There are only three business models: I pay, you pay or someone else pays. In the media distribution business this is well understood.
Networks and stations are ad supported (someone else pays). Premium networks charge a monthly subscription fee (you pay), etc. And, in case you are wondering, there is a bunch of paid programming (I pay) seen on broadcast and cable. (The cable and satellite industries have done a good job of combining subscription and ad supported services into a hybrid offering; its still just a combination of you pay and someone else pays.)
In theory, versions of these three business models exist on the Internet except they have not proven to be profitable for anything except the distribution of very exclusive content. At least not up to now.
Let's leave subscription models and free content out of this discussion, since their models are obvious, and let's deal with the $66 Billion elephant standing by the door. Television advertising budgets. In 2006, the year of online video, there's really only one question to ask: "Is there an ad supported Internet video business?" It's a good question, but to answer it, you need to ask it in the right way. "When will the marginal gain from purchasing a multitude of online video vehicles exceed the marginal cost of planning, pre-buy and post- buy to the point where it is more profitable for advertisers than traditionally optimized media buys?" This question must be framed as a "when" because there are no "if's" about it. This inversion is going to happen, sooner than later, but we need some important new tools and services to enable true online video commerce.
For example, someone has to develop an Internet-oriented qualitative media optimization program. This sounds simple enough, but it is not. Right now, the vast majority of media optimization algorithms are quantitative. This means the creative content of the advertisement is not taken into consideration when formulating a media plan. This has worked within acceptable limits for television, but in a world where both venue and creative need to be contextually matched, pure quantitative optimization is not appropriate.
We are also going to need a very robust online video advertising insertion service, one that can deal with work flow issues, approvals and electronic marketplace pricing schemas. There are consortiums at the ANA, AAAA, D!MA Group and other industry organizations whose goals include creating everything from common nomenclature to standard "advanced media" advertising units. So far, they have not successfully captured the hearts and minds of the industry professionals who would have to make the system(s) work. (Oh, and since the Internet is inherently two-way, there must be special attention paid to dynamic and addressable feature sets as well.)
Then we are going to need online video packaging that can be traded, bought and sold in a commoditized marketplace and traded as currency. What are the equivalents of TV:30s, TV:15s, billboards, bumpers, GRPs, demos, ratings, etc. in the online video world. Until all media planners, buyers, brand managers and systems operators speak the same language, it will be hard to truly build a value chain on this side of the business.
And finally, we are going to need a process that enables advertisers to easily purchase media time from 350,000 different online video vendors to reach 1,000,000 people as opposed to buying one :30-second spot on an average-rated television show to achieve the same results. Sure, it's fun to see "Ask A Ninja" or "Funtwo" reach five or six million views, but that's not what most online videos can ever hope to achieve. On the Internet, everyone is famous for 15 people! Monetizing small groups, social networks, communities of interest and clouds of interest is going to take a great deal of number crunching and that's what computers are good at. Completely new delivery and tagging mechanisms need to be created to do these jobs, and they are all in the works today. Some people with good ideas include, www.rightmedia.com, www.beamback.tv, www.booyahnetworks.com to name a few.
The advertising inversion will occur when it is more cost effective to reach true core audiences with IP-provisioned video than it is with traditional broadcasting techniques. When are we likely to see an inversion? Much sooner than the foregoing would have you believe. Although these issues seem like daunting problems, I might remind you that most of them are purely business rule issues. The technologies required to accomplish these goals are not hugely complex. And, since this is the "Year of Online Video," you can be sure that the smart money recognizes this opportunity as the key to transforming the value of online video into wealth.