We Want Our Cheap TV!

As all veteran MTV watchers know, video killed the radio star. Two decades later, this same media assassin has also whacked any dot com entrepreneur who dreamed that broadband would create a million-channel universe of nano-niche programming. The holes in the streaming video business model are now obvious to all, of course. Slow broadband penetration, advertiser disinterest, and the high cost of video production and streaming quickly turned hipper-than-thou programmers like The Den and Pseudo into VC cash incinerators. To make the model worse, it turns out that aside from the behavior modification screening room in "A Clockwork Orange," the PC may be the least comfortable place ever devised for video entertainment.

Enter the second generation of Web video wannabes, New York-based companies like The Consortium (IBetYouWill.com), AllTrue.com, and Heavy.com, who claim to have learned from the crash-test dummies that preceded them. In their new model, you make the video cheaply-very cheaply. Then you stop hallucinating that advertisers will underwrite this anytime soon. Finally, you get those video assets off of the unprofitable Web ASAP and into places-any places-where distributors still pay for content.

How Low Can You Go?
At The Consortium, CEO Morgan Spurlock keeps costs low and programming tastes even lower. His hit Web show IBetYouWill proves that "Stupidity Pays" by betting passersby to drink a jar of molasses (strained through someone's underwear), jog through Times Square (in a thong), or any other puckish antic concocted by this-you guessed it-ex-radio DJ. The resulting video may be crass, but it's cheap. Using a freelance crew to shoot the 45 episodes already in the can, "We've spent not even $50,000," says Spurlock. With post-production and overhead (only 5 FTEs), he keeps his per-episode cost below $4,000. And the talent budget? "We were going to give a girl $700 to shave her head, and then some other guy offered to do it for $200. People are cheap and easy. Don't you know that?"

We refuse to answer that question, but Spurlock's fellow travelers at AllTrue.com will. Larger than The Consortium (35 FTEs and $8.5 million in financing), but similar in tone, the site aggregates minute-long video clips of anything weird and tasteless. It replays everything from Spring Break drunkenness to what CEO Tim Nye calls "comedic celebrity debauchery," from a network of "paparazzi detectives." Among AllTrue's contributions to Western Civilization is a video of former child star Gary Coleman leaping on the hood of a car after being caught working as a security guard. Who you tapin,' Willis?

"The cost structure of anything we do is well under $1,000 per clip for all rights," says Nye. And it gets cheaper with the site's masterful Freak Box invention, a futuristic capsule and camera rig that AllTrue plants at concerts, beaches, or any venue where people are likely to come in and show off for the camera. Off of $50,000 in total material cost, it has produced hundreds of clips of tearful confessions, strip teases, and masterful makeout sessions. "It has the real ability to provoke users to do very insane and gripping things," says Nye. Not to mention a lot of regrettable a capella singing.

No matter how lean their production costs, however, Nye and Spurlock still contend with the same terrible Web video economics that killed their predecessors. Bandwidth costs only increase as your video gains an audience, yet advertisers remain unwilling to underwrite even the most popular Web shows. "We were forced to think differently," says Spurlock.

Coming to a Scoreboard Near You
Recognizing that the only way to make money off of their Web video was to get it off the Web as soon as possible, both companies are proving to be as creative in distribution as they have been in production. Spurlock's epiphany was realizing that "IBYW is really an interstitial," a time-killer. In a deal with Madison Square Garden, he and the crew do the show with hockey fans as they enter the arena. Segments of this icky drama run from the video scoreboard during media breaks, where even rowdy hockey fans will quiet down to watch some guy on the scoreboard eat a handful of mealworms. The revenue comes out to a few thousand a segment, says Spurlock, which is not a windfall yet. But the model may be spun into countless sports settings, and it gets the brand noticed among companies that have cable TV ties.

In fact, that big TV licensing deal is the elusive holy grail for Web video producers. After exploring prospects for an IBYW series, CBS returned the option because it was unsure that advertisers would sponsor such envelope-pushing antics. As TV executives continued to sniff slowly around these companies, but never quite sign, AllTrue decided to go straight to videotape. Video compilations of its best clips now sell via late-night infomercials on E! and Comedy Central. In a licensing deal that incurs no cost to it, AllTrue hands over the clips to Cole Media Group, which also distributes "America's Funniest Home Videos." Cole compiles the tape, and buys the air time, but, "We will generate hundreds of thousands of dollars in licensing fees by the end of the program," says Nye. "It's significantly helping us towards profitability."

Heavy Parsing
While Nye and Spurlock don't expect profits for another year, Simon Assad, co-CEO of entertainment site Heavy.com, says his longstanding model for more diversified production and distribution is "days away from breaking even." Much of his staff creates 45 minutes of new material for the site itself each week but two hours of video for a real paying customer, cable channel MuchMusic. Outsourced production services will account for 65% of Heavy's revenue this year, and it underwrites a $125,000 to $150,000 monthly budget for Web shows that include "Blisster" (public pranks) and edgy news send-up "Sabotage."

Unlike one-trick-ponies like AllTrue and Consortium, Heavy's variety of programming succeeded in attracting more than 2,000, $6.95-a-month subscribers in the first three weeks of a new fee-based service. And from the start, the company designed its properties for easy parsing into multiple revenue streams. An initial syndication partner paid for half of the development costs of its inspired Flash series, "Behind the Music that Sucks." Now, the property and its revenue live on in a home video series, licensing to U.S. and international TV, and even feature film development with Fox. With syndication and licensing deals, outsource production, and video sales, "It's the combination of different media driving revenue for us," says Assad.

If Heavy does go cash-positive by the time you read this, it may prove that AllTrue and IBYW are on the right track. Maybe a viable business model for Web video does exist, but much of it resides off of the Web-in outsourcing production for others and repackaging video assets for markets that still pay cash for content. For this second wave of Web video producers, economic scarcity was the mother of invention. It drove them to find and even invent revenue streams that some in the first wave were too heady or cash-flush to consider. Or as Spurlock quips, "If we had $20 million put into the company, we'd probably be gone now."