Stephen Chao, web entrepreneur, former Fox TV president: Mr. Media Interview, Part 3

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BOB ANDELMAN/Mr. MEDIA: Stephen, is there another source of revenue besides the ads on the site?

STEPHEN CHAO: That’s a good question. Yes, our business model is advertising-supported. That said, we need a certain threshold of traffic before we can become profitable. I think that, certainly in making the business plan, we were very much intending to monetize it in a couple of different ways. Namely, the real virtue of the site right now from an advertising perspective is unlike Google AdSense and keywords where you have contextually perfect ad placement in a text-based website, in video sites, you kind of have random tags and nonsense and really kind of unreliable metadata. Because each video that we have is in one of 36 categories and 407 sub-categories and because it’s curated by a human curator you know the video is the real deal as opposed to a piece of junk or spam or a broken link or whatever. An advertiser can specifically buy a sub-category and a sub-category could be cat toys, and they could buy that specific placement with complete precision. That’s somewhat or very rare in the video world right now. So we have that going for us that we’re really contextually perfect information from an advertiser point of view, but beyond that, sorry for this. My long-winded answer is we do have in our business model lead generation, and I think down the road, we’ll be able to have direct e-commerce. So if you’re in the mood for making a cat toy, we’ll be able to link you to whatever. If you want to purchase a cat or a toy or something, we’ll be able to link you to that down the road. But that’s not in the plan for another year or two years.

ANDELMAN: How much time is in the plan to earn back the investment? And we’re talking about more than $500,000 that’s been invested in this.

CHAO: Substantially more.

ANDELMAN: Yes. You didn’t speak to how much the VC firm put in.

CHAO: Right.

ANDELMAN: How much time do you have to start making the investors happy?

CHAO: Start laying off people? Yes. I think if everything went the wrong way and zero revenue came in, we’d have two full years of life. Now, you’d know after a year that things are going pretty badly if you have zero revenue. But I would say that if nothing happened properly, we’d have more than two years of life. And so I think that, in my opinion, and I’m only one person, although the CEO of wonderhowto, in my opinion, I think that we should not have a problem. But to answer your question a second way, which is, “Do you intend to get a second round of funding?” which is kind of traditional in the Internet business, which is you get the first round then the second round, and my choice would be to get one round and call it a day and be cash-flow positive before the end of the funding runs out.

ANDELMAN: I can tell you that I’m following as we’re talking, there’s some discussion in the web chat that accompanies Mr. Media. And Coll says “$500,000 on an Internet site seems kind of high, but that you must know what you’re doing.”

CHAO: Coll, you’re giving me way too much credit. It’s what we were comfortable with. It was simply a gut-check, which is, “Are we happy with the representation of the site? Is it creatively what we want it to be?” Obviously, at the $250, $300, the $400 mark, we said no. We’re not happy with it, and then at the $500 mark, we said, “You know what? We really love this site now.” So there is no right or wrong till it’s over or till it keeps going. So it remains to be seen.

ANDELMAN: And she has another question here. She wonders: “Are you guys selling direct advertising, or are you working with a…”

CHAO: Scripps, which owns Do It Yourself network and Food Channel and HGTV, is actually doing the selling.

ANDELMAN: Coll was asking if you had to convince the advertisers that the site was worth advertising on. It’s like the Internet. It operates in a different way.

CHAO: Well, even if we didn’t have Scripps, there would be just any number of ad networks that would fill in the blanks.

ANDELMAN: Right. I know with Mr. Media, we use Google AdSense. We use Amazon Associates. There are a whole bunch of them out there that are kind of invisible to people who just surf the net, but people who are putting up content and looking to get a return, there are a number of ways to do it. Chris came in a little late, and was asking how you’re distinguishing WonderHowTo. There is a site called I think one of the things that’s different between WonderHowTo and is that they are creating content as opposed to…

CHAO: That’s correct. We point and link to every site out there. We don’t, ourselves, make how-tos. So, for example, there’s a MonkeySee out there. Last week, I just sat down with the people from ExpertVillage, which is perhaps the biggest or one of the biggest in the how-to space. They produce an enormous number of great how-to videos. So we actually have discussions and agreements and partnerships with all of the people out there that we can possibly get to. So, again, we connect to 600-700 different sites. Monkeysee and ExpertVillage are two of those 600-700.

ANDELMAN: Eric Smith had another question. He says, “I notice that many of the videos on your site take you to a third-party site. How do you monetize that, and how do you address copyright issues?”

CHAO: Some of the sites are very happy to have us embed their video. For example, a number of sites have called us up and said, “Please run our video inside, please carry us because that way we’ll be featured, we’ll get on ‘Pick of the Day,’” stuff like that. And so, for example, Sclipo and and ExpertVillage are very comfortable with us embedding it. In some situations, for example, if there is a or there’s a really good site that one, doesn’t have an embeddable player and two, we just haven’t reached them or connected with them individually, we just connect to them. So you come up with squirrel taxidermy, you click on that, it takes you to a window that allows you to get onto that third-party site.

To answer your question, if it’s an embedded video, for example, ExpertVillage, who we’re very good friends with, we play their video inside of WonderHowTo because they have a lower third that is a transparency. Each play on WonderHowTo counts as a unique traffic for them and as a view count. So they monetize that piece of traffic when it’s played inside of WonderHowTo, and that’s why people are happy for us to embed their particular video. But to answer your question about the third-party ones, the third-party ones you end up on a third-party site. Would we put pre-rolls in front of somebody else’s video? The answer is no. We happen to make our money very simply from the banners in the frames that are around our site. We don’t invade anybody’s player.

ANDELMAN: See Stephen, when we started out, you probably thought I was going to spend the whole time being salacious and talking about Fox and Murdoch, but I just wanted to get that out of the way.

CHAO: I can respect that.

ANDELMAN: If you had to make a how-to video, what could you teach people to do?

CHAO: Well, let’s see. I haven’t personally made a how-to video. I’ve thought about it because then I’d post it to wonderhowto, and I’d probably give it prominence, but I guess my answer is I show them how to make a really, really first-rate taser-powered potato gun. There is a lot of art and skill to the making of a good potato gun. So I guess that would probably be it, not because there’s a need, because there are a lot of potato gun how-tos out there that we index. It’s mostly just to emotionally get it off my chest. I suppose I’d make it because I want to make the best potato gun tutorial there is. That’s probably what I’d do.

ANDELMAN: I want to say that I’m watching as we talk here. I’m looking at a lot of things on the screen, and it seems like you made the right choice going into online media. I just saw a news flash that the parent company of Variety just put it up for sale. They want to get out of the print business.

CHAO: No kidding.


CHAO: How much was the price?

ANDELMAN: It does not say, but it’s interesting that the parent company of Variety also owns Broadcasting & Cable, Multichannel News, and Publisher’s Weekly. So that’s going to be something to really keep an eye on. I don’t want to get off-track here too much, but I was kind of surprised by that.

CHAO: I come from television, of course, and I think that television and cable will have a long, long life, of course, but it’s going to be nibbled away at certainly by the Internet, and I think that the internet experience just keeps getting better everyday, whether it’s from a content website point of view, like, wow, there’s this great WonderHowTo to go to or simply because the technology of the streaming of the parties that we connect to simply gets better, and it becomes high definition, and it’s a lot less time waiting time for something to download, and there’s no jitters and jatters between the streams. It’s just a pretty thrilling experience and kind of the first inning out of nine innings of watching video on the Internet. It’s just really, really good. It’s really good now in the first inning. Just imagine how good it’ll be by the ninth inning, and that’s what is really kind of fun for me.

ANDELMAN: I can remember when it would crash your computer, and it was just terrible.

CHAO: Terrible.

ANDELMAN: A lot of people today don’t really realize how bad it was five years ago, let alone seven years ago.

CHAO: Five years ago. Before YouTube, it was like, okay, I saved the file, where is that file on my hard drive? And you just search, and it’s like horrible. So no, in the last three years, of course, you can witness the transfer in terms of the advertising dollars that go from cable and broadcast to the Internet, but in every direction it’s going that way. Namely, the viewing experience is going to be better, the advertising is going to be better, there’s going to be more Internet broadband connections. It’s just nice. Nothing wrong with television, but it’s awfully fun to have Internet video.

ANDELMAN: Eric Smith has another question. He wants to know if you give users the ability to upload their own video.

CHAO: That’s a very good question. The answer is no. The submission process is it’s kind of like Digg, which is, if there’s a link that you like, submit the link, and we’ll connect to it. We don’t actually choose to allow uploads right now, and I think we will in our future, but right now, there’s a business model issue. The cost of hosting and streaming a video is very, very expensive relative to the revenue you get in for one person or a thousand or a million people viewing that. Although I’m not state of the art, I don’t think YouTube has entirely figured out a way to make their revenues bigger than their costs, and I think this is a basic, basic problem that will be solved by technology and time within a year or two, but right now, our goal is really to provide the best results, and in order to provide the best results, we said, you know what? We’re going to point, search, and index to everything. We’re not going to host and stream. So the answer is right now no, in our future, yes.

ANDELMAN: Is this a full-time gig for you now, and will this company spin off other sites, or is it just going to be this site for the time being?

CHAO: That’s a pretty good question. I thought you were going to frame it as “… and do you have any time to go surfing?”

ANDELMAN: No, no. I try to move on.

CHAO: I don’t let go. I find it to be the most thrilling education for me in a long time. I kind of look at the things that really shocked my brain and made me learn more, and there’s a few steps that have shocked my brain. One was actually going to business school because I didn’t have any idea what accounting was even when I went into it so that kind of shocked my brain in a lovely way. The second was having kids. That completely shocked my brain in a lovely way. And I’d say the third is really starting up an Internet business. It’s just such a refreshing change in all respects in terms of how the medium works, how you get traffic, and all the technology challenges, that I’m just totally happy. So the answer is it’s a full-time job. Is there anything in the future? I kind of really, I guess I’d answer it the way Coach Belichick would answer it, which is, well, when I complete this job, I’ll talk about the next job, but I haven’t completed this job yet.

ANDELMAN: Wouldn’t Belichick answer by putting someone out with a video camera spying on what the other guy is doing? I thought that was his answer.

CHAO: I have so much learning to do. There’s so much fun in this site. There’s so much searching and index, there’s so much community building, there’s so much… Part of the fun of WonderHowTo for me is that it’s just pure intellectual curiosity that’s just unrestrained. The idea that I can do this and maybe get paid and maybe have the company worth a lot is a real gift. This kind of wasting of time watching video is what I do in my spare time so the idea that there’s actually a business behind it is ice cream on top of the pie. It’s just unexpected. So no, I have no plans to do anything but this.

ANDELMAN: I’m laughing. I was about to say goodbye, but I’m laughing because there’s conversation online. Chris has picked up on my comment about Belichick, and he suggests that Bill Belichick should do a “How to Cheat in Football” video.

CHAO: I think the Giants or the NFL should come up with “How to Catch Somebody Who’s Cheating in Football.” I want to know how they caught the guy who was operating the camera. I think that comparing myself to Bill Belichick is probably wrong in so many ways that hubris would strike me dead. So I don’t know. I’d have to pick a different analogy.

© 2008 by Bob Andelman. All rights reserved.

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