Market Watch

Google To Develop Original Programming


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It is being widely reported that YouTube, the world's most popular video service, plans to spend $100m on original content as part of a broader initiative to rejuvenate content on the site. Concrete details are thin on the ground although immediate plan for original content is said to be focused on celebrity driven low cost content that will populate the site's new thematic channels in conjunction with more conventional YouTube fare.

The story follows hot on the heels of Netflix announcing that it plans to spend $100m on remaking the BBC drama 'House of Cards.'

Analysis
More than anything else the reports should be seen as a declaration of intent by YouTube. Since being acquired by Google in 2006, YouTube has attempted to diversify the site's content offer away from the user-generated content for which it is famous. However, despite some high profile deals with Channel 4 in the UK and international rights for IPL cricket, premium content from the major US networks and studios has so far proved elusive. It has stepped-up its efforts again in the past six months, entering into negotiations with Miramax for access to its movie catalogue and sports leagues such as the NBA for streaming rights, but there has been no public announcement on if and when these deals will close. It is therefore not surprising that the company is looking to original content.

In fact, the move into original content for YouTube was beginning to look more like a question of when, rather than if. In March 2011 Google acquired New York-based production company Next New Networks (for less than $50m), which built its business around the development and packaging of video content for online audiences. Given this acquisition it seems likely that at least some of the original content on YouTube will be aimed at the middle-ground between premium TV and movies, which are expensive to produce or acquire, and user-generated content (UGC), which historically was difficult to monetise.

In reality Google has appreciably stepped up its monetization efforts around YouTube recently: last year the site is believed to have generated around $1bn in advertising revenue. However, much of this came from an increase in relatively cheap inventory (e.g. keyword ads overlaid onto the video stream). Original content should help Google to capture more in-stream video advertising, which enjoys much higher advertising rates, as it both i.) gives the company its own higher quality content to sell against (Channel 4 in the UK is understood to sell most of its own ads space on the videos it distributes through YouTube) and ii.) helps to move the perception of the site away from the old (and in many respects outdated) image of a repository for low quality videos of dogs on skateboards, which in turn should make it more generally appealing to advertisers.
 
Longer term YouTube is eyeing a future when connected TVs and BD players will bring the service directly into living rooms, a future in which it is competing more directly with traditional television for audience and ultimately for ad spend. In this environment good quality content is going to play an increasingly important role in the company's future and producing its own videos is potentially a good way to secure that content for a service that many of the world's most important media companies have been wary of (limiting their available content to clips, refusing to put their content on Google TV and even taking it to court). A similar scenario led Netflix to move into original production and for both companies these early sorties are likely to be the first of a number of experiments with original content. Nevertheless announcements of $100m from either side should be taken a clear sign that these companies are taking the need to invest in their future seriously.

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