In November 2007, we published a piece called Online Video Distribution: The Race for #3 is On…
Hulu wasn’t even around, so #1 was YouTube and #2 was MySpace TV. Then came the usual suspects: Metacafe, DailyMotion, Break and Veoh.
Since then, Hulu has launched, gone from Clown Co. to media darling, to being called just another big bad media thug… but in the process, it has become a major player thanks to its stash of super premium content.
We define premium content as any made-for-web content that is professionally produced, such as our own content at WatchMojo.com.
We then define super premium content as television and theatrical content that is repurposed or published online. Despite their resistance, super premium content owners such as Disney and Sony are seeing no choice but partnering with YouTube.
Having taken notice, CBS, who initially refused to join Hulu, bought CNET for $1.8B, obtained the TV.com URL and has now set its sights on clashing with Hulu for super premium video supremacy. As a side note: wesupply videos to TV.com, Hulu and YouTube.
Meanwhile, YouTube continues to forge ahead, though rumor has it, its costs are spiraling out of control and turning it into a profitable business is becoming more challenging as every day goes by. YouTube is in a thankless position:
- consumers want free videos
- it has to take on “Big Bad Media” when they file a lawsuit (how dare they, right, it’s their content!)
- oh, we also want someone else to foot the hosting bill for increasingly better quality video.
How do we thank them? By calling them a monopolist. Evil. Or worse, heartless. The last one came from us, but it was actually meant as a compliment. Sort of.
What About the Rest?
Anyway, in the past 18 months since I wrote that first piece, more has changed:
YouTube, Hulu, TV.com have all made life for Break Media, Metacafe, DailyMotion and Veoh tougher and tougher. They made things nearly impossible by launching their own sites, however, and not acquiring them. You see how with content, you can launch a new site (Hulu, Tv.com) and scale quickly if you have the resources. By launching these sites and shooting up in the traffic rankings, they removed a lot of leverage these companies would have had in any M&A talk.
I should mention, we have partnerships with all of these companies as well, and to borrow an analogy from Fred Wilson, like any book/newspaper/magazine publisher wants to see bookstores or newspaper stands do well, we genuinely want these companies to grow in traffic and in revenue, but the truth is, you don’t need a gazillion aggregators, either.
YouTube’s success comes partially from the fact that it stayed one step ahead of the copyright issue and managed to literally aggregate all of the videos in the world (or close to it). Hulu and TV.com will leverage their pedigrees to remain relevant and grow.
But there will be a shakedown amongst Veoh, Break, Metacafe and DailyMotion, unless they shift strategies or get some kind of differentiator.
Some would argue the shakedown has begun:
- Last week, sadly Veoh laid off more people. It will now focus on its toolbar, called Compass. Here is a piece by Tech Crunch talking - and describing - Compass much better than one my one-line “it’s a toolbar” description.
- Break Media, in trying to avoid such a fate, seems to have taken a different strategy: producing, investing and acquiring content libraries… which I personally think makes sense. They just bought HBO’s Runaway Box.
Few of these companies will ever really become profitable businesses, I think, though one or two might cash out and exit, making some money for investors. The challenge they face lies in demand and supply: too many similar offerings.
But by making a play for content, I do think that Break Media differentiates itself from the others enough to have some kind of premium or leverage in potential M&A talks, because a buyer would be getting everything else the others offer (traffic, technology, advertisers and content they not only have rights to, but actually own).
Please note, as a content producer, I am biased. Readers of this blog know this all too well. But the fact is, Break Media does get an edge here, ironic or fitting, since they are partially owned by Lions Gate, who owns a right to buy the whole piece.
Since Lions Gate owns the right to buy the whole company, then logic would suggest that Veoh, Daily Motion and / or Metacafe will also make a bid to own content libraries as a differentiator, as well, since they are actually sellable and “in play”. I am not saying they are thinking of doing so, or will for sure, because the VCs that backed these aggregators were adverse to content to begin with… but the fact remains, in their quest for relevancy, it sure would be a hedge against obsolescence.
You are also going to see this with ad networks, as well. AdConion bought Red Lever, I do expect over time for others to follow suite.
Break buys HBO’s made-for-web unit.
Read more.
Everyone is freaking out over the fact that YouTube is trying to monetize but 4% of its massive inventory.
Truth is, I thought that number was lower. But whatever the number, it’s a good thing.
YouTube is much bigger than its competitors. I do not think it’s easy for an outsider to realize just how much bigger YouTube is than Veoh, Daily Motion, Revver, Metacafe, etc.
We syndicate clips to a lot of places, and trust me, relative to its peers, YouTube is eons larger. We also syndicate clips to MySpace TV. MySpace is unique, in that MySpace.com is gargantuan, so if and when a clip gets a push off MySpace TV, it can spike your traffic.
Anyway, we love all of our partners… but the point I am making is that YouTube has so much inventory that even if it could sell ads across 100% of its inventory, all that would do in the short term is pummel ad rates because supply for video ads would shoot up but demand won’t change.
The problem is that the TV companies are generating the bulk of online video ad revenues, but they control their content, so you are seeing a bottleneck of video advertising revenue on a few major sites, such as the portals and the traditional media companies (and judging from the list below, the lines blur due to partnerships and joint ventures):
- Yahoo!
- MSFT and NBC’s MSNBC.com,
- Disney’s ESPN.com, ABC.com and Disney.com
- Viacom’s MTV.com, Atom.com, Spike.com, etc.
- News Corp.’s FOX.com, and MySpace TV (despite what the denigrators say, the much vilified MySpace did do $750M of Fox Interactive Media’s $900M in revenue, people)
- Time Warner’s AOL.com, CNN.com and related properties also probably generate meaningful revenues…
- CBS - who until its recent $1.8B acquisition of CNET was out of the Top 10 properties - has embraced a more open distribution strategy, but I suspect that will tilt to a more closed (or balanced) as it owns a larger web audience where it can keep 100% of revenues (this is why, I think, you will see CNET and CBS start to get more serious about web video, something that, well, both companies should be stronger in).
Then, of course, there is market darling Hulu, who reasonably and fairly can do no wrong. Hulu - whom many miss the point about its raison d’etre - can generate revenues off 100% of its inventory, but its inventory will always be relatively small compared to Veoh et al., let alone YouTube.
The problem is these high quality sites already charge an arm and a leg in ad rates for traditional placement (banners, etc.). Then for video, they want you to take out a second mortgage. Technically, new players like YouTube, Veoh, etc., would be ideal places for more cost effective video ads… but with these, the problem is UGC. In this case, UGC stands for User Generated Crap, or User Generated Crime (as in piracy). So net-net, advertisers balk and the entire inventory (or in YouTube’s case, 96%) becomes untouchable.
But here’s the thing, in YouTube’s case, this is a Godsend, anyway:
YouTube commands a 75% market share… maybe more. So even if it can generate revenues off only 4%, well 4% x 75% is still a meaningful chunk of the ad dollars up for grabs. Trust me, Google might refer to the 4% as a problem to get Wall Street off its back, but any self-respecting ad sales man will tell, it’s the inventory, stupid.
I am not saying that ceteris paribus (did we just break out the latin?), YouTube would not prefer more sellable inventory… of course it will… but that is over the mid and long term, when advertisers come on board and embrace online video.
Right now, they just ain’t.
Hearing about Metacafe’s founders leaving and Google’s CEO Eric Schmidt admitting that it does not know how to make money off YouTube, I realized how random success is, in business in general and online video in particular.
I like to think that as a content producer, we have a business model that makes sense, and the signs are that indeed, it does make sense. But to be perfectly truthful, I wonder if this was exactly what I envisioned in January 2006 when we launched WatchMojo.com and while the broad strategy is the same, I’d be lying if I said everything has gone according to plan.
What is more impressive is that apart from YouTube, online video is a cemetery of VCs attempts to profit from online video but persistently missing the target. Revver and Grouper (renamed Crackle) are the other two notable exits: Revver was a bit of a disaster for the VCs, who invested $13M but got $4M out. It’s now part of Brad Universe’s Live Universe. Grouper sold to SONY for $65M. It is trying different things, starting with a rename to Crackle. That is in the aggregation/distribution space, the CDN, CMS and hardware segments will fare off pretty bad, I think, because many companies were just way too early and got costs ahead of themselves: look at Akimbo, who after $47M of funding is more clueless than ever. Do we need more boxes people?
Of course, the video landscape is very broad, let’s look at YouTube peers alone (we syndicate our clips to all of these players so we want them to do well in the trenches, but some of these companies will ultimately be left for dead in the trenches by those holding the purses):
Metacafe launched as early as 2003, two full years before YouTube, but it fails to gain traction. Metacafe oddly enough continues to focus on oddball and goofy UGC… even though everyone has left that ship, including two of the company’s three founders.
Vimeo made the classic textbook mistake of going niche and highfalutin. Vimeo was founded by Connected Ventures, the guys behind CollegeHumor.com, who incidentally also launched CampusHook.com before Facebook/MySpace but failed to focus on that. If you think about it that way, CampusHook.com was a MySpace for the Facebook crowd, and Vimeo could have been YouTube. Ultimately, Connected Ventures sold 51% to IAC for $10M, valuing the whole shebang at $20M. Not too shabby, but not FU money, either.
Revver interestingly had the pay model down early on, but thy totally mishandled the method by going CPC. Performance based advertising methods don’t work with video.
If you want the bong-in-hand reason, it’s simple: search captures intent whereas entertainment captures interest. Interest is for branding advertisers, search for performance based one.
If you want the consumer behavior reason, it’s simple: when you read an article, your hands are on the mouse, trigger happy to click on a link, any link. When you watch a video, you lean back… lean back… and your hands are off the mouse.
Revver even has the best URL taxonomy, who, for example, would think that this URL
http://www.youtube.com/watch?v=VQM0OTVcPlw
is better than this URL?
http://revver.com/video/853637/travel-guide-finlands-wilderness/
Yeah, pretty odd. Mind you, YouTube’s SEO mojo has little to do with its URLs and more with the fact that it had all of the videos in the world that you could ask for.
YouTube proved that the saying “it’s easier to ask for forgiveness than it is to ask for permission” is deadly accurate.
Break.com is already an asset of Lions Gate. They own a right to buy the company outright, which makes them a bit of a moot player in this rundown.
Veoh’s got the big name media backer: Michael Eisner. Heck, it even has the media and entertainment-oriented venture capital group, Spark Capital. Yet as much as I like Veoh and praise its recent growth, Veoh, I doubt, will exit via a grand slam sale.
There’s also Daily Motion. Daily Motion is also one of those sites that changes tactics and strategy, and I would too, if I had a decent sized audience and lots of content, even though a lot of the content is questionable in quality or too racy for advertisers to like. I can see a media company like Lagardere buying Daily Motion… not because they have to or need to, but because big companies do that: they make big random bets that leave many to scratch their heads but at least shift the focus away from not doing enough to trying to make sense of why they are doing to what they are doing. Mind you, maybe Vivendi will buy them. Why do I think a French company will buy Daily Motion, frankly, because I can see strings being pulled to get some VCs some liquidity.
The video market is odd, I tell you. A lot of sites have decent traffic but they have no clue what to do with it or how to make money. The only way, it seems, is raising more money to lock in a valuation. Then again, with Metacafe asking the two founders to leave and only giving them $5M for their 5% stake, that means even internally, the Board does not see much value in the company, which is a bad message to send out.
When YouTube got bought out by Google, Guba’s CEO all but tossed in the towel. The game was over, he argued. He left Guba shortly thereafter.
I think if you are an independent player in the aggregation/syndication space, you have to start looking for dance partners, and you have to do that soon.
Thankfully, MySpace TV is a unit of Fox Interactive Media and News Corp., so it can adopt a long-term strategy in building an entertainment hub.
Hulu is another News Corp. joint… a joint venture with NBC Universal. I think I know what Hulu’s purpose and raison d’etre is. That is coming in a separate post.
There are new players coming in this space, the How To space is crowded… that requires a stand alone piece, too.
This begs the question: in one year’s time, who will remain standing when video advertising starts to scale and marketers continue to flock to quality content and the audience/eyeball is valuable in itself argument fizzles alongside the soaring cost of serving and hosting crappy videos and undesirable content?
Over the past two years, not a week went by where you didn’t see a video platform raise money. The result was a mini-bubble: countless players all vied to compete with YouTube’s utter dominance in the space but largely failed to gain any traction. This week, Vidavee was dumped by investors for $6.6M after raising over $8M, some peg that figure at about $12M.
Well, this year it’s the mobile video platforms that are getting all of the attention, and frankly, I am not sure why. This is not a knock at any one single competitor in the space: I could not even tell you what makes one different from another.
What I do know is that this is not that big of a market, and the market isn’t all that lucrative, either. Let’s break down the market and see why:
1. Not Monetizable
All this social media hype and myth is based on the premise that it should all be underwritten by marketers’ advertising money, and frankly, I am not sure live video is all that monetizable. The quality is way too low and the risk factor is way too high. That mix is not something advertisers want. Thankfully, we’re not alone in our bleak view of this segment.
2. Extremely Niche
A lot of the valuations and rationale (using that loosely) is based on the burgeoning size of online video, but streaming oneself to the Web, and doing so live, is ridiculously small compared to the broader entertainment and informational space. In fact, some of the competitors concede that much, sort of.
3. Reach is Ridiculously Low
Why none of these companies stand a chance, frankly, is that any one who would be interested in such a service will be drawn to YouTube. If I want to stream my sorry ass online for the world to see, I won’t want to reach 10, 100, or 1,000… I will want to reach 1M people. Even YouTube cannot do that for me, let alone these wannabes.
Maybe one player will create value… but that will leave a lot of carcasses, too. However, at the valuations they are raising said money, they’re cornering themselves from the get-go by pouring money into the business before they have a business model down.
- This is the #1 financial reason why VC-backed companies fail: investing oodles of VC money before having a proven model.
- The #1 operational reason why VC-backed companies fail? They don’t have much advertising sales experience.
UStream.tv raised $11.1M Series A. Series A? You have to be kidding me! That is setting yourself up for a Series B down round… and all of that on top of a $2M angel round.
To note, this came on the heels of Qik getting $2M investment. Thanks to the greater fool theory, this $11.1M Series A will basically lead someone to step in and invest $30M into one of the many other clones:
You doubt that?
4. No Leverage in M&A Talks
Consider how Veoh, Video Egg, Metacafe, Daily Motion et al. all raised $20-40M with nary an exit in sight. Those sites all have created value, too… but their market is saturated and none of them really have any traction or leverage in any M&A talk. Let’s look at that table:
I don’t understand why investors would back a company when there is so much competition, but hey, maybe that’s why I am on this side of the table.
Daily Motion is escalating the battle for #3 in their space (after YouTube and MySpace TV).
Online video advertising is growing, quickly.
Online video advertising is where search advertising was in 2000-01: a major part of the web ecosystem desperately looking for a business model.
Unlike search - where traditional media companies failed to invest and even new media companies gave up in favor of portaldom - a lot of companies are vying for online video supremacy. My read on it is that we will never have a Google of video. That’s right, even YouTube - incidentally owned by Google - won’t command the kind of revenue within its segment that Google does. The reason for that is lack of competition and monetization ability. On the former, YouTube has a lot of competition in the monetization race.
Either way, looking at the stats, the numbers are impressive:
An estimate of the US online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the US online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the US online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the US online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the US online video ad market for 2011 - set in 2007: $4.3 billion | Source.
An estimate of the Worldwide online video ad market for 2011 - set in 2007: $10 billion | Source.
An estimate of the US online video ad market for 2012 - set in late 2007: $7.1 billion | Source.
An estimate of the US online video ad market for 2012 - set in early 2008: $6.6 billion (all broadband at $12.2B) | Source.
It’s thus not surprising to see the sheer volume of money that is being invested in the space, here is an incomplete snapshot:
Judging from that, investors better be patient because only YouTube has exited, handsomely, to the tune of $1,650,000,000 (that’s $1.65B, in case you’re wondering). I’d like to remind everyone that more money does not equal more return, but I digress.
It’s worth noting, too, that YouTube raised less money than everyone else in its peer group but I highly doubt anyone in that group will be worth more, ever, than YouTube.
I am personally hoping that WatchMojo.com pulls the same feat in its peer group. I won’t say “jokes aside” because I am not exactly kidding, admitting that yes, indeed, we’ve raised - and spent - less than $5M to build our content and distribution, which is actually bigger than some of our peers. You might notice that I do not call the players in our group competitors because we are the bastard children of the broader video space: everyone is betting heavily on platforms and user-generated content and our category is definitely going against the grain.
Lastly, I think most of these players are pricing themselves out of exits:
- IPOs will be very hard: yes online advertising is growing quickly but I suspect traditional media (that owns rights to the content) will garner a big share of the online video ad pie. In this context, hitting $100M in revenues or more becomes very challenging, especially with the low-quality content most of these sites are trying to monetize.
- M&A becomes nearly impossible because you need to sell for more than you have raised, and judging by Revver’s fate (who raised $12.7M and sold for less than $5M) that becomes quite hard.
It’s a good thing I am no low-expectations mofo… just because we have not raised boatloads of cash (yet anyway) does not mean we’re not gunning for a big payday one day, but realizing that such a day might not materialize tomorrow, I respectfully think a lot of the companies in the broader video space and our content creation space in particular have dug too deep of a hole for themselves.
To each their own.
This is a work in progress, I am adding CMS platforms (Brightcove, Maven, etc.) and CDNs (Limelight, Akamai, etc.) as we speak. If you have more companies and funding amounts, or if I made a typo, leave the correction in the comments or email me at ash@mojosupreme.com.
Break.com - one of the many sites vying for #3 in the video file sharing social network space - just decided to veer into new territory by taking on Heavy.com, a broadband media company, by launching an ad network targeting men 18-34.
TechCrunch reports that CEO is expecting rates of $10-30 CPM. Break.com has a sales force of 15, expect all of the players in the space (Metacafe, DailyMotion, Veoh etc.) to ramp up sales teams as online video advertising crosses $1B in expenditures in 2008 - and potentially surpass search ads by 2018.
The challenge for many of these sites has been to handpick advertiser-friendly content on their sites, which is pretty slim in some cases (disclosure: WatchMojo.com is a content provider of such safe content on many of these sites - more on this here) so the concept of launching an ad network is not only in vogue (AOL’s Platform A, Yahoo!’s acquisition of Right Media and Blue Lithium, etc.) but a requirement to remain viable and not get drowned by the Google/YouTube and News Corp./MySpace tidal wave.
Alexa isn’t reliable, I know, but it’s useful to compare two sites, sometimes. So if it’s useful to compare two sites, imagine the euphoria it creates once you compare four, lest five sites.
Anyway, check out the different second tier video distribution sites:
Interesting, no? Look at where they were back in May (warning: about to compare apples with oranges, Alexa is worldwide vs. Hitwise, which is US data):
But, if you do compare apples with oranges, you see that Veoh has surpassed both Metacafe and Break and now only trails Daily Motion. Daily Motion, of course, does have more risque content and does not seem to filter any content out… so it will invariably get a traffic burst.
Looking at Break above in the Alexa chart, one asks: what happened to it and the sudden and sharp drop in traffic? Alexa is not very reliable, mind you… but once you are a huge site then the margin of error gets reduced… so the trendline should be right, no?
Anyway, we do wish all of these sites well because we partner with most, if not all, though some more than others.
Of course, they’re all far, far back you-know-who:
The train has left the station: YouTube owns this market. But, the race for number 2 remains.
Actually, MySpace TV is the #2, so the race for #3 is on.
Oh wait, that will be MSN, AOL, or Yahoo!’s video site, once they get their acts together…
Mind you, I presume AOL, MSN and Yahoo! will probably buy one of if not more of these file sharing video sites because Yahoo! Video remains to have direction, MSN Soapbox remains to have a soapbox and AOL Videos seems to be feeds coming in from Truveo and lord knows the future of all things AOL is murky. Have they finished setting all of Dulles ablaze yet?
You can presume CBS, NBC, FOX (less so because it will want to back MySpace TV) and ABC will consider buying these sites too…
In fact, Break is already technically partially owned by Lions Gate, and they own an option to buy the whole thing…
Of course, so long as the makeup of content on these sites remains heavily skewed towards UGC and pirated clips, they won’t. Hence why made for web video content is actually important… but we’ll see more of that in 2008.
So the race for #3 is on… surely you’re wondering, what about Hulu. Good question. We’ll handicap Hulu’s odd some time soon.
PLAY
