Doing the residual math - an explanation

Math is hard, but this isn't so much. I just did a video that you can watch that does a fairly complete job of explaining the differences between the current system of residuals for linear TV, and what we face in the world of online video to attempt to replicate that residual system.

Take linear TV (broadcast tv). On Heroes, each :30 spot sells for around $300,000. Each show is 38 minutes long, with the other 22 minutes for spots and promos. Some is national, some is local. In fact, 75% is national, and 25% is local, sold by the local NBC affiliate in each market. So, that's 44 total spots, 33 spots for NBC. 33 spots x $300,000 means NBC takes in $10 million per airing of each episode.

Let's say 10 million people watch. That's 10 million dollars for 10 million views, and NBC makes around $1 per viewer.

With free Online TV, it's very very different.

Each view is individual at the whim of the visitor to Hulu or NBC.com, so over time, let's look at 10 million views. Networks make money with sponsorships, product integration, and ad clicks. Sponsorships take up space that would normally be held by ads that are sold per click, so we'll set those aside for a moment. Product integration is in the low 4 to 5 figures per production - not per view, so let's assume $10,000 product integration income from Claire's driving a Nissan Pathfinder.

Ads online are sold on a CPC (cost per click) basis, and income from those clicks can average between 5 cents to 10 cents each. An advertiser pays that much when you click on an ad. Sometimes more, sometimes less, but that's an average.

Sold on CPA, ads can be all over the place, but it's pretty hard to connect

the sale of a Nissan Pathfinder to someone's click on a pre-roll on Hulu, so

there will be record keeping issues.

So, let's do the math on pure CPC: 1 pre-roll in a webisode, 5 pre-rolls (one per act) in an online view of linear episode. Google will tell you that a 1 percent clickthru rate is phenomenal.

Let's say you get 10,000,000 views. Very few episodes do, but let's be generous. And 1 percent click on one of the pre-rolls. That number is very high for video, but let's be generous. That's 100,000 clicks.

At 5 cents a click, that's $5000 in income for a webisode.

At 10 cents a click, that's $10,000 in income. For the entire 10,000,000 views.

That's .0005  or .0010 dollars per view, or 5 or 10/100's of a penny per view, as opposed to $1 per view on regular TV.

Add in that product integration, and you've got around $20K in income to work with. Hire a crew, rent equipment, pay actors and writers and directors and that 20K gets eaten pretty fast.

And here's the kicker: no webisode has ever come close to 10 million views per episode. So the real truth is, currently, if you get 5,000 views over time, your income might be closer to $2.50. Total.

Remember if you click on an ad, you stop watching the show - you go to the advertiser's site. You may come back, but that's considered a new view.

I believe 1 percent click through, based on my experience as a producer for YouTube channel producers is extraordinarily high, and is falling.

This is gross income. From that, for original webisodes like the series done for Heroes, The Office, and other extremely popular shows, comes 

THIS IS NOT MEANT TO SAY WE SHOULD CAPITULATE, but rather to gain insight into the world of a producer.

So where do we figure in residuals? How do we measure them? Each viewing on television is easy to predict, schedule and account for. Not so with web product. At some point we have to ask the hard questions, and this is one of the hardest.

You can view the video here. I'd love your comments.

Comments

[scottganyo]

Which, I believe, would leave us with what residuals were approximating in the first place: Actual joint ownership of the product and sharing of the profits. A method based on that concept could and should be completely independent of distribution channel.

Now we just need a method to sidestep greed and creative accounting and we'll have a brilliant deal.

Scott

[David August]

David, you've ignored both CPM ads (which pay per 1000 impressions, not clicks) and that prices for "premium" video ad impressions are much much higher than non-premium (selling video ad impressions for $15-$20 per 1000 views is not uncommon). Ads on studio sites are typically premium.

I agree with Scott, residuals must be computed independant of distribution channel for both actors and producers. What is most equitable is a percentage of each gross dollar made, no matter the source. This gives producers the flexibility to develops new revenue sources and provided accounting is legitimate makes the actors and producers succeed together.

[David H. Lawrence, XVII]

Counselor, I'm not forgetting those at all. CPM ads are far less prevalent on the web, especially for video, because web advertisers aren't satisfied with the lack of tracking of CPM ad results. The vast preponderance of ads are CPC. Until that changes, the meaningless residuals we'd reap from a percentage of gross would more anger those demanding the residuals be similar to linear TV than make them happy. They're already bitching about the fact that a gross percentage calculation leaves them with $22 on an episode on the web, that for an episode on TV would be scale.