October 30, 2003 1:32 PM PST

Yahoo to kill paid video service

Yahoo is expected to stop selling its streaming-video service as a standalone product within the next few weeks, according to sources familiar with the plan, raising new questions about the viability of charging for televisionlike content over the Net.

News.context

What's new:
Yahoo is dropping its paid video service as a standalone product, folding it into a new bundled premium offering.

Bottom line:
The decision is a sign that content companies are becoming less militant about charging people for streaming video. Many may offer advertising-supported free streams instead.

More stories on Yahoo

Launched in February, Yahoo Platinum charges Web surfers $9.95 a month for access to streamed video clips of content such as ABC News or CBS' "Survivor."

The service will eventually find a home in Yahoo Plus, a premium-services bundle that's been in the works for the past year and is expected to launch as soon as next month, sources said. Yahoo is also expected to expand free video programming throughout its site and offer it as a perk for its broadband access partnerships with SBC Communications and British Telecom.

A Yahoo spokeswoman declined to comment specifically on future changes for Platinum. However, she pointed out that the company's broadband offerings will continue to change.

"Yahoo is committed to being a leader in providing broadband content," spokeswoman Joanna Stevens said. "How it's packaged, priced and presented will evolve over time."

The possibility of offering free video streams comes amid signs of a broader attitude shift among content companies, Web networks and advertisers alike. Some content companies once militant about charging people for their video are becoming more open-minded.

"It's not that (consumers) won't ever pay for it," said one source from a content company, who spoke under the condition of anonymity. "But the jury is still out. Other companies will try a method of giving (video) away for free to see if they can offset costs through advertising."

The launch of Yahoo Plus comes as the company's main rivals, America Online and MSN, are positioning their services in a similar fashion. In response to a decline in the number of dial-up subscribers, AOL and MSN are trying to sell their online software to existing broadband users in hopes of retaining customers who have defected to cable and DSL providers.

Microsoft recently announced plans to launch a free service next year called MSN Video, which will offer advertising-supported news and entertainment clips.

AOL, meanwhile, has made video a key part of its turnaround strategy. The company has been offering its customers a "bring your own access" plan for $14.95 a month that includes e-mail and other software, as well as exclusive broadband

"When we ask consumers, we never see more than 10 percent saying they'd be willing to pay for video content."
--Jed Kolko, analyst
Forrester Research
content such as news clips and music video broadcasts. Just this week, the company announced a new sports news program as part of that package.

Creating a video service hits close to home for Yahoo CEO Terry Semel, the former Warner Bros. co-CEO who joined Yahoo in May 2001. The longtime Hollywood mogul has taken steps to boost Yahoo's online entertainment assets, engineering the acquisition of music video site Launch Media and the unveiling of Yahoo Platinum, among other things.

To get Platinum off the ground, Semel hired former Warner Bros. colleague Jim Moloshok as his point man for securing content from media and entertainment companies. Moloshok once ran Entertaindom, Warner Bros.' online entertainment site, but he left in 1999, shortly after parent company Time Warner scrapped plans for a public offering.

During a conference call with Wall Street analysts in July, Semel described Platinum as a "real learning curve" and admitted that Yahoo had not put many resources behind it.

The company has refused to break out subscriber or financial details of Yahoo Platinum, although it has highlighted subscriber gains from other "premium" services such as enhanced e-mail and online personals. Still, the move is a clear admission that Yahoo has failed to convince many Web surfers to pay for its motley collection of video programs.

Even RealNetworks, which operates RealOne, the largest paid video and audio subscription service on the Internet, has seen overall membership stall this year, despite rapid growth in music service Rhapsody and in premium radio.

RealOne charges $9.95 a month for access to a bundle of programming it calls SuperPass, which includes access to movies, news and live audio of Major League Baseball games. RealNetworks announced 1 million paid subscribers in March, sparking a surge of interest in paid video offerings. Since then, however, sign-ups have shown signs of flagging, with total paid subscribers for the company climbing to just 1.15 million in the third quarter, including the addition of 165,000 music subscribers.

The race for content
Portals are paying attention to online video, because the number of households that have high-speed connections has matured. About 21 million households will have broadband access by the end of this quarter, analysts estimated. Although the major portals know consumers want video content more than ever, the business model for delivering such content is still up in the air.

According to The Yankee Group, 68 percent of broadband subscribers have watched streaming video within the past three months.

But much of that content, such as music videos on Yahoo's Launch service, is free. Industry analysts said most consumers are not interested in paying for streaming video services and that video is not a significant driver for broadband growth.

"When we ask consumers, we never see more than 10 percent saying they'd be willing to pay for video content," said Jed Kolko, an analyst at Forrester Research.

Analysts cite one notable exception: pornography. Gerry Kaufhold, an analyst at In-Stat/MDR, estimated that the adult entertainment industry generated about $600 million in video-streaming revenues last year.

But pornography is not on the menu of mainstream Web portals such as AOL, Yahoo and MSN.

Mike Goodman, senior analyst at The Yankee Group, said RealNetworks, Yahoo, AOL and MSN are under pressure to provide consumers with unique, high-value programming if they want to inspire loyalty, lure subscribers and attract large advertisers.

"If you can get the right anchor programming, subscription works," Goodman said.

Sports programming is among the top five most sought-after types of video online, along with adult entertainment, news, short films and movies, and music videos, which rank No. 1.

RealNetworks' partnership with MLB is up for renewal shortly, and the company is facing heated competition for the contract. Real CEO Rob Glaser cautioned investors earlier this week that it could lose MLB if offers from other bidders such as Yahoo and ESPN push Real toward "irrational" financial promises.

The company paid $21 million for a three-year exclusive contract in 2001.

Analysts said that in comparison, Yahoo's subscription video service has so far failed to offer compelling content. When the service began, it had a contract to broadcast National Collegiate Athletic Association basketball games, but that only lasted a month. Its behind-the-scenes videos of "Survivor" and Fox's "American Idol" were offered in the summer, when the shows weren't being aired--a recipe for subscriber indifference, analysts said.

Advertising moves to the front row
The shift to free video marks an about-face among Web portals, which were hit hard by a drop in Web advertising two years ago, a trend that put subscription services on the front burner as a hedge against fickle marketing dollars.

Now, analysts said, Web advertising is showing signs of renewed strength, making it an attractive gamble once again. As a result, Web video viewers can expect to see more advertising clips--which sell at a premium compared with traditional Web marketing such as banner ads--attached to free programming in the future.

One early entry in this market is ESPN, which this year introduced ESPN Motion, an advertising-supported desktop application that pushes sports highlights and commentary to users' desktops. Although downloads of the application soared, the advertising side had some hiccups, initially. ESPN expected more demand from advertisers, and the company originally placed the video ads at the end of highlights, giving viewers a chance to avoid commercials. ESPN has since embedded ads within the sports highlights and has had success with the model, according to analysts.

Microsoft's MSN Video service will be supported by 15-second video spots and a broad range of programming.

"It begs the question, 'Is this partially in response to MSN?,' because it's taking what Real and Yahoo do and offering it for free," said Goodman. "Talk about a way to undercut a market."

Goodman cautioned that services such as MSN and Yahoo don't have the highly valued audience ESPN has and can't necessarily demand the same fees from advertisers. He compared MSN and Yahoo to broad TV networks such as NBC that have mass or muddled appeal, which may not seem like a sure thing for advertisers in a new environment. He also said the market is still fragmented in such a way that it can be intimidating to advertisers.

Internet ad executives say video will hit prime time with advertisers next year, thanks to greater stability in the medium and to the number of broadband-wired households. Jeff Lanctot, vice president of media for Avenue A, said advertisers take notice when a market has an audience of more than 20 million. And because of moves by AOL, MSN, RealNetworks and Yahoo, advertisers in the entertainment, audio and apparel industries will warm up to video content. He said that so far, MSN Video has tested spots with the entertainment and apparel industry, focusing on movie trailers.

"The table has been set for advertisers in 2004," Lanctot said.

 

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