By Jon Fortt
August 7, 2009

By Keith Richman, CEO, Break Media

It has become fashionable to claim that it is impossible to profitably produce original video content for the web.  After all, many high-profile digital studios closed after burning through millions in venture capital, while established media companies are finally making real money by streaming prime-time shows on their websites and through ventures like Hulu.  The future of entertainment on the web, these people suggest, will continue to be driven by expensively produced “premium content” that looks a lot like today’s prime-time TV.  Nothing could be further from the truth.

The premium shows that networks now distribute online are subsidized by two unsustainable situations: big advertisers who spend millions of dollars during the upfront process to finance unproven shows, and big audiences that television can deliver to those shows since viewers have fewer choices than on the web.

When these subsidies disappear, as they certainly will in the next few years, the industry will desperately need a new economic model for producing content.  The companies that survive and prosper in this new environment will have to take some lessons from Hollywood studios in the early 20th century.

Digital studios come up short

First, let’s look at why so many digital studios are failing these days. Many of these businesses had fundamental problems that didn’t have anything to do with broader industry trends—some lacked professional sales forces, and many had no clear online distribution strategy. Companies without these problems have failed as well because they followed the model of major media companies by investing in expensive online productions without the legacy subsidies of the television upfront process.

These companies regularly spent money developing concepts, paid for expensive talent, or even outsourced production entirely. Once you factor in the costs of doing any of that, you lose all hope of making a video profitably. The math just won’t work.

Hiring a professional staff to develop the concept for a recurring series costs at least a few thousand dollars. Recognizable actors have been commanding $15,000 or more to appear in a single web video. Studios have been spending up to $250,000 to produce a series of 10 five-minute episodes, and outsourcing production can bring that figure even higher. Add it all up, and some companies are spending upwards of $25,000 per web video.

Even if we assume that a video is a huge hit and will get 1 million views (which most don’t), and is fully sponsored at a rate of $15 per thousand streams (which most aren’t), the maximum return is still only $15,000.

It’s no surprise that these companies are failing left and right. As television audiences continue to migrate to the web, it’s not going to take long for this brutal math to impact major media companies in a similar way.

The future: a lot like the past

The only video content model that works today is to produce a lot of content, frequently. To succeed, a company doesn’t need to create the next culturally significant hit or buzzworthy production. Companies just need professional content that is good enough that people will keep coming back to their website. Currently, online entertainment is purely a volume game with a lower quality standard than we’ve grown accustomed to from broadcast television.

The successful studios of the near future will specialize in mass production—more than anything else they will resemble the big studios of Hollywood’s Golden Age. They won’t spend money on outsourcing or costly development. Instead they will have a full time creative staff on board, and they will give them the freedom to be creative (in an advertiser friendly way, of course). In return they need to work their butts off. They need to crank out new content every day, not just every week.

With this kind of a model, companies can produce a professional video for less than $500.  Some shows will be big hits, getting millions of views and producing profits. Many others won’t attract an audience, but with lower production costs and a more agile production staff, these new studios will be able to brush off the small losses and move on to the next idea.

Over the last few years, Break Media has embraced this new model. We have assembled a talented group of writers, directors, actors and producers, almost all of who wear multiple hats. They spend their days making advertiser-friendly content for our audience and our clients that is also a hit with our young male audience. Some other companies like CollegeHumor have also done this exceptionally well – so well in fact that CollegeHumor leveraged its success into a show on MTV.

Successful low-cost Internet content can sustainably make the jump to TV – but taking TV in its current high-cost environment to the web won’t work for much longer.

Keith Richman is CEO of Break Media, an online community based in Los Angeles.

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