Digital Media

If YouTube and Hulu are to become Web movie houses, will they be the online equivalents of those gleaming multiplexes where all the latest releases appear? Or will they be the revival houses that screen only outdated flicks?

Metro Goldwyn Mayer (MGM) caused a stir on Monday by announcing it will become the first Hollywood studio to post full-length feature films to YouTube. But while long-form movies are unprecedented for YouTube, MGM has plans to offer only a handful of older titles, such as Bulletproof Monk and The Magnificent Seven.

Some of the studios are easing their way into YouTube and Hulu, the video portal formed by NBC Universal and News Corp., because of doubts about whether ad-supported business models will ever generate the kind of returns the studios see from pay-TV channels, DVD sales, and iTunes, which charges for movie downloads. One of the hurdles ad-supported movie sites face is that many people don't want to watch two-hour long films on a PC; in the case of Hulu, revenue has to be split with the site's distributors--such as Yahoo and AOL; and perhaps most importantly, Web users will click away if asked to watch the same number of commercials online that is shown on traditional TV.

It's just not worth it for the studios to throw their support behind ad-supported sites, according to Tom Adams, one of Hollywood's most-respected researchers and the owner of Adams Media Research, an entertainment industry research and consulting firm.

Last week, in reporting a story as I reported a story about YouTube's plans to build a feature-film service, I asked an executive at a large media company why his company wasn't being more aggressive in posting long-form content to the Web. He told me to talk to Adams and that his company thought his research on the subject was correct. On Monday, Adams told me the paid model is a clear winner over ad-supported.

"The issue comes down to ad-supported versus the paid model," Adams said. "For ad supported, the question is how many ads can you run and how much money can you generate per viewing? That has to be compared with the money made from rental or movie purchases. The content companies have all their content on iTunes and have shown complete support for the site despite their worries about Apple dominating the market. The studios aren't making the same content available for ad-supported services."

YouTube disagrees that ad-supported film sites are at a disadvantage and so does a one high-ranking studio executive, who told me last week that he was convinced long-form video has a place on the Web and was looking forward to having the studio's content in front of YouTube's 80 million monthly visitors.

"We think that content creators will continue to benefit from engaging with the YouTube community, the largest audience for video in the world," said Aaron Zamost, a YouTube spokesman. Representatives from Hulu could not be reached for comment.

Nonetheless, it's easy to spot the differences in the way the studios treat iTunes compared with Hulu or YouTube. For example, Lionsgate has been selling full-length features off iTunes since February 2007. Last summer, the Canadian studio agreed to give YouTube users access to only snippets from its films.

Disney has yet to post films to YouTube or Hulu and Paramount has no films on YouTube and just six on Hulu. Compare that to iTunes, which has inked distribution deals with all the major studios.

Adams tempers his gloomy outlook for ad-supported Web movie services by acknowledging that this is just the beginning of their development. He argues, however, that the services will always be less important to the studios than DVDs or paid services because the public has for the most part rejected films that are interrupted by commercials. His firm expects revenue from Internet film rentals and paid downloads to double this year.

"We have a 30-year history where all of the growth in movie revenues has come from commercial-free options," Adams said. "First came pay TV in the 1970s with HBO, then VHS and then DVD. Consumers have made it clear they will gladly pay up for commercial-free movies. Of course, they consume a ton of movies now on TV, at places like Turner Broadcasting. Our last study we found 15 or 20 cable networks that dedicate a lot of their programming hours to movies and make money. But they generate very little money per viewing (for the studios) as opposed to the $4 rental or $20 DVD sale. That's where you're talking real money per transaction.

"(Ad-supported movies) are a nice revenue stream but it's shrinking," Adams continued. "The networks have gotten rid of movies for the most part. The fact is, consumers love commercial-free films and can get them that way in lots of different forms."

To illustrate the difficulties in advertising to Web users, Adams focused on Hulu.

Hulu, the year-old Web portal formed by NBC Universal and News Corp., has won accolades for offering full-length TV shows and films in high-quality video. In addition to Universal and Fox, the site offers feature films from Sony and Warner Bros and offers hundreds of catalog titles. The site generated splashy headlines this year by announcing that it had sold out of ad inventory. Adams said Hulu likely sold out because it doesn't have that much to offer.

Hulu runs four 30-second commercials every half hour, Adams said. This is about four minutes of ads for every hour. That is four times less than the 16 minutes of commercials typically found on broadcast or cable TV, Adams said

"Maybe the Internet guys can cram some more in there eventually," he said. "But they have a pretty instant feedback loop with their viewers. This is as much as they can push it at this point it looks like. You can tell they are pushing it as far as they can because the CPMs (cost per thousand impressions) for the site are pretty high. This indicates that there is limited inventory...clearly they are finding that adding more ads causes people to click away."

Hulu has disclosed little about ad inventory, user habits or revenue figures other than to say it gets a higher CPM rate than traditional TV broadcasters. But if Hulu is limited in the number of ads it can sell, the site may not be making much money, Adams said.

Even after coming down hard on ad-supported services, Adams says the studios are wise to offer some film content online. He thinks it helps combat piracy by offering films to the niche market who prefer watching films online and this generates incremental revenue he called "found money." So does he think there's a future for Internet movies?

"The key to Web movies is TV connectivity," Adams said. "The Netflix Player (a set-top box from Roku that connects to the Web and streams movies from Netflix) is a value-added proposition. It's kind of the best of the paid model and the ad-supported model. You have to pay for your Netflix subscription but you don't have to inject a lot of ads into the films.

"We think Netflix is on to something."

Metro-Goldwyn Mayer Studios, better known as MGM, will be the first major movie studio to post full-length feature films on YouTube, the company announced Sunday.

CNET News reported on Thursday that YouTube was preparing to launch a feature-film service after spending months smoothing over fractured relationships in Hollywood.

MGM will likely not be the last studio to post full-length feature films on YouTube, according to an industry source. Last summer, Lionsgate announced a partnership with YouTube, but that deal calls for the studio to offer only short clips from films and TV shows. MGM will also post TV shows on YouTube, according to multiple reports published on Sunday.

For Google, YouTube's parent company, the deal is a turning point in its relationship with Hollywood. There was lots of distrust and bitter feelings in entertainment circles after the way Google dealt with copyright infringement on its site. But that was when Google was in the driver's seat. Back then, thousands of YouTube's users would post clips from TV shows and films on the site and YouTube executives told the studios they were powerless to prevent it--all the while YouTube amassed an enormous following.

The law, according to YouTube, didn't hold them responsible for crimes committed by their users. Hollywood was further frustrated when Google required copyright owners to send written requests when they wanted a clip removed from the site.

The studios have Hulu to thank for forcing Google to soften its approach. Hulu, the video portal formed by NBC Universal and News Corp., has become the top outlet for watching full-length films and TV shows on the Web. The site is generating as many ad dollars in only its first year in business as the three-year-old YouTube, according to reports.

If Google wanted to duplicate Hulu's success, it needed to make nice with film studios. So it did. YouTube has developed systems that help keep pirated clips off the site and is developing video players that present clearer images than the site's standard player. When it comes to financial terms, Google has proven much more flexible than in the past, according to three studio sources.

The typical splits right now call for the studios to pocket 70 percent of the profits and Google gets the rest, say the sources. What MGM and Google negotiated hasn't been disclosed.

The only obstacles to Google and YouTube getting more studios to post full-length movies is Google's insistence on a particular ad format, say the sources. They declined to say which ad unit Google prefers. The other hurdle is that some studios are skeptical that users will accept all the ads that need to accompany a feature film in order to make it profitable.

Updated at 8:16 a.m. to include mention of ZDNet's review of YouTube's filtering system.

YouTube will begin offering feature films produced by at least one of the biggest Hollywood movie studios possibly as early as next month, according to an executive with a major entertainment company.

For months, Google, YouTube's parent company, has been talking to the major film companies about launching an ad-supported, streaming movie service, two execs with knowledge of the negotiations told CNET News. "It's not imminent," said one of the executives. "But it's going to happen. I would say you can expect to see it, if all goes well, sometime within the next 30 to 90 days."

To be sure, not all the studios are prepared to give YouTube full-length movies. Canadian film company Lionsgate agreed in July to give YouTube access to only short movie clips. At least one other studio is trying to cut a similar deal for short-form content with Google, said a separate high-level industry insider.

There's skepticism in some circles about whether enough ads can be placed into a streaming movie to make it profitable without also overloading viewers with commercials. Another sticking point with some of the film companies is Google's insistence on using a specific ad format for feature films, according to two studio sources. They declined to specify which ad unit Google prefers--whether it's prerolls or postrolls or something else--but said some of the studios want the final say on how to advertise to viewers.

Google declined to discuss specifics, but a company spokeswoman issued this statement: "We are in negotiations with a variety of entertainment companies. Our goal is to offer maximum choice for our users, partners, and advertisers."

What is certain is that YouTube's original hope of building a behemoth business exclusively around short, homemade videos is, to this point at least, a bust. The company captured the world's imagination by showcasing 10-minute long user-generated videos but the strategy hasn't yielded much in the way of profits. Three years later, the company is turning to professionally made content.

YouTube vs. Hulu
By choosing this route, YouTube must go head-to-head against the Web's reigning king of streaming long-form video: Hulu.

A showdown between Hulu and the 3-year-old YouTube was inevitable. Consider that Hulu, the joint video venture formed by NBC Universal and News Corp., attracts only a fraction of the 80 million people who visit YouTube each month, but Hulu still managed to generate nearly the same revenue in its first year in business, according to reports.

Over the past year, Hulu's advantages over YouTube have become clear. Hulu attracts more ad revenue because advertisers are more comfortable with full-length TV shows and films than they are with user-generated fare. Something else Hulu has going for it is a superior viewing experience. Hulu's player offers some of the clearest images found on the Web.

YouTube's new wide-screen player presents video in a less pixilated 16:9 format than the site's standard player, but it falls short of providing Hulu-esque quality.

But here's what YouTube offers that Hulu can't: 80 million monthly visitors. No other video site comes close to reaching an audience of that size.

"We'd love to have our long-form content in front of that audience," said an executive with a studio close to reaching an agreement with YouTube.

YouTube's move to join the growing number of competitors trying to deliver movies over the Internet isn't entirely unexpected. Last month, CBS, parent company of CNET News, announced it had agreed to post full-length TV shows on YouTube. That same month, Google rolled out a new wide-screen video player built to display long-form content.

In addition, Google has lamented publicly YouTube's inability to generate significant income. Some people, including me, predicted it was only a matter of time before Google began obtaining rights to TV shows and films.

But I didn't believe Google could manage to shore up relations with Hollywood as quickly as it did.

Kinder, gentler relations?
YouTube was supposed to be despised by the entertainment industry. Viacom CEO Philippe Dauman last summer called YouTube a "rogue company." YouTube became the Web's No. 1 video site and amassed an enormous following, partly by becoming a favorite place for people to post pirated clips of TV shows and movies. YouTube got rich on the backs of filmmakers, or so it seemed to many content owners.

It didn't help that Google often took a hard line in negotiations with the studios, according to multiple sources. Things got hostile enough for Viacom, parent company of Paramount Pictures, to file a $1 billion copyright lawsuit against Google last year. That case continues to play out in the courts.

Then, Google's approach to Hollywood changed. Google actually began wooing the studios. The search company, which has said often that it doesn't want to be a media company, won over many a bitter studio suit by developing systems that help them either thwart piracy or profit from it. Google representatives also became more flexible about sharing ad revenue, according to insiders.

How far the relationship between Hollywood and Google will go is anybody's guess. It's going to be hard for YouTube to land Universal or 20th Century Fox because each has a parent company that owns a stake in Hulu.

"Will (Google) try to get into the same space as Hulu, of course," said one studio executive. "Lots of people will."

Google also wants to deliver all the ads and this is problematic because some other companies do a better job, according to one of the executives. He singled out Auditude, which enables a content owner to insert ads into clips wherever they might appear on the Web. This means that if someone posts a pirated copy to some blog or message board, Auditude can slip an ad within the player and allow the rightful owner to turn a buck.

The one thing that Google and YouTube should be encouraged about is the growing number of Hollywood executives who believe there is plenty of interest in viewing films on PCs.

"Our movies are consumed frequently and for long periods of time on the net," said the exec whose company is in talks with Google. "We're big believers in long-form feature film content on new media platforms."

Check out ZDNet's stories on YouTube's filtering systems. You can find the stories here and here.