Video is Impossible pt. 2: Exceptions Make the Rule

Video is impossible, except when it isn't

This is part 2 in a series of posts about online video. Last time we talked about why video is nearly impossible as a business model on the internet, and this week we’re going to talk about the exceptions to the rule.

Video is Impossible

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In last week’s article, we summarized what seems to be a pretty basic truth of the internet - video is taking up more and more of the social content space, but unless you’re one of a very small number of sites it’s almost impossible to make money in online video. This was due to a combination of factors I’ll summarize again below. I’ll add some additional details, including very good discussion from the comments of last week’s article that I’ll call out.

• For everyone who isn’t YouTube or Netflix, the lack of first-mover advantage and lack of network effects makes building a video service hard. This is especially true for user-generated video sites aiming to compete with YouTube - YouTube is a natural ‘aggregator’ who dominates the two-sided market that brings creators and viewers together. Aggregators tend towards natural monopoly, and that certainly seems to be the case here.

• Technical costs are high and will remain high.

  Mark hewis
  had some great comments elaborating on this, as I wrote a fairly simple account focusing on the cost of hosting and the cost of distribution. In reality it’s not just expensive, it can also be hellishly complex behind the scenes. Even for the most basic service, you have to worry about converting videos into different formats, encoding different resolutions, different codecs, DRM software if you don’t want to get sued out of existence, how to store your data packets so all this can actually accessed instantly, and much more. The technical task is immense.

  You’ll also need different approaches for livestreaming vs video-on-demand - one might require you to serve the same single source to millions of people around the world, the other requires you to store millions of different video files and distribute them on demand. There have been technical advancements that make things easier, but they have been counteracted by increased video resolution and framerate standards.

• Cost of acquiring content is high, whether for a streamer or for user-created video. New entrants to the streaming space tend to make splashy investments, like how Apple spent $20M per episode on their hit show Severance¹ or how Amazon dropped almost half a billion on their Lord of the Rings series. In theory those investments in shows could be reduced, but the reality is that to grab market share they do need to spend big money. For user-created video it’s even harder - costs usually scale linearly with revenue. With a streaming service, in theory if you have a big hit it’s all profit after you repay initial content costs. But YouTube is set up such that 55 cents of every dollar of ad revenue goes to creators, so extra revenue by definition means extra costs (This same dynamic is why Spotify is eternally struggling with profitability).

For all those reasons, we concluded that video is nearly impossible. But is it really?

Alternative Theories of Video

Here I want to cover some alternative models of a video site. YouTube and Netflix are entrenched. They aren’t going anywhere. But maybe there’s a way to avoid fighting them, or ways to fight them non-directly and still make a profit. Some of these methods don’t work at all, some are highly speculative, and some - miracle of miracles - actually do work. Let’s talk about these alternative theories of video and rate how realistic they are as real business strategies.

Don’t be video-only

This one’s kind of cheating, but one simple way to avoid some of these problems is to not be a video-first or video-only site. Video works at Meta because Facebook and Instagram weren’t founded as video-first apps. They were already solidly profitable before video became crucial on those platforms.² This means they’re not subject to the same second-mover disadvantage as pure-video plays, as they have built in audiences already. It means they have money to invest in doing video correctly. Video is one feature among many keeping people on those platforms.

As a counterpoint - Meta is a comparably huge company to YouTube or Netflix. Facebook and Instagram are also aggregators. This likely only works if you’re already a very successful and large player, not a startup. But it could be a positive sign for companies like Spotify, Amazon, and a few others.

Strategy rating: (8/10 for giants, 3/10 for non-giants)

Get Political

Online video is just another form of media, in the end. And media is political. Maybe the route to profitability is to be explicitly political! This certain seems to work for certain TV and radio stations.

Let’s not be coy - the group we’re really talking about here is conservatives. There are two media ecosystems, the mainstream media and the conservative media. There is no ‘progressive’ equivalent with reach like Fox News, NewsMax, or Rush Limbaugh and the conservative radio/podcast network. Conservatives are actually quite fond of setting up new social media sites as well - see Gab, Parler, Truth Social, Gettr, Rumble, MeWe and more. If Fox News can make money, why not a conservative video site?

It’s a nice theory, but the problem is that it’s been tried and it’s failed. As best I can tell, not a single site named above as ever come close to turning a profit. Rumble was explicitly built as a conservative version of YouTube, and while they’ve built a decent audience they’re still deeply unprofitable with no clear plan to become profitable. Part of the problem is that being explicitly political makes it hard to truly scale, as only weirdos want to be on IdeologyTube instead of YouTube. There’s also the fact that advertisers don’t want to advertise on sites where the median content creator was in the Jan 6th crowd. Tough break.

Strategy rating: (2/10 )

Invent a video new format

This one’s quite tricky because it seems very clear to me that it could work. But empirically, it hasn’t yet.

YouTube is the dominant beast in traditional user-created video-on-demand content. Short of some sort of apocalypse, that’s not going to change. But where YouTube doesn’t have a dominant monopoly yet is in livestreaming and short form vertical video. It was innovative new entrants who created those categories, got big, and challenged the king.

Livestreaming formed from Justin.tv, which eventually became Twitch. Short form vertical video was pioneered by Vine and then later by TikTok. Both Twitch and TikTok were able to grow into huge, mature businesses with very large audiences and market share. They were able to disrupt YouTube’s first-mover advantage by doing something truly new and innovative with the video format itself.

The problem is that neither Twitch nor TikTok is profitable. Yet. TikTok likely has a cleaner path to profitability if they aren’t banned in the US, but it hasn’t actually happened to date. It’s clearly possible for these services to become profitable. But the challenge is two-fold: first, video is just naturally difficult for the reasons described at the beginning of the article. Even YouTube struggled to turn a profit for more than a decade. And second, these innovators have to compete with YouTube. If you show signs of success in your new format, YouTube will jump in with their massive audience and create YouTube Live or YouTube Shorts.

So the jury is still out for Twitch and TikTok. You could also consider VR/metaverse stuff a potential new advance - if 3D/AR/VR/metaverse video content becomes a huge new category, that could disrupt the current market.

Strategy rating: (4/10)

Non-traditional monetization

Ok, now we’re getting to the good stuff.

Most video platforms (and most content sites on the internet generally) make money in one of two ways: advertising or subscriptions. Those two revenue streams are the source of funding for almost all the online content you consume, whether it’s Squid Game or your weird obsession with yodeling influencers. But there are other ways to fund a website!

For instance: Kick is a competitor to Twitch that funds itself through gambling. Kick, like basically every livestreaming service, is deeply unprofitable on the face of things. But Kick is owned by Stake.com, a gambling site. And it’s designed in a way to funnel the viewers of Kick streamers into gambling on Stake. Is promoting gambling to a young, wildly immature user base a great way to, you know, design society? Definitely not. But is it a feasible way to keep a livestreaming site alive? It just might be!³ Similarly, Amazon Prime will continue as a streaming service indefinitely not because its streaming business is profitable in and of itself, but because it attracts people into the wider business of buying things on Amazon.

Or consider TikTok and its close Chinese cousins like Douyin, Taobao, Kuaishou, etc. TikTok isn’t profitable in America yet, but it’s main bet on profitability is an interesting one - TikTok Shop. They’re not trying to replicate the success of Meta or YouTube in advertising, they’re trying to replicate the success of Douyin & friends.

In China, the livestreaming and vertical video spaces are intimately integrated with live shopping. There’s a huge emphasis on influencers selling goods directly to users. In many cases, that is the main point of the influencer - they aren’t content creators who occasionally get sponsored by a brand, they are professional sales people where 75% of streams are directly pitching you products. It’s more akin to QVC and home shopping networks in America than anything else, and it’s why Douyin is consistently profitable in China. Check out this farmer lady selling crabs! On a Douyin livestream! Crabs! When was the last time you bought groceries from TikTok? It might be the future?

This model is proven to work in China, and TikTok is hoping it can work in the US.⁴ In a very real sense, TikTok wants to compete with Amazon instead of with Meta or YouTube.

In general, I feel like this sort of thing is one of the more serious ways a video service can survive. If you’re not going to beat Netflix at the subscription game and you’re not going to beat YouTube at the ad game, make a third solution and find an alternative way to make money.

Strategy rating: (7.5/10)

Niche Content Kings

If you haven’t read You Need Gravity To Survive, it will be a helpful companion to this section. Quoting that piece, in a discussion of why sites like Buzzfeed and Vice have declined:

BuzzFeed’s main issue was that nobody turned on their laptops or phones and went directly to BuzzFeed.com. They opened their laptops or phones and went to Facebook, and then they would see something fun from BuzzFeed and click on it. BuzzFeed never controlled their own flow of users. To put it simply, they had no gravity. They had no organic pull where users felt compelled to visit their site independent of other sites or platforms. Digital gravity is a real thing, and if you don’t have any your site will always be vulnerable to disaster - no matter how successful you currently seem.

I want to be clear about what I’m saying here. The concept of digital gravity sounds like an overly complicated way to say ‘popularity’, but gravity is distinct from popularity. BuzzFeed and Vice, in their heydays, were enormously popular. But neither had real gravity.

What is gravity? Gravity is being the first site someone logs in to each day. Gravity is the site that you instinctively type in the URL of their laptop when you’re bored. Gravity is the app that gets opened mindlessly by default. Real gravity relies on no intermediary. It often comes paired with community. Giant social networks are the purest example of this - billions of people go to Facebook, TikTok, Twitter, Reddit, etc, by default. They have an enormous, organic pull on users completely independent of other platforms, companies or technologies. They pull you in, they’re sticky. They have gravity.

If you’re a video content creator who has achieved a certain level of success, you might have enough personal gravity to build your own video service. This sounds a little fantastical, but it’s already been done several times.

Dropout is a comedy site from the people who used to work at CollegeHumor. Their audience was loyal enough to stick with them after CollegeHumor collapsed years ago, and they’ve built Dropout into a fully profitable video service. They’re like a micro-Netflix that produces all their own shows, which are all the same flavor of alt-comedy, but the people who like that content really like it. And it’s working! They’re profitable and sustainable and doing well enough they just announced their first round of profit-sharing with employees.

Another good example is Nebula, which is a video content site set up by a collection of YouTubers. The YouTubers involved are very successful, big accounts and typically create extra videos or bonus series to place on Nebula. And their fans seem to buy in - Nebula recently surpassed 600,000 subscribers. Again, they seem fully sustainable and profitable.

It’s important to note what services like Nebula and Dropout are not. They’re not in direct competition with YouTube - that’s still the only game in town for non-famous people to upload their videos. They’re exclusive subscription services started by creators who already have a following. They’re not even properly divorced from YouTube - Nebula’s big creators all still post free videos YouTube, and both those services very deliberately use sites like YouTube and TikTok as the central funnels into their paid subscription sites.

But that model seems to work!⁵ They’re not going to slay the giant, but they’ve found a way to live alongside it and even benefit from it. They’re bridging the divide between being their own streaming service and being a content creator on a larger platform, doing both at the same time. This to me seems like one of the best ways to make money in video. It won’t work for everyone, but it’s clearly something that successful creators can keep doing in the future.

Strategy rating: (9/10)

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That’s a wrap on part two of the Video series. In the next installment, I’ll be reviewing the book Like, Comment, Subscribe which is a history of the internet’s most important video site, YouTube. So, uh, don’t forget to like, comment and subscribe here?

1. The Severance number is truly baffling, because much of the show takes place in an almost featureless blank set and it has few to none special effects. It’s a great show but it could be made for less than $20M total - $20M per episode is NUTS.

2. Instagram feels like it’s always had video, but for the first three years of the app’s existence it was image only. And it wasn’t until six years in that Instagram added stories, and it took even longer for video to really become a core focus for the app.

3. I’ve written pessimistically about Kick before - I don’t think Kick’s business model works as a stand alone venture. But the one thing I didn’t account for when I wrote that last year was how deeply enmeshed the gambling angle is to their plans.

4. You know, if they don’t get banned.

5. It also works outside video - for sites like Defector, Puck News, 404Media, and a wide variety of Substacks like this one that you should give money to.