• by Ashkan Karbasfrooshan , Op-Ed Contributor, May 7, 2012

In the mid-2000s, Kevin Rose helped launch two companies, Digg and Revision3, with the former being the quintessential web 2.0 aggregator, and the latter being a more traditional content producer, albeit intent on disrupting the cable industry.

Indeed, Revision3’s name refers to the transition from standard terrestrial broadcast television to cable, then PC-based vide, and then TV and Internet converged content -- hence Revision3.

Digg, the high-flying, sexy, user-generated content play, was the poster child for the winner-takes-all distribution game.  But with Twitter stealing Digg’s thunder, Digg lost its big chance to exit, passing on acquisition offers of $80 million as well as an alleged  $200 million offer by Google.  In the end, this Business Week “How this Kid Made $60 million in 18 months” cover story may go down as the Dewey-beats-Truman moment in Web 2.0 lore.  (To be fair, Rose has had an incredible run as entrepreneur. As he transitions to an advisor/investor role, his legacy on will do just fine).

Digg raised $45 million.  Revision3, meanwhile, has raised $9 million.

But as Digg earned the headlines, Revision3 -- like all content companies, ahem -- remained off-the-radar, building distribution, good will and revenues.  Last week, the Washington Post  acq-hired the Digg team, while Discovery Communication acquired Revision3 for $30 million.

The Glass is Always Half Full

Cynics argue that a $30 million exit on $9 million invested isn’t a home run.  Fair enough.  But last year Next New Networks sold for approximately $25 million to YouTube, helping both companies improve the ecosystem.  This is a step in the right direction.  In fact, during 2008-09, few people would have imagined any kind of positive outcome for Revision3 (or any VC-backed company, frankly, that wasn’t a possible grand slam).  CEO Jim Louderback deserves a lot of credit for not only landing that ship safely, but finding a home for the company, preserving all 50 employees’ jobs and returning a capital gain to his investors. 

If You Can’t Beat Them, Join Them?

AllThingsD’s Peter Kafka can cynically remind us that “web video was supposed to disrupt cable TV” and point out that Louderback may no longer be writing articles titled “Cable TV Is Screwd,” but for Discovery Communications to recognize the value that Louderback and his team created is a positive for the industry.

Did VCs go about this the wrong way?

Digg and Revision3 or Revision3 and Next New Networks represent too small of a sample group to make conclusive findings, nonetheless:

-      Digg’s end game is a reminder that distribution bets are very risky and usually fail.

-      Revision3’s end game is a reminder that so long as you can stay in the game, a content company will provide a return to investors.

-      Both Revision3 and NNN moved away from producing (which for them was expensive and risky) to identifying and signing existing talent that was generating views (which becomes expensive when you’re bidding against the Maker Studios, Machinima, Stylehaul’s of the world…)

-      Both Revision3 and NNN were acquired by companies looking to buy a competency and address a headache.

-      Mainly, revenues and profits from online video companies -- be they creators or aggregators -- will never be material enough for traditional media companies to really care. Distribution companies have higher revenues, but pay massive traffic acquisition costs, lack profitable models and command low multiples..

The challenge for all venture-backed video companies is over-investment and heightened expectations.  While everyone’s raised a lot of capital to try to build revenues, big media is saying “meh, what revenues?” Discovery earned $1.1 billion in profits on $4.2 billion in revenues.  It commands a market cap of $14 billion. 

“We produce content on a $500,000 to $750,000-an-hour scale,” Discovery’s digital boss, J.B. Perrette, tells AllThingsD's Peter Kafka. “Producing something at a tenth of that cost means it has to be very different.”

End of Hubris (on both sides)

Other companies can do it for less.  The problem isn’t cost, it’s revenue.  Conversely, traditional media companies (TMCs) have the sales force and means to generate revenues; their problem is producing good content in the world of “good enough content” at ever-lower costs. 

Louderback concluded the AllThingsD post:  “One’s not going to destroy the other.  I don’t think any new media destroys the other. I think it just creates its own path.”

Indeed, for online video to flourish, then it needs an assist from TMCs.  Conversely, after years of trying to build the competency internally, it’s clear that the TMCs need web-natives to produce online content, which reminds me of Steve Jobs’ famous 1997 Macworld Expo explanation for the initial Apple/Microsoftpartnership, to paraphrase:

“If we want to move forward and see [online video] healthy and prospering again, (…) we have to let go of this notion that for [online video] to win, [television] has to lose. We have to embrace a notion that for [online video] to win, [online video] has to do a really good job. (…) So, the era of setting this up as a competition between [online video] and [television] is over as far as I'm concerned. This is about getting [online video] healthy, this is about [online video] being able to make incredibly great contributions to the industry and to get healthy and prosper again.”