Online Video has its own Cuban crisis?

Speaking at the D7 Conference, Mark Cuban says that despite the growth of YouTube, the Internet video market over the last decade has actually been a disappointment. CNET:

The problem, he said, is that when Google bought YouTube it focused on ubiquity rather than making money. The result, he said, is that the market can't really sustain itself.

"This is a company that is literally subsidizing the bandwidth for the world," Cuban said, speaking at the D: All Things Digital event. That's a risk, Cuban said, if someone were to ever find a better search business model than Google.

"I think its a real disappointment to see where Internet video has come," Cuban said, noting that the industry still doesn't have advertising standards, among other shortcomings.

Yes and no. In our Future of Online Video work we use the model in the diagram above to show what is happening. The X axis is time, the Y axis is total market share in financial terms. Internet technology tends to destroy existing value at a faster rate than it creates new value. This is due to 3 main reasons:

(i) It is initially heavily subsidised by offset economics, Google, as Mark notes above, or VC funding etc

(ii) It is operationally lower cost and is being set up by startup skunkworks, so can subsist on lower revenues anyway (and thus highlights the main structural weakness of teh incumbents)

(iii) It "cheats" by not paying its full way in full in the early days - content piracy for example.

Typically teh new media goes for market share first (using its advantages) and only competes on economics later. This is standard and it makes it harder for incumbents to combat new entrants.

However, Cuban did point to how some of the incumbents are crossing over - and the structural issues they still face:

"Hulu has done some great things and they are focused on monetization," he said, but also added "they have some big pockets that they have to appease."

But big picture, at the end of the graph you will see what happens time and time again with new media models emerging:

- They do have an S curve, they do figure out how to make money eventually - Movies, Radio, TV, Newspapers 1.0 all went through this phase.
- The old incumbents decline inmarket share, but still stick around for a long time

Our models predict that the TV/Movie/Video industry is starting to enter a period of major turmoil now, which will exist for about 2-3 years (depending on wider economic conditions) but in 5 years time a clear New Media industry will have arisen. The music industry and print newspaper industries are further down this curve. What is easy is predicting what will happen, harder is predicting who will be around.

As Cuban notes, YouTube, which still relies on massive Google subsidies, will eventually have to pay its way as a business model - but right now it is "crashing" the market. One of the other predictions we make is that incumbents will use all means at their disposal to reshape the market structure - attacks on piracy and low cost bandwidth are already starting.

We also predict an attack on Google's market dominance/subsidy of Online Video will occur.