Is There Room for YouTube and Yahoo! in Original Video?

The two companies are trying to compete in what has become a very crowded space.

Jul 17, 2014 at 11:32AM

It's a good time to be a content creator.

The number of outlets that provide original television programming has exploded -- and it keeps getting bigger. In addition to the many cable networks that now compete with the traditional broadcasters, the number of online companies paying for high-quality shows continues to grow.

A field that already includes Netflix (NASDAQ:NFLX), Hulu, and Amazon (NASDAQ:AMZN) has expanded to include Yahoo! (NASDAQ:YHOO) and will soon add Google's (NASDAQ:GOOG) YouTube, which plans to up its spending on original programming, Reuters reported.

The possible benefits in creating original shows can be huge. HBO has built its subscription base on high-quality, heavily talked-about programming. That model has also worked for AMC Networks (NASDAQ: AMCX) on the basic cable side, and it has helped Netflix(NASDAQ:NFLX) rapidly expand its subscriber base. A single hit show like Netflix's "Orange is the New Black" or HBO's "Game of Thrones" can lead to people subscribing or renewing a subscription. In the basic cable world, a hit like AMC's "Mad Men" or "Breaking Bad" can establish a network and give it a powerful platform to launch other shows.

Once a company establishes itself as a content destination, its new shows get some benefit of the doubt. That does not guarantee a hit; HBO and AMC have had their share of failures. But it does make it easier to create hits. A new HBO, AMC, or Netflix series gets a level of media attention and initial viewer sampling that a network, online entity, or other service is unlikely to receive for its new offerings. 

But producing original television comes with risks. New content is expensive, and spending money does not guarantee an audience.

With more companies crowding into an already crowded space, the challenge becomes getting noticed. This may be the time in history with the most good television ever produced. There are more programs worth watching than time available for viewing. This makes it harder for a new company to break in and gain an audience. YouTube and Yahoo! are very late to the party, which makes success decidedly harder.

What is Yahoo! doing?
Yahoo! has embraced a multi-tiered approach to creating exclusive content, which included signing Katie Couric to a $6-million-a-year deal to serve as global news anchor. On the entertainment side, the company began its Yahoo! Screen online video offering by licensing existing shows, including old "Saturday Night Live" episodes. The company also has a deal with Bridesmaids director Paul Feig for a series titled "Other Space," and one with Varsity Blues producer Mike Tollin for a show called "Sin City Saints."

In recent months, however, the company has embraced original programming in a creative way by making a deal to produce a new season of "Community," the program NBC canceled after five seasons earlier this year. Yahoo! is also reportedly in talks to bring back another cult program, "Enlisted," which had a devoted, but small, fan base when it aired on Fox last season.

In bringing back well-liked shows with devoted audiences, Yahoo! is mitigating its risks. It's certainly easier to get fans of a show to watch it in a different location than it is to create a new audience for an unknown program. Still, the lack of risk comes with a limit on upside. "Enlisted" only brought in around 3 million viewers per episode, and that number is unlikely to grow on a smaller platform.

Yahoo!'s original programming is not as direct a business proposition as airing a show on traditional television, however. If Yahoo! sells ads on its programs, ratings will matter, but having marquee properties with built-in audiences will also bring people to Yahoo! Screen. That may lead them to "SNL" re-runs, a Katie Couric interview, or something else, but it at least gives Yahoo! a seat at the table.

Yahoo! may lose money now by bringing back these two shows, but it could be a successful revenue growth strategy in the long term.

What is YouTube doing?
YouTube has long been a player in original video, but Reuters reported Tuesday that the company has been talking with Hollywood and independent producers to fund premium content that would bolster its efforts. 

The news story said that for the last two months, YouTube executives had been attempting to gauge content creators' interest in producing more high-quality programming for the video service. It would be looking to spend between $1 million-$3 million per series, though the shows may not conform to traditional network lengths.

This is not new ground for YouTube. The company committed an estimated $100 million in late 2011 to pay for around 100 channels of original content. Those channels were built more around brands and personalities than shows. 

YouTube is the largest video streaming service, with more than 1 billion monthly unique visitors. The new initiative would be part of an effort to sell premium advertising, which is a tougher sell on cute cat videos and clips featuring people getting hit in the groin than it is on more traditional programming from higher-profile creators.

On one hand, YouTube is already a video destination in a way that Yahoo! can only dream. On the other, just throwing money at Hollywood has had mixed success. Amazon has spent lavishly on its original programs, and some of them have big names involved -- John Goodman, Garry Trudeau, but none have connected with an audience the way Netflix's hits have.

YouTube does not really need more eyeballs. It needs more people watching shows that advertisers will spend money on.  

Will it work?
Both Yahoo! and YouTube are taking a risk. But the risk is relatively low versus the potential reward. 

Neither Yahoo! nor Sony (NYSE: SNE), which produces "Community," has released details of what the online search giant is paying for the show, but Vulture.com estimated the licensing cost for the 13-episode season at $10 million-$20 million. 

In YouTube's case, it would be throwing a few million dollars at creators to see if they could make something that finds an audience. That's a much less certain strategy than Yahoo! is following, but it's a cheap bet with a large payoff if a series does become a breakout hit.

Both Yahoo! and YouTube face long odds. Both companies, however, are right for trying. Very few original shows succeed, but when one does, it can make a network, streaming service, or website a destination.

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Daniel Kline has no position in any stocks mentioned. He intends to watch Community on Yahoo! The Motley Fool recommends Amazon.com, AMC Networks, Google (C shares), Netflix, and Yahoo. The Motley Fool owns shares of Amazon.com, Google (C shares), Netflix, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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