Can user-generated content generate revenue?

Three years ago, there was no MySpace. Today, Alexa Internet, a subsidiary of that provides information about web traffic, rates it as the fourth most popular English-language website and the sixth most popular site in the world. The number of MySpace accounts reached 100 million in August of 2006, and according to CNN, MySpace adds 230,000 new members every day. Similarly, SecondLife, a subscription virtual world that went public in 2003, now has one million subscribers. Even more dramatic is the growth of YouTube, founded in 2005. Every day, visitors view one hundred million clips and upload 65,000 new videos. Nielsen/NetRatings reports that YouTube has 20 million visitors per month.

Although online communities drive tremendous traffic and interest, particularly among younger users, industry executives are trying to develop business models that will allow such sites to make money for their operators and content owners. At the PricewaterhouseCoopers “Outlook for Content and Communications 2006-2010” October event held at the Four Seasons in Beverly Hills, a panel of industry executives discussed this important new type of content genre: social networking and user-generated content sites. Tony Uphoff, former publisher of The Hollywood Reporter and President, VNU Film & Performing Arts Group, moderated the group including Blair Harrison, CEO of iFilm; Norm Lehoullier, formerly new media director of G2; David Tenzer, vice president of media partnerships at Revver; and Rex Wong, CEO of Dave TV.

“What are the business models that will show how these sites can generate profits?” asked Uphoff. “We’re seeing extraordinary audiences being aggregated in social networking sites, which some people call the Phase II phenomenon of the Internet. But are they sustainable? Will they be advertising-based? If so, will they take advertising dollars away from other ad-supported media such as TV and print? Is this only a phenomenon of early adopters and teens or is it going to go mainstream in other demographic segments? What are the potential brand components of advertising?”

Windows on the social networking world

The panelists described how their companies are looking at monetizing social networking and other websites based on user-generated content and interaction. Their insights on current assumptions and revenue models for these new content genres also provided a look into future viability as dependable sources of revenue.

According to Blair Harrison, CEO, iFilm – an on-line video network that offers a library of about 100,000 pieces of short-form video including licensed television content, short films, and user-generated content – it is important for marketers and content purveyors to understand how people access and consume content. To better comprehend user behavior and engage visitors, iFilm held a contest with prizes that rewarded users for building their own "channels," which, in this case, were user-created collections of users' favorite TV, movie, video, and music video clips.

“I think everyone overestimates how hard it is to make money from these sites,” said Harrison. “The challenge is finding a way to make money that is sustainable. We exist in a world where legal issues surrounding content and user-generated content are very fluid, especially concerning professional content. Those who are in the user-generated content business don’t have long to create models that are sustainable.”

Norm Lehoullier, formerly new media director of G2, Grey Global Group’s specialized marketing services global network which offers clients a range of brand communications capabilities including digital marketing, said G2 focuses on what they term ‘activation.’ “From our perspective, it’s not about awareness advertising, but getting customers to act when they see an ad. From an ad agency perspective, the difficulty is that original business models for social networking sites were based on sharing content rather than providing ad-supported content. Therefore, the sites do not really aggregate eyeballs. However, a key to ad success is quality content where the value exchange is high. "Still, in this kind of environment, advertisers fear the possibility of negative discussions of their brands," said Lehoullier.

David Tenzer, vice president, media partnerships, Revver – a viral syndication network that matches advertising sponsorship with user-generated content and pays users for creative work – said, “Our business model supports two core principles: the sanctity of copyright law and the right of artists to be compensated for the work they create. Our proprietary technology allows people to upload videos into which we place ad insertion capability. As the videos move around the Internet - posted on MySpace or a blog, or podcast into iTunes – we actually serve ads into that content. Therefore, we monetize user-generated content on behalf of the creator,” said Tenzer.

Rex Wong, CEO of Dave TV, explained that Dave is not a person, but an acronym for ‘Distributed Audio and Video Entertainment.’ Dave TV builds broadband video social communities around brands, harnessing the social networking in user-generated content.
“We launched for MGM Stargate, a complete video social community around the brand where users can create profiles, upload episodes in a contest, blog, participate in a message board, and invite their friends. This approach allows a TV show like 'Stargate' to harness and engage their fan base in multiple ways. We then help monetize the TV show through ad support and sell-through content as well as merchandising and licensing on the site. By creating a critical mass of users, the brands, studios, and labels can really engage them,” said Wong.

Spot buys: Spotting the winners

The panelists concurred that new media platforms are changing the nature of the audience, so that potential buyers and customers have become members of “tribes,” or groups of individuals who share common interests that bring them together. “It is about tribes: communities, user bases, and audiences are all becoming the same thing,” observed Tenzer. "In this emerging environment, advertisers must consider that mass marketing may not work as it has in the past."

“Advertisers will increasingly have to advertise to the tribes,” said Lehoullier. “People are going to be curators of content, rather than mere consumers. They will have a play list on their devices, and a portion of their content will be user-generated. Combine the audience as tribe with mobility and consumers as curators – and that’s changing everything.”

The panelists also agreed that establishing metrics would open the floodgates for advertisers to begin spending money on sites based on user-generated content. “There is a reason advertisers spend a lot of money on television. They know that if they advertise against a given level of Gross Rating Points [GRPs], they can forecast how many products they will sell. During the next year, we’re going to see consistent measures that will take replace GRPs, taking into consideration not just reach but also engagement,” Uphoff commented.

There may still be limits for the advertising support of user-generated content-based sites. “In the advertising world, I hear about the 'MySpace Effect,'” reported Wong. “This occurs when a site has such a huge inventory that no matter how much they grow, it won’t help them in terms of revenue. When Fox bought MySpace, the site had around a billion page views per day – now it’s double or triple that. But the fact is that the majority of their ad space is actually sold on the front page.”

Harrison said, "I believe that the next phase of social networking and user-generated content sites will be the emergence of virtual networks, like a virtual CNN offering the works of 50,000 content creators."

Could YouTube or a YouTube-like site with a carefully constructed index become the new CNN – a media powerhouse in its own right? Many traditional entertainment companies have won and lost when betting on new media platforms and content genres – failing to invest in them when they were small and inexpensive, or paying big money for entities that fizzled out. It takes more than due diligence to know when to hold ‘em and when to fold ‘em – it takes rare insight and broad knowledge of both the old and new media business landscape.