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UGC: Just a Loss Leader in the End?

Back in the late 1990s, dot coms were all about the land grab. The idea was the more eyeballs and shoppers you got- POOF!- the more valuable you were. Never mind, the advertising market wasn't quite there yet and you were selling bags of dog food at a loss. The common wisdom has been that this was irresponsible, and truth be told, none of these companies had any business being publicly traded. But, more than half of the companies started during this time, actually stayed in business-- incredibly high odds for startups. To many, that proves that the problem wasn't that too many companies were started and nor was it their unfounded business models. It was that too much money was wasted on each one, and that it was never a game the public markets should have been playing.

There was, of course, one very important benefit to that land grab and wasted millions in investment capital: All those free services and cheap bags of dog food did bring a ton of people online. And they stayed online, even as many of the companies that did survive did so by charging realistic prices and shipping if they were in ecommerce, or switching to premium services and subscription fees if they were in content or entertainment. In fact, throughout the post 2000s, nearly every Web startup pitching venture capitalists or reporters were all talking up their premium services and subscription fees. You can still see vestiges of it with The Wall Street Journal's stubborn resistance to giving away content for free and early Web 2.0 companies like LinkedIn that didn't wait for an ad market to develop, but rather charged fees for things like job posting and "InMail."

As the wet blanket of recession has settled around the Valley and startups have come under pressure to monetize what they've built, I've wondered when we'd see the same flight to subscriptions and fees. Instead we're starting to see something similar but with a Web 2.0 twist: The rejection of user generated content in favor of professional content that's more consistent, reliable and palatable to advertisers.

This is bold shift, as the whole Web 2.0 movement was predicated on user generated content and the engineer-centric idea that you could build an easy to use platform, everyday people would create content for free, and other everyday people would navigate it, consume it and push the very best up to the top. It was rooted in the conviction that you didn't need the kind of doomed content partnerships of the past between New York, Los Angeles and Silicon Valley, because Web 2.0 was democratizing media and entertainment and ultimately that platform was the future, not the content gatekeepers.

This was clearly the most pronounced on YouTube, where the viral sensations like the Evolution of the Dance and the Grape Lady (ow! ow! owwwwww!) became the lexicon of an entire generation and the myth sprung up that everyday stars of viral videos would become household names with their own movies and HBO shows. (They never did.)  Sure there were whispered claims that as much as 50% of YouTube's views were actually of copyrighted material. Still, the company never would have sold to Google for $1.65 billion without UGC.

In other words, user generated content was to Web 2.0 what free-bags-of-dog-food was to ecommerce.  But flash-forward to 2009, and there's still no clear way to monetize user generated content, either from the sites themselves or the would-be stars.

Guess what? The Web has evolved to the point where you can monetize professional content. And that's why you see most of the smarter members of the Web 2.0 elite doing the very content deals they would have rejected a year ago. First, there was YouTube's rumored deal with the William Morris Agency, and now Slide has teamed up with the Valley-addict Ashton Kutcher and his company Katalyst Media. Katalyst also launched its site The Blah Girls at TechCrunch50 and produced 24-hours-at-Sundance with Kevin Rose last month, to mixed reviews.

Under the deal, Slide's FunSpace application on Facebook will be the exclusive distributor for Katalyst's reality show about its own company, KatalystHQ. Cheetos will sponsor the show. (What's that? ACTUAL REVENUES!? Between Cheetos and BlahGirls' sponsor Vitamin Water, Ashton's poor fans are going to need gym memberships, stat.)

Liz Gannes over at NewTeeVee questioned the logic in limiting distribution to an application within a site, even if it is the highly popular FunSpace on the highly popular Facebook. That was my first question too. But, Ashton's approach to all things Silicon Valley is very hat-in-hand, you-guys-are-the-experts, teach-me-your-techy-ways. He wants to learn what works as much as he wants to make each particular project a raging success. I think that's smart. And Max, with his metrics-watching obsession, knows what works online.

I talked to Ashton and Max yesterday, and while they noted the shift from UGC to professional partnerships was real, both said "loss leader" was too harsh a term for User Generated Content. They were both careful to extol UGC's virtues. Max talked it up as an unparalleled way for sites to get a volume of cheap and frequently highly viral content, and Ashton said that professional content had learned a lot from more on-the-fly lifecasting and the interactivity of user generated video. Indeed, the content of KatalystHQ is little more than Ashton's receptionist shooting video of life around the office.

But the inconsistency and unpredictability makes UGC nearly impossible to monetize. Said Max, "It's a much easier ad sale to do product placement in professional video where advertisers can control how they want it to be. They don't really want to rely on thirty second clips of people slamming into trees."  So UGC is a tool for bringing in users and content, but not very monetizable. Hmm...Sounds like the very definition of a loss leader to me...

But I grant their point that the shift hardly means that the move to democratize content is over. It's very possible there is still a genius way to monetize UGC, we just haven't found it yet. Remember how long it took the industry to come up with paid search ads? Back when Google was founded, many VCs deemed it too late to an already mature market with no good business model. It's also very possible a huge star does arise from YouTube and actually does cross-over to traditional media. But just like in the post-March-2000-era, companies need to focus on where advertisers want to spend money now, versus trying to sell them on the future. The future, simply put, will still be there when the economic crisis is over.

But why should we believe ties between Hollywood and the Valley will finally bear all that much-promised fruit? Max pointed to nearly every broadcaster voluntarily making content available online, the surprising success of Hulu, and viewers increasingly choosing the Web as the place to consume even long-form content. "A year ago, I think (Slide's sassy head of business development) Keith (Rabois) would have spit in the face of anyone suggesting a content deal with us," Max said. "Now you can't argue against it." The wake up call for Ashton? Five years ago, if you made people chose to get rid of their TVs or computers, most of the ones he knows would have said computers. "Now, you ask the same question and hands down everyone would get rid of the TV. You don't need it anymore."

When I teased Ashton about his third splashy Valley press tour in just a few months, he added, "By the way, I'm not going away so people can brace themselves for that."

Is a deal with Twitter next?


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GREAT analysis. It will be interesting to see what happens with Twitter especially, since they seem to have an 'old-guard' mentality about funding and are supposed to start trying to monetize soon.

I think you are writing UGC off too easily. The key to it will be product placement. I bought a Roomba within 30 seconds of seeing Roomba cat on YouTube. A $250 purchase as a direct result of watching a YouTube video yet YouTube made nothing from it.

I think all this 'get professional content, sell ads against it' approach is old school tv advertising transposed to the web. There is no new thinking there. The reason search advertising cleaned up is for the first time it offered advertisers something different.

UGC product placement works because it is showing real people using the products. With a lot of things it would be genuinely useful to look at a few videos of whatever being used in a normal context before buying. How hard can it be to sell relevant ads against that with all Google's tech?

I don't think UGC can be painted with such a broad brush and it really depends on the context.

For instance, certainly some bloggers can risen to fame and gotten huge audiences (in many cases, replacing mainsteam media). So much so that many online publications are now considered mainstream, and blogging is some of the earliest UGC.

And UGC can be highly valuable for sites in lieu of or along with professionally written content. Reviews are a great example. Amazon.com balances professional reviews with user reviews. The core of tripadvisor is UGC.

I think Vanessa said it best, "I don't think UGC can be painted with such a broad brush and it really depends on the context."

One thing that is difficult with "new media" (to use an old term) is that we still think of one-size all solutions.

Being in the interactive space for over 10 years in marketing, I've seen people constantly chasing for the next "killer app".

Unfortunately, if the whole "long tail" meme holds true, there will be no "killer app". Everything depends on context. There's are now a multitude ways of generating content and creating media - yet not all will work well depending on the situation.

Vanessa and Robleh are correct in UGC's value for reviews. There has been a number of ROI-focused case-studies that show that ecommerce websites with user-based reviews tend to have higher conversion rates than a ecommerce website with none.

Again, this all comes into context. Clearly a website like TripAdvisor are very, very different than YouTube. Yet both are technically "UGC".

Intriguing article - definitely got me thinking.

I think that UGC has a place in media consumption and the monetization path goes far beyond display advertising, or any advertising for that matter.

For example, I met "the evolution of dance" guy at Blog World Expo last year, and he didn't make a penny from that video (he couldn't because he didn't have the rights to the music). He had actually been doing that skit for over a year when it hit YouTube - he was totally shocked - so I think you are right about the lack of predictability. That being said, he now makes money doing corporate speaking gigs.

So, while he didn't make money from the video it led to other opportunities. I think that many creators of UGC think of it the same way - as a means to an end.

Advertising on UGC or any other content is probably not the best long-term solution for publishers either, as consumers get better and better at blocking ads, either through ignoring them (banner blindness) or adblockers.

All businesses need to ask "What creative and relevant paths are to monetize beyond advertising?". Look at CNN - they sell t-shirts with headlines, other news sites are selling photos, books and more. Pandora is looking to use their knowledge about your musical tastes to sell you concert tickets (vs. regular radio which is advertising based).

For both the content creators and publishers there seem to be better paths to monetization than advertising.

A minor complaint. This is the first sentence in the article where the name "Max" appears:

"And Max, with his metrics-watching obsession, knows what works online."

I don't know who Max is. He is not mentioned in your TechTicker interview with Kutcher, which is the link previous to the name "Max".

Had to figure this out from context. A little confusing.

Daniel Riveong wrote: "There has been a number of ROI-focused case-studies that show that ecommerce websites with user-based reviews tend to have higher conversion rates than a ecommerce website with none. Again, this all comes into context. Clearly a website like TripAdvisor are very, very different than YouTube."

I think the trend against user generated content is fairly broad. VibeAgent is a competitor to TripAdvisor, and VibeAgent has just given up on its whole emphasis on its social network, which was originally going to be the thing that set it apart.

Krista Neher writes " Look at CNN - they sell t-shirts with headlines, other news sites are selling photos, books and more.... For both the content creators and publishers there seem to be better paths to monetization than advertising."

I wouldn't know how to make money off of a property like CNN, because it is so broad in scope. But it came into existence before the web, and it still draws most of its profits from its offline business. Content sites that have no offline divisions tend to be much more niche oriented. I think advertising still offers the possibility of excellent profits for online properties, but the editorial strategy needs to be quite different from anything like CNN.

Lately, when I've been asked for advice about how to make a content site profitable, I've been emphasizing the need for extreme focus. Over the last 9 years, I think I've seen close to $2 million wasted on startups that simply were not focused enough. Most people who consider startups are somewhat aware of the need to be focused, but I think the need is especially intense for content sites that will supported by advertising.

I think it's best if the entrepreneur starting a startup knows, before the site is created, which industry the site will get its advertising from. Then they need to create the content that will bring the customers who are interested in that industry. For instance, if an entrepreneur were creating a content site focused on fishing, they would (I hope) decide ahead of time whether the focus would be on deep sea fishing or freshwater fishing. After they make that decision they would know, roughly, which companies they could expect as advertisers. Then (hopefully) they would create the content that would bring in the ideal customers for those advertisers. They might, for instance, hire some bloggers who are already writing about fishing. For any large community (such as fishermen), it is possible to find at least a few bloggers who are in that community and who have distinguished themselves as excellent writers.

There is, of course, room on the web for authentic voices that speak about personal experiences or insights. Most of us have blogs where we write with no expectation of turning a profit (at least not in any direct, obvious way). But if the goal is a content site that lives 100% on the web and is meant to turn a profit, I think there needs to be a very high level of focus. And then, I think, the profits can be quite good.

Hold on, isn't this very blog UGC?

Flanagan, how much money do you think Sarah Lacy is making on this blog? The time she invests here doesn't make her any money, though it may help to sell some books, or it may help her career in some other way, for instance, by raising her profile. So her writing here is a loss leader for the rest of the stuff that she'd like promote, which is the point that, on a general level, she is trying to make.

When UGC is available at the dinner table, it will be a huge money maker in the end. Think about it. Search advertising was limited to the most tech savvy companies, the early adopters, who were the initial purveyors… But then Brands realized that they were missing out on the action and that’s how Google grew to prominence. The action that drew the Brands was the huge mass of people that flocked to the internet with improvements in technology, specifically the death of dial up and the standard of DSL and cable to get on the internet.

With UGC, as with any other successful media, the power lies with the attention of the masses and their accessibility to the desired media. Sure, UGC doesn’t make booku bucks now. But it’s still a young media with a limited mass following (it’s mainly the younger age groups who are the mass consumers of online video) and inefficient accessibility (you have to be online and it’s not available on your living room TV).

The tipping point for UGC comes when web enabled TV gives you the power to watch online video while you’re eating dinner with your friends. This ushers in a paradigm shift. UGC is known for garnering eyeballs and despite the unpredictability of the content (which truthfully, people have seen worse on Animal Planet or America’s Funniest Home Video anyways) the masses will certainly take from the trough of UGC. At that point, bold companies will take advantage of this shift in media consumption, just like in the search industry, and UGC can be efficiently monetized with this technological revolution (hehe, sorry all… can’t say anymore already got ideas for this stage). But seriously…

UGC at the Dinner Table… Think about it.

just read it now.. may 1st. good article...

"When I teased Ashton about his third splashy Valley press tour in just a few months, he added, "By the way, I'm not going away so people can brace themselves for that."

Is a deal with Twitter next?"

are you related to nostradamus..? or actually you gave him the idea (Ashton Vs CNN race in twitter)

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