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Thoughts on Online Video Budgets

September 24, 2007

Click here to read an article that speculates how cheap online videos need to be to be in order to be profitable. 

I completely agree that online videos have to be dirt cheap in order to break-even from ads alone. What’s interesting is that what’s considered cheap in Hollywood and Television is still really high for Internet series IMO. I actually believe that there’s an opportunity to be much more profitable, if internet content producers start to think in terms of even cheaper/student film budgets and are willing to forego traditional production value found in TV and Film. Hey, I’m a run ‘n gun filmmaker so I’m used to making flicks on the cheap.   

In Hollywood, studios are constantly trying to create the next blockbuster. The idea is to reach the biggest audience possible. In the physical world, this makes sense, because there is limited physical space for distribution. So they want to pack people into theaters. Sure there are specific genre/niche films out there, but generally, studios want to make bank, and they accomplish this by looking for the next Spider-man, Star Wars, etc. However, this is not the way to go in the Internet.

Instead of shooting for a couple of “blockbusters”, Internet companies should consider leveraging a portfolio of niche programming. In the Internet medium, it makes more sense to follow Long Tail economics (read Chris Anderson’s Long Tail to understand his way of thinking). The Internet video space is a much different game than traditional film/video. Aggregation of niche programming can easily surpass any product aiming at one mass audience (which already has a barrier for adoption). Of course, the only way this will make economic sense is if the budgets of the niche shows are dirt cheap. Basically, the idea is to leverage quantity in this case over production value quality. A few reasons why this makes sense:

  • Production quality doesn’t matter as much on the Internet (e.g., 35MM film not necessary to draw an audience especially on such a small screen pixilated screen)
  • With distribution essentially limitless (no distribution scarcity like physical theaters), a small budget production can reach just as many people as a large budget one (marketing dollars aside). Hence, there is no “shelf-space” cost for a distributor to store and distribute several low budget series with smaller audiences. With no real additional distribution cost for additional series (with the possible exception of marketing), why wouldn’t a distributor hold as many series as possible?
  •  Internet word-of-mouth can be significant and can essentially dictate what shows are being watched. So one hit/cult show could gain viewership very quickly. So by having more shows out there, the better your chances of having a hit and finding an audience. 

Rather than focus on what one would consider a large budget on the Internet (say Quarterlife at $500,000 per episode), a smarter strategy is to diversify the portfolio of offerings so that if one show hits, it pays for the costs of all the others. I believe that’s what Meistrich’s NEHST Studios strategy is, and that makes sense.  

A $500K per episode hurdle is going to be tough to beat. It’s going to take a lot of viewers, and according to News Corp’s marketing guy Shawn Gold, even with 20MM viewers, it would be tough to surpass $400K per episode based on ad dollars alone. So why spend this much on a show when you could theoretically produce 100 shows at $5K apiece that focus on either 1) the exact same target demographics, or 2) several different demographics. In the former case, if 10 of your 100 shows are successful (10% hit rate), you’re likely to have greater viewership than just a single show. And even if your audience isn’t unique, they’ll watch more content so ads can be served at 10 times the frequency. In the second case, producers can aggregate several niches and leverage long tail economics. 100 shows targeting 100 different audiences is likely to bring in more viewers in total than one show, targeting one big demographic. Or at least that’s the theory in this case.  

The Hayley Project is costing us under $10K (excluding deferred salaries). Even if we assume that our total all-in cost is $100,000, on average, our per episode cost is under $3K. It seems to me that the better strategy is to follow Eisner’s lead and budget an entire series at $100K (like with Prom Queen) and produce multiple series, treating each one as a low break-even proposition, and a lottery ticket to be the next big hit (a la Lonelygirl15). There doesn’t seem to be any financial logic to producing an expensive show, unless it’s something very unique (like Afterworld) or the additional money is spent on marketing which somehow guarantees a larger viewership. My prediction is that Eisner’s 100K for a series will become the benchmark eventually and those paying too much for unproven series will lower their budgets. Of course, when a series becomes a hit, that’s a different ballgame and budgets can increase if warranted. But right now, it seems like there’s a bubble of demand for online content. Once people realize the economics don’t work out, producers will focus on cheaper content.

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