Part of that is allowing people to take our content and embed it and make your own things out of it, whatever they want.”

In my view, the strategic implications of this bold move by Viacom is huge. Opening up their vaults to the masses, for the first time in their history, is a watershed event that should not be underestimated. And its significance should have been highlighted in David Carr’s latest piece about MTV in Monday’s NY Times. If and when MTV makes a comeback, this is the move that will prove the turning point.

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But before we get to the profit and loss statement, allow me to make a few observations about Facebook, and its relative position within the overall social networking space. Firstly, I thought Facebook made a very smart strategic decision last year when they opened up their network beyond the college (dot edu) market. From what I hear, their increased signup and overall traffic numbers are bearing that decision out.

Secondly, their approach to product planning and feature enhancements has always made certain of one thing… for Facebook users, it’s all about communications, and any new feature must enhance that core functionality and not distract from it. Too many competing social networks are moving away from that core, and those that continue to do so will end up suffering when the novelty factor of such “enhancements” inevitably wears off.

Lastly, the loyalty and usage stats (e.g. stickiness) of Facebook remain extraordinarily high, particularly for their original student users. The correlation between the last point and the second should not be lost, and as I often like to say, it’s what makes social media (and its reliance on user-based peer-to-peer production and consumption) somewhat like an Internet version of the hypothetical “perpetual motion machine.”

So given such positives, one might conclude that Facebook did in fact make the right decision not to sell… as momentum and value creation certainly seems to be in their favor. Unfortunately, that’s not the end of the story… let’s now get to the bad news.

On the surface, the bad news is simple. Like most social networks, Facebook is facing the monetization challenge. All their direct sales efforts and third-party alliances (e.g. deals with Microsoft and IPG) to sell advertising are yielding far less than expectations.

Word on the street, Madison Avenue that is, is that advertisers who have experimented and bought ads on Facebook are universally disappointed with the results. Consequently, getting these big brands to come back to the table and pony up again with significant ad-buys is going to be very difficult. In other words, Facebook is looking at a foggy fiscal future, and needs to make some tough decisions.

It seems its an opportune moment for potential suitors to take another look. Yahoo, how about making that call?

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I mention this because I believe Jeremy Liew, venture capitalist at Lightspeed and subsequently, James Hong of Hotornot.com, posted some “must-read” thoughts and observations on this topic. In fact, I would encourage every entrepreneur to read what Jeremy and James just blogged.

Simply put, we live in a country that encourages dreamers to take risks, and the laws protect those “entrepreneurs” from the potentially excessive consequences of failure. Bankruptcy laws enable risk-takers to protect themselves and start over. There is no other nation on this planet that by its very by-laws fosters such an economic environment. This spirit, the acceptance of failure, while counter-intuitive, is crucial to this country’s enormous success within the world economy.

Consequently, it’s not a coincidence that in the world of technology, having some failures under your belt is actually a badge of honor. It means you’ve been around the block — you’ve made mistakes, ones to learn from — experiences that will make you stronger the next time around. In fact, the incredible and rapid rate of technology innovation almost requires that any entrepreneur worth his or her salt fully embrace failures as a very normal and acceptable part of the journey.

And as Jeremy and James implicitly advise all those dis/interested observers, who are unwisely kicking those who recently failed when they’re down: be warned, if your goal is to succeed, chances are 99 percent that you’ll experience failure along the way. And when the inevitable happens, let’s hope your peers are not as naïve and self-unaware as you’ve been.

It seems weird, I know. The ability for a U.S. entrepreneur to go bankrupt is actually the most important element of this country’s economic success and wealth. It’s a great example of why I love counterintuitive thinking.

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I consider the remote control, first commercialized in 1956, one of the greatest inventions in electronics. It’s so ridiculously simple, yet that little device was powerful enough to dramatically impact the evolution of the TV & cable industries. Think about it… without the remote control, there would be no interface to manage hundreds of channels, no serendipitous discovery of new shows enabled by channel-surfing during commercial breaks, no watching two or three shows simultaneously by clicking back and forth between channels.

Without the remote control, watching TV would not be the relaxing, lazy experience we’ve all come to enjoy… it would, instead, be a stressful and annoying experience, having to get up and down, up and down, over and over again.

The titled quote is very apt now, as the emerging interface for video is now the mouse and keyboard (see YouTube). Being “remote” gives way to being in full, interactive control. Content “programming” shifts away from the Hollywood elite to the masses. The critical point here is that *we* now get to decide what we want to consume, and increasingly do so in a format, and from a menu, that’s not pre-selected by the old media gatekeepers. So just as the adoption of the remote control ultimately fragmented the TV industry, the mouse & keyboard will fragment it even further. In fact, any media that gets digitized and put online is experiencing hyper-fragmentation.

Just look at music and publishing. Via the Internet, these industries are feeling the “remote control” effect. A great example is the rapid obsolescence of “albums” in the music industry, giving way to individual tracks. The same goes for newspapers and magazines, where the value of the curated/edited package gives way to people wanting specific articles that are only relevant to them.

All that said, let’s be careful when we interpret what all that means. For instance, it doesn’t mean that the need/demand for quality content will decrease. For the old media guard, that’s good news. But it does mean that the need/demand for “packaging” and programming, old-fashion style, will rapidly decline. This is where control in the hands of users will have a diametrically opposite, and negative, effect on the control previously held by the traditional gatekeepers. Bundles get unbundled… user control causes hyper-fragmentation.

At the end of the day, the strategic implications for such change towards user control ultimately ends up being an issue of business models. Media industries that built their businesses based on the model of branded packages are now going the way of the horse-and-buggy. With consumers increasingly in control, it’s not only the markets that are fragmenting. It’s also the business models themselves that are being sliced and diced. Monetization techniques must adjust to this new environment as the economic rules are being redefined.

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Without doubt, a strategic shift in policy by MySpace along such lines could cause significant ripples, if not outright panic, among many of those vested in the MySpace economy.

While I can’t reveal the “deep throat” reasons for my speculation, let’s discuss some of the more publicly-known factors that could influence such of move:

• With the departure of Ross Levinsohn as the President of Fox Interactive Media (“FIM”), the MySpace economy lost its best internal corporate champion and defender of the Web 2.0 “open & share” ethos. While the cofounders of MySpace, Tom Anderson and Chris DeWolfe, are also net-savvy and remain ostensibly in charge of the social network, they are no match when squaring off against Peter Chernin (COO of News Corp) and Peter Levinsohn (the new head of FIM). The loss of Ross was a tremendous setback to FIM, and it looks like the pain will be felt by hundreds of entrepreneurs as well.
• Unconcerned by the virtues of operating under Web 2.0 principles, the aforementioned two Peters of the old media guard live by a different ethos: money and control. And as MySpace continues its quest for improved monetization, their objective to deliver a “clean” environment to major advertisers is increasingly aligning with their vigilant efforts to improve safety & security.
• Given such internal momentum, Chief Security Officer Hemanshu Nigam has identified its existing level of openness to its third-party ecosystem as the number one threat to its unifying objectives.The problem here, of course, is the everlasting delicate balance between openness and control. The question is, which is the optimal path to continued growth and sustained profitability? In my view, it would be very premature and self-destructive for MySpace to close up now as social networking monetization schemes are in their infancy and the major innovations are yet to come. Put another way, while extracting rents from its third-party ecosystem may prove financially beneficial in the short term, such a strategic shift may sow the seeds of its destruction in the long run.
• As I’m told, one of the key drivers for MySpace to start charging their ecosystem has to do with YouTube. Specifically, FIM wants to monetize all those YouTube videos that are embedded within MySpace pages. Now that YouTube is owned by Google, internal forecasts are estimating that MySpace can add as much as an additional $500 million in revenues to the existing agreement they have with Google (which is guaranteed at $900 million of revenues over 15 quarters). That’s a lot of cash, and who can blame them for wanting to secure that income stream? But if MySpace starts charging YouTube, do they have to set up tollbooths for everyone else? They’re pounding their heads against the wall on this one.These are vexing issues and I empathize with the management of FIM and MySpace.
• And let’s be clear, erecting tollbooths is not the same as closing up behind walls. It’s a monetization strategy that could conceivably add much to the bottom line — something Murdoch insists of all his companies. At the end of the day, there’s only one thing that we can be certain of: the current relationship between MySpace and YouTube will not continue as is. MySpace will either move to monetize the relationship, or it will cut YouTube off. In either case, it will set a new policy for the third-party ecosystem.

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