Strategy: Vevo's Stop and Go

With its sales chief out and margins slim, the video service heads to its second upfront presentation thinking about life beyond YouTube.

The surprise exit of Vevo sales chief David Kohl, who had been there since 2009, is a big cause for concern among advertisers and music industry partners who worry about disruption to a business whose primary revenue source is advertising. In the interim, Vevo CEO Rio Caraeff has taken on all key sales decisions and has appointed recruitment firm Spencer Stuart to find a chief revenue officer for the video company.

Vevo's advertising is fairly stable with average CPM (cost per thousand) rates of $25-$35, which is in line with forecasts by Credit Suisse for 2013 that expect premium online ads to cost $32.60. It generated nearly $300 million in revenue in 2012, according to a Wall Street Journal report.

But the crux of Vevo's challenges is its razor-thin operating margins, given its high content and distribution costs. About half of every dollar it brings in goes to rights owners, while 30 cents goes to YouTube, its primary distributor. What's left has to cover the remaining costs. Some see that as unsustainable, and why Vevo has yet to turn a profit. But Caraeff sees it as an opportunity to develop the brand for life beyond YouTube, particularly on new platforms like online TV services Xbox, Roku and Apple TV. This need to explore life beyond YouTube is what led to protracted discussions with other potential partners, including Facebook. But according to sources, Vevo is sticking with YouTube because it believes that at this stage in its development, it still needs the scalability the platform provides, even at the expense of better margins in the short term.

Vevo has also had advanced talks with cable/­satellite partners, which on the face of it sounds foolhardy, given that media giant Viacom, owner of MTV, has realized the economics of music video TV isn't the best business to focus on. But Vevo believes that having the rights to on-demand music video on Vevo's scale is of great value to cable operators that are prepared to work out a kind of quid pro quo deal for exclusive on-demand content. Vevo might not get paid any carriage fees, but it won't be charged reverse carriage fees either if these deals come to fruition. If they pitch it right, it would open the door to new cable TV brand sponsorship and advertising revenue streams.

Finally, we shouldn't overlook the option Vevo has to introduce a paid subscription for users who'd rather not watch a 30-second ad in order to view a three-minute video. Caraeff, who has publicly hinted at it in the past, declines to comment on specifics but it is certainly being considered. "There's no bigger business than advertising for the foreseeable future," he says. "Subscription is a viable complement."

To make that work, Vevo would need not just premium videos but compelling original content. It is spending around $10 million this year to develop such programming--not music videos or concert footage, but original shows that would work well in its linear TV format online.

The startup is in the middle of a funding round with interested parties reported to include YouTube and Guggenheim Partners, owner of Billboard parent Prometheus Global Media. The new funds will also be focused on programming and international expansion as a stand-alone brand.

All this in the run-up to the second year of Vevo's advertising upfronts, aka Newfronts, on May 2. When Caraeff steps onstage, advertisers and music industry insiders will be looking to hear more from a brand that is on course to represent much more than being YouTube's music video channel--with advertising.


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