In part I of "Hollywood 2.0," CBR News delved into the new media issues underpinning the WGA strike, and took a look at initiatives like "Speechless Without Writers" and other ways in which the writer's guild has been using the internet to get their message out. We also took a look at just a few of the new internet ventures that have grown out of the strike, like Strike TV and Virtual Artists.

In part II, Nami Media President Ken Hayes talks about monetizing the internet, and CBR News talks with pioneers Kent Nichols ("Ask a Ninja"), Rob LaZebnik (Icebox.com) and Marshall Herskovitz ("Quarterlife") about their successes and failures in the new frontier of new media.

MONETIZING THE INTERNET

Ken Hayes, president of Nami Media Incorporated, rounded out the Strike TV panel discussion with a PowerPoint presentation about ways to monetize the Internet. Hayes began his presentation with a slide breaking down how people spend their time, and the flow of advertising dollars in the media landscape (noting that the chart was several years old, but was still a fairly accurate representation of the advertising marketplace). The chart showed that the average household spends 32% of their time watching television, and that TV ads account for 43% of advertising dollars spent. "Newspapers are very overly weighted in terms of ad spending, and people don't spend a lot of time reading newspapers," Hayes noted. The current figures for online advertising showed a comparable disparity, but in the other direction: only 8% of advertising dollars are spent on Internet ads, despite the fact that an average household spends 43% of their time online. "And for me as a marketing advertising technology company, this is where all the action is going to be. The dollars are flowing online, plus the market growth is about 20% a year. But so far no companies really have cracked monetizing video on a site like YouTube or MySpace, the advertising value of videos has not yet reached the amount of time that people are now starting to spend watching it."

Hayes' next slide showed the flow of advertising on the Internet. In the advertising paradigm, visitors are referred to as traffic. "There are two ways that traffic gets to your website, there's organic, and there's paid," Hayes said. Organic traffic is visitors who find a web site thanks to word of mouth or any source other than paid advertising. "Paid is a much more typical and a much faster route to getting visitors to you website, you basically go out and you pay for people to come to your site. You do that by buying banner ads or buying mailing lists or things like that."

Hayes went on to talk about the different types of web content. "UGC is User Generated Content, this is like YouTube or MySpace where basically people are creating their own content," Hayes said. This also includes web message boards. "You have editorial which would be original content that the site has probably paid for." And finally, scraped or syndicated content, "websites that basically go out and scrape content from other websites and aggregate it." The last three areas of web content that Hayes talked about were the look of a site, the design of a site and the functionality that it provides. Hayes identified social media as one of the fastest growing and most popular website functionalities.

Since websites are comprised of so disparate a collection of elements, different websites benefit from different kinds of advertising. Hayes laid out the four primary models in online advertising: flat rate, CPM, CPC and CPA. Flat rate advertisers pay a flat amount no matter no many people see or click on their ad. In CPM (cost per thousand) advertising, advertisers pay a chunk of money for every X number of people who see the ad. "That's great for a publisher because, that publisher is going to get the dollars no matter who looked at that ad, just the fact that a human looked at that ad, that's enough to trigger the payment," Hayes said.

Google, far and away the most successful Internet publisher, uses CPC (cost per click). "In CPC, when a publisher displays an ad, the advertiser only pays a small fee at the moment upon an action when a user actually clicks on the advertisement," Hayes said. Hayes has seen advertisers pay anywhere from 5 cents to $150 per click, and notes that that ad expenditure only succeeds in getting a potential customer to their site but does not guarantee that a sale is going to take place. "You may have heard of things like click fraud, and how there's armies in the far east of people that are just looking at websites and clicking on ads."

The fourth and final ad model Hayes talked about was CPA (cost per action). Hayes likened CPA advertising to a sales commission, because the advertisers' payments to the web publishers are only triggered when a user follows the link back to the advertiser's website and then purchases a product. Hayes has seen CPA payments as low as $5 per action and as high as $2000. "From a publisher's point of view, the publisher is taking a risk," Hayes said. "They're showing the ads, maybe somebody clicks on it, maybe they buy the product, maybe they don't."

And sometimes Internet advertising is used not to sell a product but to buy traffic for another website. "Try to imagine it's like a river, and users are a drop of water going down the river, and you're sticking your dam out in the middle, and you're trying to generate electricity as these drops of water are going by," Hayes said. This could be a cost effective business model if, say, the ad revenue a publisher generates when a user visits their site exceeds the cost of placing the ad that brought the user to their site in the first place.

As far as Hayes is concerned, the premise that "content is king" is a flawed one: Hayes contends that traffic is king, regardless of the content that brought them there. And Hayes said that the best advice he was ever given regarding keeping those visitors coming back to your site was to "own your traffic." It is nigh inevitable that other websites will scrape and try to generate revenue from your content, so the trick for publishers is to make their method of content delivery the most rewarding user experience, thereby owning the content and compelling users to access their content through their own website as opposed to some other source.

Further, to fully take advantage of the money-making potential of your site's content, it must contain the ability to monetize itself. "You wouldn't want to just put a video up on YouTube, you would want to put a video up on YouTube that has the ability to draw people back to your own site," Hayes said. Embedding links in your videos is one method of doing this.

Lastly, Hayes pointed out that the true value of an Internet video property is not necessarily in the broadcast itself. "You may own a piece of the content, but the value of that content is not necessarily in being shown in other mediums, it's in the spin-offs that that content creates," Hayes said. "Maybe it's merchandise sales, T-shirts, mugs, DVDs or whatever. This is something that companies are just now realizing on the web, it's not the act of broadcasting the video that has the value, it's everything wrapped around it."

NEW MEDIA PIONEERS

In an effort to truly understand the promise and the pitfalls of the emerging paradigm of new media, CBR News examined the efforts of a number of new media pioneers. First up is Kent Nichols' Internet sensation "Ask a Ninja," which the writer spoke about at length at the Strike TV seminar. For those unfamiliar with Nichols' enormously successful Internet venture, "Ask a Ninja" is a comedy website that Nichols started with his writing partner Douglas Sarine in November of 2005. Fans submit questions and then Sarine dons a ninja costume and records video responses to fans' queries. Originally developed by Nichols and Sarine to be an 18 episode Internet animated series about a ninja living in Orange County, CA, the pair quickly realized that the ten thousand dollars they had raised from family and friends would not be near enough to see their script through to fruition. It was at this point that the writing team shifted gears and set themselves a more manageable goal: Nichols would set up an "Ask a Ninja" gmail account and solicit questions from users of a small social networking site. And then with the resources at hand, namely the writers themselves, their apartments, a shoddy camcorder and a laptop computer, Nichols and Sarine would produce the first episode of what would quickly become an Internet phenomenon.

After their first two episodes were in the can, the "Ask a Ninja" team registered Askaninja.com, started a free blog on blogpsot, and submitted a podcast feed to iTunes. And "Ask a Ninja" was not only accepted to the iTunes directory, it was also featured. "We were featured on a Wednesday, we went from having 5 subscribers on Sunday night, to having 12,000 by the end of the week," Nichols said. With demand for their product steadily growing, Nichols and Sarine kicked production of "Ask a Ninja" into high gear.

Nichols said it was consistency and a limited scope that allowed "Ask a Ninja" to thrive. "A lot of people will have one viral smash hit and then they'll just peter out, because they weren't expecting it and they weren't built to do it again," Nichols said. Now the site gets 2.5 to 3 million video views a month. "We beat the demographics on Adult Swim," Nichols said.

Nichols and Sarine first started experimenting with monetizing "Ask a Ninja" via Internet advertising in the summer of '06, eventually settling on ad agency Federate Media in January of the following year. 80 to 90% of the site's $100,000 monthly revenue comes from the high value CPM advertising deal they have with Federated Media.

If "Ask a Ninja" is a paragon of new media success, the decidedly self-deprecating Rob LaZebnik said his company, Icebox, was a lesson in what not to do. LaZebnik, along with fellow "Simpsons" scribe Jonathan Collier and "X-Files" scribe Howard Gordon, founded Icebox in 1999. The enterprising trio had gotten it in their heads to develop an animated series for the Internet, and the writers found that they were able to obtain a significant amount of funding from Silicon Valley venture capitalists on the strength of their writing resumes alone. "Before we knew it we had a CEO, we had a warehouse in Culver City, we had 120 employees, before you could blink an eye, all on the notion that we would raise more money, and that advertising would come in," LaZebnik said. Icebox did produce 24 animated series, but the traffic they generated, which numbered in the hundreds of thousands, was still not enough to offset the company's tremendous expenditures.

If there's one thing LaZebnik learned from the experience, it's to not "spin your wheels looking to get advertising sponsors." He urged writers to take a page out of Kent Nichols' book: "Just try to produce something as cheaply, as simply as you can, and good things will come."

Next, Tom Smuts spoke to the differences between the studio system and the new Internet paradigm being pioneered by people like Kent Nichols. Since the early '90s, Smuts explained, in order to get a show on broadcast television, creators were forced to give up most of their ownership on the property to the network in question. "Obviously there's going to be trade offs between money and ownership," Smuts said. Smuts singled out Nichols as an example of a writer who managed to built an asset without having to give up ownership, but he said ventures like "Ask a Ninja" are the exceptions that prove the rule. "In most cases, you're going to need more capital up front, and you're going to have to make some kind of arrangement for that capital."

But Nichols believes that the success he and his writing partner have achieved with "Ask a Ninja" is attainable by the majority of up and coming filmmakers. "We raised $50,000 from friends and family, not only from my mother, but then anyone else who had a mortgage," Nichols said. "What you can start doing is applying what independent film is, and independent film financing, and bring that into television."

Smuts agreed that the kind of business model to which Nichols referred is not unprecedented. Smuts cited Marhsall Herskovitz's "Quarterlife" as "an example of a self-financed, relative to network TV low budget production, that began on the Internet first, built an exclusive distribution relationship with MySpace, and then licensed itself to NBC. Smuts did not know the specifics of the NBC deal, but the fact that "Quarterlife" built a fanbase on the Internet before going to network TV potentially gave the show's creators more leverage to negotiate a lucrative licensing deal. "And it's also conceivable that they could retain digital rights on that property," Smuts said. And even if a show like "Quarterlife" doesn't last on network TV, "maybe they've tripled their Internet audience to a scale where they can actually invest in continuing to produce that show on the Internet scale, and that show can live on their channel, on their distribution model, for a long time. Because the Internet is an open distribution system, if you can use the Internet to build an audience, then you can actually start changing the terms of your relationship with the studios."

CBR News caught up with Marshall Herskovitz himself, who confirmed that much of what Smuts had said was true. Earlier this year, Herskovitz and Edward Zwick, best known for creating shows like "thirtysomething," "My So Called Life" and "Once and Again," teamed up once again to develop the web based series "Quarterlife." Not to be confused, Herskovitz said, with the project he and Zwick tried to develop three years ago of the same name.

"We did a project for ABC three years ago called 'Quarterlife,' and it was about people in their twenties, so people naturally assume that this is the same thing," Herskovitz said. But in fact, the creators were not happy with the pilot they shot for ABC, and threw out the entire concept, deciding to start again from scratch. It was during the re-conceptualizing of the series that Herskovitz and Zwick realized that "Quarterlife" was better suited to the Internet than network television. But the new direction in which the creators had taken the series did not fit into Disney's corporate strategy. "They were kind enough to give 'Quarterlife' back to us and let us run with it ourselves, which they did not have to do, by the way, so we were grateful."

Interestingly enough, neither the decision to take "Quarterlife" to the Internet nor the NBC licensing deal that followed came about in anticipation of the WGA strike. "We had completed all of our deals, including the NBC deal, about two months before the strike," Herskovitz said. "Everyone's best guess at the time was that if there was going to be a strike, it would be in July, so really we weren't thinking about the strike at all, we just wanted to do a show on the Internet."

It was NBC's Ben Silverman, after seeing the "Quarterlife" pilot, who laid the groundwork for the NBC licensing deal. "We made a sort of complex deal with NBC where they became investors in the site, they became distribution partners with us, and also had a right of first refusal for network play," Herskovitz said. And the most remarkable thing about the arrangement is that the show's creators have retained 100% ownership of "Quarterlife," and total creative control. "We are delivering completed episodes to NBC, they haven't even read the script, they don't even know what the stories are about. I would say that's never happened in the history of television."

To hear Herskovitz tell it, the sweetness of the "Quarterlife" licensing deal had everything to do with Ben Silverman. "He saw the pilot and he believed in us," Herskovitz said. "And we were delivering something to him that he couldn't get anywhere else, which was a much cheaper show with full production values. So for him it was a bargain, and in return, he was willing to just say, 'Look, you guys do your show.'"

Based on their track record as showrunners, Herskovitz and Zwick were able to make unprecedented advertising deals with Pepsi and Toyota. "They committed major dollars in advance, because they believed in the show and they believed in the idea that if you put something on the Internet that has the same values and the same emotional accessibility that televisions shows do, that you'll get an audience that's more emotionally committed to it," Herskovitz said.

"I think it's really important that the Internet be used as a platform for independent production and distribution," Herskovitz said. Herskovitz also hopes that the advent of the Internet as a distribution platform ushers in a new age of creator-owned Internet content, though he acknowledges that not everyone has the resources to self-fund their own series. "The minute you have somebody pay for your pilot, then they're going to co-own your work."

As an Internet show, "Quarterlife" has performed remarkably well. The numbers for the first episode were through the roof, thanks in no small part to a 48 hour front page promotion on YouTube. Subsequent episodes have not brought in as many viewers as the first installment, but traffic on the "Quarterlife" MySpace page has steadily increased since the show began, in sharp contrast to many of its web-based predecessors whose viewership would historically drop off sharply after the two month mark.

"I really think there's a misconception people have that you can put something on the Internet and people will find it, because that's happened to some people," Herskovitz said. "But in fact, for millions and millions of websites, they never get seen by anybody." Aside from the initial YouTube blitz, "Quarterlife" has relied exclusively on word of mouth to draw in new viewers, what Ken Hayes referred to as organic traffic. "The only promotion that's taken place for "Quarterlife" has been on MySpace by MySpace. And it's very hard to sell anything under those circumstances."

The online viewership for "Quarterlife" pales in comparison to the numbers for a successful network television series, but there's no telling how these numbers will translate to the TV business model. "The Internet is still not a place where people think of going to see scripted content," Herskovitz said. "We don't yet have the idea of appointment Internet the way we have appointment television. But I certainly think that people's habits are changing." Herskovitz cited his daughter as an example, who now watches scripted television on the Internet exclusively. "So there's a whole new generation that is much more comfortable with their computers than they are with television."

THE FUTURE

There is no doubt in Alan Sereboff's mind that the Internet model works. "The difference between what we've seen in the past on YouTube and what we're going to see in the future on the Internet is that, through the strike, a bunch of A-list talent are willing to get into this," Sereboff said. "We're looking around seeing some of the best talent in the world developing straight-to-Internet content. There is money to be made here, that's obvious. You put the quality out there, and people will watch it."

There is also little doubt that the line between television and the Internet is going to blur in the coming years. "We all know that three to five years from now, there's going to be a continuum between broadband and television, they're not going to be two separate things," Herskovitz said. And whether that's going to be more like the Internet model or more like the television model, we still don't know."

Sereboff was of the same mind as Herskovitz. "I see in the next couple of years, cable boxes going away completely, being replaced by servers, where you'll be able to download content," Sereboff said. "Anything that people want to watch off the Internet, they'll be viewing on their plasma screen. I don't think that's some weird futuristic vision, I think it's literally around the corner."

And as a global distribution network, the Internet has considerably more reach than network television. "We can make a program and it can be viewed by anyone with a computer anywhere in the world simultaneously," Sereboff said. "Now, that's power. Are you telling me that that's not going to be utilized to its fullest in the next couple years?"

The NBC deal with "Quarterlife" notwithstanding, Sereboff thinks that more and more writers are starting to look at the Internet as an end in and of itself. "I don't think writers are looking at television as an endgame any longer," Sereboff said. "I think they're saying, 'Listen, we're creating our own endgame now. It's called the Internet. You've turned us into pioneers, and that's what we're going to be.'"

"I really think that it's sort of the Wild West, it's sort of a gold rush," Mendelsohn said. "And I believe there's going to be a boom in production companies and distribution companies that are going to pop up over the coming years. Some will make it and some will fail, sort of like early Hollywood, but what it will do is start to marginalize these big players that have had the stranglehold on entertainment for the past 80, 90 years. And that's a glorious thing."

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