Veoh’s Short-Sighted Strategy: Alienate 83% of World

Veoh, the online video upstart, has been in the news quite frequently this past couple of weeks, for both reasons good and bad.

The good news is interesting for sure, but what I really want to focus on is the bad news, or the fact that recently Veoh started blocking access to their service to all except 33 countries. (Singapore, where I am based, is not one of the countries which are being blocked.)

Was this a necessary move for Veoh and was it good for them in the long run? I have my doubts.

First of all, let’s look at why they did it. The general consensus seems to be that it was because of two reasons:

1. It’s difficult for a US-based company to monetize traffic coming to your service from countries outside of the US. And bandwidth usage for video sites are likely the largest cost component of a company’s operating cost. So this is basically a cost-cutting move.
2. The majority of questionable and illegal copyrighted content is being posted by users outside of the US. So this is basically a move to reduce administrative overhead (for needing to police the content) and to reduce legal exposure.

I don’t buy reason #2, just for the simple argument that 33 countries are still a lot for Veoh to police, and I would guess that that the questionable content will still find it’s way onto Veoh’s network through the 33 active countries. That’s the beauty of Internet economics at work – if there is enough demand for something, it will eventually reach its intended audience.

So this is likely just a cost-cutting exercise.

Let’s also think about how does Veoh makes money. Which of the four basic monetization strategies does Veoh follow?

1. Sell Technology? Possible but I doubt it at this point in time. Flash video distribution is a pretty easy thing to program, and even the largest companies today (like IBM) deal with user bases that are a magnitude less than what even small video sites like Veoh need to reach. So unlikely enterprises will need the scalable infrastructure and video distribution technology that Veoh provides.
2. Sell Advertising? Absolutely. In fact Warner Brothers just announced a non-exclusive distribution deal with Veoh (among others) to run WB content on ad-supported “channels” later this year.
3. Sell Content? Nope.
4. Sell Services? Nope.

So you are basically trying to monetize a service solely based on advertising revenue. Advertising revenue is directly correlated with the number of users you have, and congratulations, you just alienated about 83% of the world.

Veoh, despite its reputation for technical superiority, is still fighting an uphill battle against the two behemoths of online video distribution, YouTube and BitTorrent. Veoh needs every single last user it has and all the loyalty and grassroots word-of-mouth buzz that it can get for new people to try it out.

However, for a company that was quoted to be “absolutely not” running out of cash, it decided to cut costs anyway, and in return:

1. All of the positive buzz around Veoh on the Internet is now all negative. Veoh forgets that the Internet is a very powerful medium, and bad buzz travels extremely fast across borders, regardless which country you are from or which language you speak.
2. Perception among industry observers and users are that Veoh is running out of cash.
3. Even some of Veoh’s unblocked users are moving away from Veoh, seemingly disgusted by Veoh’s actions.
4. If any of the users currently residing in a blocked country ever moves to an unblocked country (globalization makes this more and more common), do you think they will be willing to go back to Veoh after the sour taste left in their mouths?

Bottom line is that online video services are very difficult to pay for themselves, much less turn a profit, and even Veoh’s founder, Dmitry Shapiro admits that they are still in the red.

Therefore, knowing that Veoh is operating with a business model where YouTube dominates, wouldn’t it be better for Veoh to change the rules of the game and explore other potential revenue models first instead of trying to diminish their reach and generate bad PR in the name of cost-cutting? Why not give the users who are difficult to monetize a choice to remain a user?

As David Mullings, a commenter on NewTeeVee, explains:

Veoh should offer them a fee-based version for countries that are currently hard to generate revenue from – they will either generate revenue to cover the delivery costs or they will reduce the users from that country automatically due to the new barrier.

I couldn’t agree more. Netizens do not easily forgive you if you turn them away. Let them choose to leave themselves and at least you still have a chance of them saying good things about your service.

Will Veoh really become profitable next year like its founder proclaims? Imagine… today YouTube is still not profitable.

Or perhaps the cost-cutting is a short-sighted gambit for Veoh to reach profitability quickly so that it can be quickly sold off to a sugar daddy like what YouTube did in 2006? Hmm…

Related Posts:

1. Four Fundamental Monetization Strategies for Internet Companies
2. Is the Internet Intelligentsia Disconnected from the Enterprise World?