2006 was not just the year of online video, it was also the year that saw massive increases in estimates of the size of online video advertising.

Tale of the Tape

Within a couple of months, the estimated size of the market mushroomed: one study came out in 2004 and pegged the market at $657 million in 2009, that was followed by a 2005 study that pushed up the number to $1.5 billion.  Not to be outdone, in 2006, two studies unveiled new, more bullish figures: one came out in early 2006 and pushed the figure to a numbing $2.3 billion while just months later, en even loftier target from yet another study, placing a whopping $3 billion estimate on the potential size of the online video ad market.  For my post outlining all of these studies click here.

Clearly, online advertising is going to be big.  Of course, I wonder how many people press pause and wonder if just because online advertising is going to be big implies that video content will be big as well.  Don’t get be wrong, online content is mushrooming as well.  YouTube, did after all, go from 0 to $1.65 billion in eighteen months, or, 100 million daily video streams.  It’s not just YouTube, the entire Web has caught the video bug: 24% of surfers watch online video at least once a week, 46% watch at least once a month (Online Publishers Association).

Hey, if there’s one thing we’ve got, it’s stats on the market.  Then again, we need stats because we operate in the space.  When I am not writing about the industry at large, I am producing a lot of original content for the Web over at WatchMojo.com.

The Online Video Landscape At Large

Of course, not all online video companies are identical.  They fall under many categories:

1 - content management system (CMS) platform technology companies (Brightcove)
2 - advertising creation and management companies (Klipmart)
3 - content aggregation and distribution (ROO)
4 - video file hosting and sharing (YouTube)
5 - video content editing (Adobe’s Macromedia/Flash)
6 - content producers (Our own WatchMojo.com)
7 - content delivery network, or CDNs (Limelight, Akamai)

In fact, even companies in one category are different, and some companies technically fall under many categories.  Brightcove is one of them.  I have written before about Brightcove trying to be everything to everyone.

An Egg is Hatched

Today I spoke to Matt Sanchez, CEO and co-founder of Video Egg.  Backed by First Round, Maveron and August Capital, Video Egg is one of the many companies vying in the space, alongside Vidavee and Brightcove.

According to their About Us:

“VideoEgg is a video-enabling platform that allows Web publishers to painlessly integrate video into their site experience and generate advertising revenue. The company’s suite of tools makes it easy for end users to capture, edit, encode and post video online. A “universal adapter” captures video directly from virtually all digital devices resulting is faster upload times, and publishes it in a format that anyone can watch without worrying about player compatibilities.”

Online Advertising Industry Statistics 

If you get a sense that there’s a lot of competition in the space, you are right.  Here are some numbers why: 

- Online Advertising is a $15 billion market, set to grow faster than print, TV, radio and billboards (PriceWaterHouseCoopers) and reach $25 billion (eMarketer) to $32 billion by 2010 (Morgan Stanley).  Online advertising as a whole is growing, and TV advertising is a $75 billion industry, so there is a lot of upside in video, I presume.  The prevailing wisdom is that money will flow from one (TV) to the other (Web).  Right now, paid search makes up the bulk of the pie, and is set to grow from a $4.2 billion market in 2005 to $7.5 billion by 2010 (Jupiter Research) to $12.8 billion (Morgan Stanley).

- Online Classifieds are set to grow from a $2.6 billion market in 2005 to a $4.1 billion by 2010 (Jupiter Research).

- Local Search is slated to grow to represent a $3.4 billion market in 2010 (Kelsey Group).

Pockets of Bubbles in Online Video? 

The online video industry is still largely nascent: 27 online video companies secured $126.7 million in financing in 2003, 23 secured $121 million in 2004, and 37 companies secured $160.7 million in financing in 2005 (Thomson Financial).  However, in 2005, the entire U.S. venture capital industry invested $20 billion in 3,000 new companies, so only 5.3% of that was invested in online video. 

Of course, I have written how the Sequoia/Google/YouTube conspiracy to sell YouTube to Google was a big negative for other video players.

Unlike YouTube that is essentially a destination site that has successfully aggregated both the content and the audience, Video Egg is trying to become “a platform that powers video into a site, or preferably, a community, keeping in mind how communities interact,” states Sanchez.  In other words, Video Egg is not trying to become a destination site, and that’s a good thing, because with a name like Video Egg, I am not sure if they should.

Jokes aside, the company has partnered with three of the top ten social networking communities, Bebo, Hi5, and Tagged as well as AOL and Current.tv. 

Current.tv dropped Yahoo! as a partner, read my thoughts on that here.  Pardon the random, shameless plug, but if you were to use Alexa as a gauge (you should not, by the way), WatchMojo.com is bigger than Current.tv - just thought y’all should know.

Imagine if Big Al was on our side…

It’s Not About Competition, It’s About Cooperation

By resisting the temptation to launch a destination site, Video Egg does not inadvertantly compete with its partners, though by partnering with social networking communities, it’s not like Brightcove’s predicament of pitting its destination, consumer site with one of its content producing partners. 

You cannot blame Sanchez for gunning for the social networking communities, not only have they grown like wild, but they also help the company tap into a sought-after audience: young teens and the 18-24 crowd.  That’s right, the in-crowd.  Unlike many platform companies that charge a fixed monthly fee and/or ask for a variable bandwidth fee, Video Egg offers its platform and bandwidth for free but in exchange obtains the rights to sell advertising around the content or derives a cut from the advertising the site sells.  While the model is somewhat straightforward, the revenue share is not transparent and is doled out on a case-by-case basis.  That makes sense, I suppose.

The key word here though, is around the content.  But more on that in a bit.  The three co-founders David Lerman, Matt Sanchez and Kevin Sladek hail from Yale, and like all Yale grads, the blokes seem to have a very altruistic outlook on video advertising: “we want to introduce ads to the environment in a respectful way,” confides Sanchez, who previously started a network matching up non-profits seeking to issue public service announcements with filmmakers willing to create video PSA for those entities.  It was then and there that the Yale grads realized that creating and sharing online video was not very obvious.

Video Egg is ultimately a publishing and engagement platform for online video, but the business model they have adopted firmly puts them at the crossroads of media and technology.  Many companies in the space are trying to leverage technology to generate ad sales.  That is the lesson that Google taught everyone: keep IT services free, or make it cheap, and then try to generate revenue through ads. 

Of course, even though many companies are trying to do just that, each one is “fairly unique,” according to Sanchez.  “We have a community focus, and we’re a good partner for community sites, whereas if you are a content producer, you might prefer to go with Brightcove…”

I asked Sanchez if he thought that Brightcove might impede its chances of signing content partners who might view Brightcove’s destination site as a threat? 

“Their partners are content producers looking for distribution, so any added distribution is good for them, we’re trying to build a better experience for the communities who use our platform, we do not see a need to take away their traffic.”

Naturally, the talk eventually shifted to other online video companies who made noise in 2006 for the wrong reasons: Guba’s CEO left, while Revver saw two co-founders pushed out by the VCs while the CEO was on vacation!

“There are a couple of nuances worth pointing out, broadly speaking they all look to be in the same space, but we are seeing firms stratify the industry, each one doing very different things.  You have those destination sites, and indeed, YouTube and Google won that fight, YouTube has emerged as a great repository of video and is a great video search destination.  But they are a destination point.  Then, there are the peripheral services like Revver who allow for much smaller producers to monetize their content…. Revver is also trying to be a player, but whether or not there is a real ability to make money for themselves and the content producer, I don’t think so.”

I actually agree that Revver is two parts hype and gimmick and one part substance.  It’s a great PR spin, but in terms of deliverables, the market is way too nascent and the model untested for Revver to make their concept turn into a reality for anything more than 1% of the producers on their site, if that.

“We are going in the opposite direction,” brags Sanchez, “the real test lies in the ability to aggregate distribution, YouTube was extremely valuable because of its ability to stream millions of videos per day, they have significant distribution.  We’ve been doing many things and adding to our management team.”

Venture Backed Egg

That last part comes as no surprise as the company has had three, count ‘em three VC rounds, with the latest one coming in at $12 million.  As per the use of funds, it’s the usual:

- bandwidth and infrastructure
- sales and operations
- continual product and platform improvement

Video Egg employs 40 full-time people and is headquartered in San Francisco.  It was founded in New Haven, Connecticut but the three co-founders moved to SF to build the company after raising the last round.

Potential Exit Strategies

I personally see the company being eventually bought out by a media company that is a heavy client as well, somewhat like how Comcast bought The Platform last year.  The firm’s list of partners includes AOL, Bebo, Current.tv, Dogster, Hi5, and Tagged, I am really just guessing here, but it would make sense at some point for a Time Warner to make a move for a company like this, it adds quite a bit of reach to their network.  It’s not something they can build from scratch as many firms might not want to partner with an established media company duking out for ad dollars, but once it’s built, I can see TW buying it and flexing its ad muscles to boost revenues.

Sanchez is coy when I ask about exit strategies, only to throw out the standard: “we’re building a big company, a new media company that provides tools and services, along with content libraries and advertising.” 

In one sentence, Sanchez strikes three triggers that I run with.

Content Libraries

Sanchez is candid enough to admit that Video Egg faces the same challenges that other file sharing sites face: getting the rights to the content from rightsholders.  While he is keen on stressing that his company needs to secure proper rights and rightholders need to make money from the content, the company seems to nonetheless boast the “same mix” of user generated content and copyright-violating content as YouTube and company.

He said the company was engaged with media companies but there was “not a lot [he] could say,” other than “philosophically,” rights-controlled content-owners need to have their rights protected and by extenstion, make money.  I put him on spot and asked why would media companies grant Video Egg rights when YouTube offers such a larger audience?

“Volume speaks volumes, and at 15-20 million streams we’re large enough,” boasts Sanchez.

Advertisers

Sanchez is bullish on marketers desire to advertise alongside user-generated media.  “There has been a tremendous shift in appetite, the amount of [user-generated content] consumption is considerable.  Advertisers realize that they need to if they want to hit the key audiences,” of course, Sanchez is just as biased to make that prophecy turn true as I am biased into thinking that user-generated content is great to scale content libraries and audiences but won’t be what drives video advertising shifting to the Web: I think the money will follow quality: high-quality professional content from the major media companies, and the “semi-professional” content by online-only producers like WatchMojo.com.  Far from being black and white, the line dividing old media and online-only producers will blur, as will the line between both of those groups and user-generated content.  In fact, as Sanchez points out, “many advertisers are turning to producing their own content,” which oftentimes looks awfully like the amateur-level content we find in user generated media.  I am not using “amateur” in that sentence in a derogatory context, by the way.

I try to weave through his thoughts to get a sense of where his mind is going, he points to other, previous youth-oriented media brands like MTV.

Of course, I interject to add that MTV was a destination site, whereas he is trying to take Video Egg in “the opposite direction.”  Of course, Viacom - MTV’s parent - is also a great acquiror.  Why own the communities like Bebo, Dogster, Hi5 and Tagged if you don’t need to but can get a cut of the revenue through Video Egg.  Of course, by the same token, why bother with a technology company like Video Egg when you can just buy the social  networks like Bebo, Dogster, Hi5 and Tagged and sell ads yourself and simply remit a licensing fee for Video Egg’s platform.  Over time, as we have seen in ad serving, text content management etc., technology platforms become a commodity and prices fall.

One reason for that, obviously, is the sheer supply of choices.  As a video producer looking as we speak for a CMS/video player to embed in our new CMS, the number of choices I need to look at is daunting and frustrating: numerous formats, sizes, codecs etc.

“Well, the format is being standardized, and it’s flash video,” referring to Adobe’s Macromedia product that YouTube used and led to the forefront of the format chain.  Of course, I work with many of the different distribution players, and trust me, not all of them use flash.  But that’s another post.  Sanchez continues: “advertising has yet to be standardized, there are a lot of choices,” it’s the chicken versus or the egg argument if you ask me, how can you possibly standardize the grease that makes the wheel turn if you don’t know what the wheel looks like?

The bottom line is that the powers that be have decided that it shall be advertising that will drive free video content, and that is mainly due to the 25/5 Divide: 25% of people’s time is spent online, yet 5% of marketers budget is spent online. 

As such, the trio from Yale had the smarts to focus on advertising from the get-go.  And judging by their Chinese-style menu, I think they are going about it the right way.  This is in fact something I suggested to Google to do - an Ad Sense of sorts for Video - here.

I definitely like the methodical way that they break down their ad units:

1. The Graphical Ticker

Play the video. About 1/3 of the way through (at 11 seconds in this example), the Graphic Ticker will invite you to watch a video ad. Try closing the ad. Notice how we bring you back to the content. Invitations are optimized to deliver the highest possible response.

2. Text Ticker invitation with video

Here is another example, this time a simple text invitation (11 seconds in). We’ve seen responses to these of well over 5%.

3. Text Ticker invitation with a rich media ad

Watch for the ticker again (about 11 seconds in). This time we’re delivering a different kind of ad experience. The possibilities are limitless.

4. The End-Cap Invitation with video

The end of a video is a perfect time for user discovery. We give you prime real-estate to work with. Try playing the OC video in this example (go to the end of video to access it).

5. The End-Cap with a game

You can deliver gaming experiences inside the player as well. Give Red Beard a try (again at the end of video).

As disclosure, I should mention that we are about to do some kind of promotion with a firm called Vidavee, which could be seen as a direct or indirect competitor of Video Egg.  Vidavee too offers some neat advertising features to content owners.  I am not sure that has anything to do with me writing this, but it should be noted so it’s out there.  I think it’s pretty clear that the blogger/writer in me covers many things that the entrepreneur/company founder in me wishes he didn’t (did I just refer to myself as two people and address myself in the third person? - yikes!).

Anyway, I certainly appreciate how Video Egg is going about it: a Pull mechanism whereby commercial messages, or introductions or “invitations” as Sanchez calls them, are made in between two videos: “advertising should not create an interruption,” he argues.