In Depth

Column: Who Will Survive Online Shakeout?

There’s just not enough money to go around on the Web. That’s why the digital studios are tumbling down.

The first to fall was Mania TV in March, followed by 60 Frames earlier this month. More will surely shutter in the coming months.

The question is, who will be left standing? Digital studios like Deca, Agility, Next New Networks, Electric Farm Entertainment, Revision3 and others are fiercely competing with YouTube, Hulu, broadcast and cable networks and online video advertising networks for the precious few Web video ad dollars. Media firm Magna forecasts the U.S. market for online video will grow by 32% this year, rising from $531 million in 2008 to $699 million in 2009.

That’s just not enough to keep everyone fed.

“Digital studios are obviously challenged,” said Adam Kasper, senior VP and director of digital media at Media Contacts. “They sell high-priced creative services without long-term, contractual relationships with marketers. That means they are pitching all the time. I don’t see that as a sustainable business model. It’s too taxing on an organization.”

For Web video to work for advertisers, brands want to be involved early on in the creative process to meet their marketing objectives, said Jordan Levin, CEO of Generate, a multimedia production shop. Generate creates Web series, but the company also produces for TV and film and manages talent, allowing for multiple revenue streams.

“A pure-play digital studio cannot by definition offer a solution for brands that extends beyond a single digital platform. If a brand’s desire is to reach consumers and engage those consumers, you have to follow consumer behavior,” he said.

Break Media is similarly diversified. Break produces original branded content, but its core business is the distribution network it owns, led by Break.com.

“We license content, but we also have distribution, so we can control our own destiny,” said Break Media CEO Keith Richman. “In an ROI-driven economy, advertisers are focused on getting their ads seen and a media plan that guarantees exposure.”

Still, a number of pure-play digital studios remain, and they say a smart approach to business is their key to long-term success.

My Damn Channel operates a lean business, has never employed more than half a dozen staffers and hasn’t raised much venture money. As a result, it’s very selective about the shows it produces, investing in inexpensive properties with celebrities attached such as Sarah Silverman and Isla Fisher. The company, now profitable, was one of the first digital studios to hit the black.

Next New Networks aims to operate like a cable network, said CEO Lance Podell. “We build brands that are relevant to passionate, underserved communities,” he said. “In our world, [Next New Networks’] ‘Indy Mogul’ is a network, and if one of the shows under Indy Mogul doesn’t attract viewers, then the other shows will and new shows will be developed under the network brand. We now have more than 25 million consistent views of our programming every month.”

Even so, longer-form premium content is going to attract the bulk of the ad dollars for now, said Maria Cirino, a venture capitalist with 406 Ventures.

That’s why any digital studio that survives will need a low-cost, high-revenue model. The Denver-based digital network Jookt covers high school sports and recently shifted its business model to significantly reduce expenses. Last fall the network relied primarily on professional photographers and spent about $70,000 each month to create 20 stories.

Now Jookt is churning out about 100 pieces a month for about $20,000 by relying on high school and college students and less expensive crews, said Jeff Bennis, the company’s CEO.

Maybe what this time of transition really means is everyone in the creative business is going to get paid a lot, lot, lot less.