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.
Question: “As far as your business goes, which is proving the bigger challenge monetising existing content or increasing views?”
Answer:
One year after launching our syndication network, we’ve become one of the largest syndicators of video content online (for more on this, read a press release we issued or check out one of many sources backing this up). The focus now is on monetizing it, either via advertising or licensing deals… frankly, due to the lack of traction in the former (advertising) we’re now focusing on the latter (licensing).
As a result, on our end, we’ve stopped giving away our content for free (in the hope of speculative revenue share deals) and now demand minimum revenue commitments (so basically, ask for licensing fees). If I had plenty of money in the bank, I might be more willing to give it away… but even then, to be very honest with you, with YouTube commanding such a large market share, just because you sign a distribution deal with a new company does not mean it translates into incremental views, let alone revenues… I won’t name any names… but I do wonder how most of the other sites competing with YouTube (be it directly or indirectly) will stick around and be relevant - let alone competitive.
So since we are financing the company with debt (money I am fronting the company, basically, since we launched) and revenue from operations, we demand minimum revenue commitments to keep the lights on, so to speak, though we’ve kept the costs low by being smart about things, ie. not raising VC so having to spend it on expensive fax machines and cutting edge coffee machines, along with the latest deflingers.
What does this mean practically?
For purposes of illustration, out of 10 leads for syndication partners that we talk to:
- probably 5 balk when I demand for minimum commitments because “it’s not in their budgets”, but with all due respect to them, they’re the ones who made a mistake not to allocate any funds for content acquisition and instead prefer to burn money on non-differentiating things like servers etc. More f’n power to them… honestly. If I could get content for free, I would too…
- 3 consider it but balk, saying the timing is not right… it’s their loss… because their sites remain hollow ghost towns while YouTube continues to gather audiences and content… to see why these companies make a mistake, see this.
- yet 2 agree. But guess what, content is king and those 2 sites have something that differentiates them… unlike the 8 that sit on the sidelines with oodles of servers waiting to handle the load but have little to serve other than UGC or not-frequently-published video libraries of yesteryear, or content from our peers who publish a clip a week, maybe. I won’t name any names… but you be the judge.
Honestly, I don’t mind losing out on the 8 because there is so little good content being produced that invariably they come back at one point or another… and the 2 that do pay make it worthwhile. I can add up some of the revenue share checks from the smaller players and honestly, I can use some of those checks as coasters because the cost of coasters is greater than the amounts on those checks. Yes, the initial analogy I was going to use was R-rated… I cleaned it up.
The reason why advertisers are staying on the sidelines with online video is not a lack of streams, but a lack of trustworthy content… what has not helped is the backwards investing targets of VCs who have plunked down $2-5B in more platforms, file sharing sites, CDNs etc., all things that become commoditized and don’t differentiate anything that advertisers look for. Coca-Cola does not care about your back end, they care about the content, demographics, reach etc. That all starts with content…
We’re living in a very faddish, hype-driven world… and thanks to the souring US economy and abysmal VC investing in video (quick: name me a successful exit in video other than YouTube) the noise is going down, fast. Digg was fetching $300M last month… now it’s $200M. Honestly, in 3 months, it will be $100M and in 1 year, $50M.
Why? The US economy will make things change very quickly: growth will be less sexy because non-monetized growth will mean more costs and costs alone… and VCs will become more fickle about financing clunkers. Companies will have to compete for every inch (especially with a US Greenback that is puny relative to global currencies) so money losing ventures become losers, quickly.
Of course, this weakening economy also means that companies won’t want to foot the bill for content creation…
But what won’t change is the rush of users and audiences online… with voracious appetites for content, particularly video content.
So day in and day out, our content is worth more and we have more pricing power and leverage… but the fact remains, until we’re breaking even and laughing all the way to the bank… yes, it’s a constant struggle because the Web has trained us that content does not pay, apparently, aggregation pays… frankly, I think that is nonsense and as the Web develops and matures, this will come back down to reflect the real world.
Distribution is easier to come by than good content, largely because aggregators and distributors have been over-funded, but content has been under-funded, but additional distribution is not valuable because it dilutes your product. We’re awfully idealistic with online media… but ask yourself, if the Olympics really were on all networks (CBS, ABC and FOX in addition to NBC), the Olympics would win, but NBC would not. But the reason why NBC agrees to foot the licensing fee is because the scarcity forces advertisers to pony up. Right now, we don’t have any of that online.
So instead of following the institutional imperative, we’re going against the grain and now protect our greatest asset to make it worth something.
But distribution is meaningless if people are on YouTube and “the latest aggregation site that will reinvent everything” isn’t even being visited. Look at the latest stats: it’s brutal if your URL is not YouTube.com, and if your URL is YouTube.com, you are monetizing 3% of your content because only 4% of it is monetizable to begin with - yikes.
Bottom line: if you give something away for free, it’s impossible to come back and price it at something other than zero.
From TubeMogul:
About a month ago, we launched a “Top 40″ list of the users getting the most views from videos deployed by us (an admittedly biased list, but an interesting one). We will be releasing an updated list shortly, but it’s worth pondering: what is the key to their success? Great content, for one. An additional insight came after we released our recent research on “Online Video’s Short Shelf Life.” A blogger savvily pointed out that most successful content creators already understood that online video fans have a short attention span, and thus put out a high quantity of videos.
Curious if that was actually the case, I tested it using our Top 40 list, and found it to be largely true. In the month of June, Chris Pirillo (#2 on our list), deployed 803 videos. Similarly, WatchMojo.com (#6) put out about 691. Further on down the list, Vlaze media (#35), put out a decidedly humbler 74 videos, and Sony (#40) deployed 32–and so on.
The data shows the brilliance of this. Since average online video viewership tends to peak on day three, putting out videos often allows producers to constantly ride the highest point of the wave. While individual videos rise and fall fast, a given producer can always have a steady audience.
Web video publishers need to balance quantity with quality if they want to be relevant, let alone scale, online. The pro of operating in a hyper-syndication world is that audiences might be splintered and fragmented, but you can reach them on those places if you have an effective distribution strategy. The con of it, frankly, is that it’s nearly impossible to stand out from the clutter.
When people question our strategy of publishing so much content (5,000 videos, 100 new each month), the analogy I use is this:
- Think of the Web as a massive college building… seemingly with no end in sight, as one classroom leads to another, and another, and another.
- Think then of the online video ecosystem as a huge classroom with a number of desks…
- With each online video aggregator (such as YouTube, MySpace TV, Veoh, DailyMotion, Metacafe, etc.) representing a desk. While those desks share some similarities, they are all, in fact, independent and stand alone islands. It’s not, after all, like YouTube links to the same video - or for that matter, related videos - on another site…
- On each desk you find stacks of paper on it, lots of them, with each stack representing:
* categories
* subcategories
* keywords- Each video is represented by a sheet of paper…
What do you represent? You’re a you-know-what disturber shooting spit balls on as many desks and stacks as possible. What services like Tubemogul do is help you get those spit balls on as many targets at once… but that’s just one small part of the equation. Why?
Ironically, while online video content is broadband content and dynamic in nature, currently SEO is utterly ineffective with video (relative to text content), so no one can really see through the sheets of paper, let alone see what’s on each desk.
Individually, no matter how great the content (quality) on each sheet of paper, they get lost in a sea of pulp and paper…
The only way to get your sheet seen by users - who might be landlocked to one desk (by having signed up on that site) - is to ensure that your sheets of paper fall on as many:
a) stacks, and
b) desks,
as frequently as possible… why?
In between the time you upload two videos… there’s a whole lot of papers landing on your sheet after yours has landed… making yours disappear from the top and rendering it nearly invisible to the human eye.
In other words, content companies that can’t scale syndication - and production - will find themselves irrelevant before long.
However, this opens up a new question, which is: is there such a thing as diminishing returns with marginal distribution?
The Misplaced Bet on UGC
Back in 2006, we’d get the occasional call from someone pitching us a turnkey solution to add User-Generated Content (UGC) videos to our WatchMojo.com property, which houses professionally produced videos we have created.
At the time, I thought it was an odd pitch, akin to adding a half liter of malt liquor over graciously aged scotch. Biased no doubt as the producer of these clips on WatchMojo.com, I tempered my prejudice and disdain for UGC and said, maybe, just maybe, UGC is the great next big thing, and advertisers will catch on.
Mind you, having served for 6 years as a VP of ad sales at a Fox Interactive Media-acquired property, it struck me as odd. The advertising ecosystem has long been a tiered on involving marketers, publishers and users. That was not to change in my opinion.
That part regarding advertising is key, for in this free, ad-supported ecosystem we’ve created online, no self-respecting consumer pays for anything; advertisers are supposed to foot the bill for both content and technology.
2008: The Flight to Quality
Fast forward to 2008, and things they have changed. For one, no one calls us with such offers, in fact, the calls are coming in asking for the right to license and syndicate our library of professionally produced, premium content.
While this is refreshing to hear for us, I do believe that it spells a potentially doomsday scenario for many of the aggregators of video content as well as suppliers of the broader video space, namely hosting companies and content delivery network (CDN) firms.
UGC’s Impact on Media, Publishing, Marketing and Advertising
Numerous companies raised a lot of money betting on UGC, expecting the so-called wisdom of the crowds to change the rules of engagement in media. Indeed, social media (of which UGC is a subset) has changed the dynamics of publishing, but advertising will remain largely immune as marketers won’t come near it. In fact, the only real impact UGC shall have on advertising is depress advertising rates as an influx of ad inventory floods the marketplace.However, a solid 5 years into the UGC video “revolution”, it’s clear that advertisers are not impressed. eMarketer just reduced the forecasts for social advertising: The company is projecting that by 2011, advertisers will spend $4.3B worldwide on social networks; it had previously guessed the number would be $4.7B. It also took down its US 2008 estimate to $1.4B from $1.8B. You won’t see that in any investor decks, I’ll tell you that.
This spells a lights-out scenario for many in the space, let’s consider the domino steps to explain why.
Today Chad Hurley, co-founder of YouTube, suggested that affiliate marketing (the low paying, low hanging fruit in the marketing ecosystem) might become a source of revenue for YouTube. This year, analysts have been throwing darts at the board trying to guesstimate YouTube’s earning power. As a professional content provider to YouTube, I can probably add my own two cents, but in this post, that makes no sense… and with an NDA in place, that would be folly. So as usual I will keep the comments to the market as a whole. To read our 2006-era estimate of YouTube’s earning power, potentially the first one conducted on YouTube, click here.
The point is: apart from YouTube’s massive, outlier $1.65B sale to Google, every single YouTube competitor in the social networking file sharing video segment has been throwing airballs and putting up donuts on the scoreboard that matters most: making money, either via income or via capital gain. It seems, in fact, that the only time money is even an issue or in the news is when one of these firms raises a ridiculously high financing amount. As I like to say, success should be measured by return on invested capital, and not invested capital.
Measured by the former, practically all of these firms are flamboyant flops. Measured by the latter, granted, they’re smashing successes.
What Should These Sites Have Done?
In essence, VCs have financed these UGC sites to spend money on hosting. Oftentimes, these hosting firms are engaged in price wars with other hosting firms (or CDN companies) that the same or other VCs have invested in. Then, these companies go public and they flop. Case in point: Limelight Networks, who has put up a disastrous return since its IPO. Limelight raised $130M from Goldman Sachs before its IPO.
Quality vs. Quantity: Are You Better Off?
Well, first off, remember that while social media/UGC is a numbers game where you hope to generate 1 billion impressions; and then sell those for $0.10 CPM. The math is simple: 1B impressions x $0.10 CPM equals $100,000.
With professional content, you can build a lucrative business on 10M impressions and then sell those for $10 CPM, which once again running the numbers yields a revenue of $100,000. This was further discussed in our Hulu vs. YouTube: Quality vs. Quantity post.
As a business person, I much rather take my chances building the business that needs to hit 10M impressions.
But, if you are a VC who invested $10M in a CDN or some infrastructure company, you get far more value by investing in a video file sharing site that can house tens of millions of videos and generate 1 billion streams, even if pound-for-pound, those streams are of lower value. This is especialy true if you’ve never sold a single ad deal, and don’t understand the ad business, as most VCs don’t. Of course, it does not help that VCs have a predisposed bias against content businesses, anyway.
As a result, the bulk of video aggregators essentially spend their VC funding on hosting, CDN, etc., and other non-differentiating costs instead of things that could get advertising money in the doors. Advertisers really don’t care where you house your clips and who your CDN provider is, they do however care about the quality of the content.
In other words, instead of footing CDN charges to host crappy UGC videos that are unmonetizable, these companies should have licensed professional content instead.
Chicken, Meet Egg.
As a content producer, I am biased. But the truth is, it’s the other way around. It is not the fact that I am in the content business that I am biased. I have a belief that advertisers seek professional content, so I am in the business of producing high-quality video content.
In the same vein, content owners are now turning their backs on speculative revenue share arrangements and demanding guaranteed money not because they did not initially believe in the idea of revenue sharing, but because the aggregators loaded up their sites with so much crap that they became unmonetizable.
However, had these aggregators taken a portion of their massive funding and licensed professional content and combined that with their burgeoning audiences, they would have been in a very strong position to profit from it.
But don’t take it from me, take a look at Hulu (for more on this, read Mark Cuban’s post). Admittedly, Hulu had a unique advantage what with being owned partially by News Corp. and NBC Universal. Hulu does not need to pay out for content because it leveraged NBC and News Corp.’s content to come out of the gates.
Hulu came to market 2 years after Google bought YouTube. It also came to market years after the YouTube clones had raised boatloads of cash. But when the dust settles, YouTube and MySpace TV will remain standing, along with Hulu. As per all of the others, I suspect one, maybe two will remain in business. The others might cease to operate not because their traffic is stalling, but because they will be perceived as largely untouchable and undesirable to advertisers. There are way too many low-quality UGC clips on those sites for advertisers to care to bother with. Consequently, advertisers will continue to seek a distance between professional and low-quality (or pirated) content. They’ll have no one to blame but themselves, because they got lazy and arrogant about the value of content.
For the record, WatchMojo.com syndicates content to YouTube, MySpace TV, Hulu, Veoh, Daily Motion, Revver, Metacafe. etc. etc. etc. and genuinely wants every single aggretator to succeed, because marginal distribution - while susceptible to diminishing returns, too - is always welcome.
In the end, sure, YouTube will have walked away with a $1.65B payday, but when you consider that since 2006 the online video has garnered $1B in VC investment, suddenly, you wonder if that’s anything to write home about.
Moore’s Law is Meaningless in an Environment Devoid of Revenues
Back in the day, YouTube’s hosting fees were said to be $1M per month (according to a piece by Dan Frommer in Forbes, he is now at SAI). Today it’s rumored to be $1M per day (according to Fortune’s Yi-Wyn Yen).
YouTube commands 75% market share, Veoh (placed #5) has 1%. In other words, Veoh, Daily Motion, Metacafe et al. are not spending $1M per month, let alone a day, but they are spending alot. Veoh has raised $80M in funding, Metacafe and Daily Motion are at $40M each. I presume the companies are now spending $5-10M per year on hosting fees to house User-Generated-Crap.
VCs are no longer indifferent. Initially, VCs were at best ambivalent about hosting costs because when the technologists who programmed these file sharing sites pitched their vision and business model, they presumed that it would replace the historically expensive cost of creating content. They were wrong.
Their business models relied on the wisdom of the masses and collective mojo to create content that advertisers would want. Why pay for content, was the idea, if content would be created on the cheap? That might very well go down as one of the biggest investment flops ever, when you consider the sum of money invested in UGC with no promise or hope of payoff in the near, mid or long term.
Don’t take it from me, take it from existing case studies:
- YouTube - despite a 75% market share - continues to wonder about monetization.
- Revver sold for $5M after raising $13M in VC.
In both cases, the companies bet on the wrong cost structure: hosting of crap over licensing of quality content. YouTube won, others did not. The”others” camp is far more numerous while YouTube remains the lone winner.
So, What’s Around the Corner
Ultimately, my gut says that many of these VCs who 3-5 years ago placed their chips on these horses will grow wary and tired of burning money while Google’s YouTube continues to galvanize market share. Before long, much like the fate reserved for Revver, VCs will cut off the lines of financing; they will have to sell for pennies on the dollar.
It’s not like this is new, either:
- GoFish has changed business models a few times as it looks for something to hang on to.
- Handheld Entertainment / ZVUE is now worth a whopping $6M, it’s changed its name a few times and paid an obscene $25-50M for eBaumsworld.com, something that left many scratching their heads.
But these have been off the radar. The more visible players are entering a period where they will have to raise $10M or more to maintain their lifestyle… I am not sure those content libraries are worth their weight. I am also not sure if an audience that has been conditioned to watch UGC will suddenly embrace professional content, either.
Once this happens, I expect to see a lot of the videos that are fueling the growth in CDN business take a further hit, too (as a whole, this is a bad market to invest too, as it has become a commodity).
Onto the Next Fad
Of course, this is all moot, because VCs are now chasing the next pipe dream: wireless, clean tech, space travel…
But there too expect a meltdown, and look no further than today’s news where Helio sold for a paltry $39M after raising $650M.
From a general entrepreneurial perspective, the lesson is simple: VCs talk a big game about being in it for the long haul, but their definition of the long haul is unique to their attention spans, which rivals that of a 2 year old’s. When you craft a business plan, build a company based on your gut and your understanding of the space. Generally speaking, you as the entrepreneur has the best understanding of the opportunity and market reality, and not your VCs or advisors.
From a video specific perspective: it’s on. Video is no longer about hype and its potential. With TV audiences now averaging a mature 50 years of age, newspapers declining faster than anyone could have predicted, the Web is the future of media and the future is now. A lot of money was placed on the wrong horse, a horse who is wobbly and in decline. The shakeout has started, it won’t hit overnight because some of these companies have money in the bank… but when VCs come knocking, you won’t know what hit you.
Related: Video
- The race for #3 in the online video space is on.
- Comedy video vertical sites getting cluttered.
Related: Social Media
- Connecting the Dots: Why Social Media Fails at Generating Revenue
- Why Social Media and Advertising = Fail
- Dark Cloud, Meet Social Media. Social Media, Meet Dark Cloud
- Social Media Hype Train Continues
- When Will Social Media Get It?
- Why Social Media and Beacon Are Doomed to Fail and What Facebook Should Do
- Social Media Growing Pains
Is it all negative? Nope. In fact, social networking might be better suited for e-Commerce, but the greed muscle clouds people’s judgment and makes them chase ad dollars, by far the more lucrative slice of the pie.
- Facebook, or MySpace’s, Multi-Billion Dollar Business?
- Are Affiliate Sales the Path to Facebook’s Billions?
- Memo to Facebook Sales Team
What do you think, is UGC going to experience a turnaround and experience a renaissance… or is it on its last breath?
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?
Paid Content refers to a NYT article on CBS which calls for the company that Bill Paley built to make digital acquisitions, which begs the question: should they go for a big purchase or make small moves?
Of course, answering that question alone without addressing the backdrop to that question yields an incomplete picture.
CBS has hit some rough patches, according to Paid Content:
The parent company is under a mini-siege of sorts about
a) its performance,
b) Leslie Mooves’ salary,
c) Katie Couric’s disastrous tenure at the company,
d) layoffs (even on the digital side, as others are ramping up) and other issues (…)
e) CBS’s need for an acquisition is becoming apparent. Some CBS executives privately agree.
All right. I want to dive in and comment on e) but let’s run through this list quickly.
a) Its Performance
We’re not sure if they are referring to its financial performance or its stock’s, either way:
As per the NYT:
“Without the cushion of Viacom’s other properties, CBS has been more exposed to the struggles of the advertising market. In 2007, it earned $1.25 billion, down from $1.66 billion the year before. CBS stock closed at $21.40 on Friday, compared with $30.99 a year earlier.”
While no company or manager can control what happens to the stock price, I think big media will see a lot of revenue loss over the next few years. Print-centric media companies shrank, why would TV or radio-centric media companies be any different in the next wave of the Web’s growth?
After all, 1994-2003 saw text-based media explode online, 2003 is about audio/video-heavy media.
CBS is seeing this sooner and faster due to its exposure to TV and radio. However, they are strong in outdoors, the challenge there is the upside there won’t account for the downside in more traditional media.
So all hope signals point to online… which explains why:
“On Monday, the company’s interactive unit will officially open a fully staffed office in Menlo Park, Calif., in Silicon Valley, to stir innovation and content development.”
Ironically, the CBS Interactive brass gets the Web quite a bit, but it’s true that they have been overly cautious, too. Being cautious is a bad thing in booming times and a great thing in corrections. The problem for CBS is that the correction is coming offline and online continues to charge ahead… so indeed, CBS does need to make some bold moves. But what are those moves?
Last year, we suggested an outright merger with Yahoo! With MSFT’s $45B gamble, those bets are off (hmm… are they?).
b) Leslie Moonves’ Salary
Last week Henry Blodget wrote: “CBS CEO Moonves Gets 29% Raise, Just Reward For Job Well Done“.
Clicking through, I realized he was being sarcastic by pointing to the seemingly inverse relationship between Mr. Moonves salary and CBS’ performance. While I appreciate Henry’s position, the truth is that CEO pay is determined on a number of things, frankly.
It’s also about the demand and supply for talent. As the CEO of CBS, Mr. Moonves could probably command a much larger salary elsewhere, if CBS’s Board wants to pay him $100M because that is what it takes to retain him, I am not sure CBS or Moonves should be blamed. For the record, he did not make $100M but rather $37M. Is that a lot of money? Yes. But the company made well over a billion dollars in profit and $14B in revenues. Of course, I’m an executive so my perspective is going to be different than that of an analyst or journalist.
But my point is: running a shrinking business in a mature market is not something most executives would embrace, to lure the best (or retain them), guess what? It takes a generous compensation program.
c) Katie Couric
Don’t care personally, but indeed, this is becoming an albatross and if indeed she is that horrific (I don’t watch TV), it’s time to try something else. I recognize she might not be best suited for news, but surely there is plenty of things she can be doing for CBS in other capacties (infotainment, mainly).
d) Layoffs
Layoffs are always demoralizing, especially when a company is making over $14B in revenue and remains profitable. But what about a case - like this one - when the company is shrinking? This is a tough question.
My gut says Jack Welch’s “the lowest 10% should leave” is not a bad thing… so while I don’t want to dehumanize the layoff dynamics and their effect, I think it’s unfair to question the layoffs.
Of course, I do wonder why layoffs are taking place in online areas… which is what both Paid Content and NYT refer to. But just bear one thing in mind: many traditional media companies are not necessarily well structured in new media; divisions and structures are sometimes borne out of legacy organizational systems and sooner or later a correction or adjustment is called for. If this is the case, then I don’t think it’s fair to bash CBS on this point.
e) Acquisitions
The question remains: should CBS make one big hairy and ambition acquisition or should it buy a number of smallish companies and roll them up and/or foster their growth?
For the record, CBS has done both. In fact, it’s done everything including investments in Spotrunner, Joost and many others. In terms of acquisitions: Last.fm was a mid-sized / big one; Wallstrip was a small one.
What would you do if you were Quincy Smith and company? Buy? Merge? Sell?
ACQUISITIONS:
You know what, I admit a small acquisition won’t move the needle, but a major acquisition won’t either. Who would they have bought?
- Bebo? Is a company that marketers love really well-served by serving advertisers social networking inventory? Nope.
- Facebook? Too expensive to buy. Nothing to see, here (perhaps a merger? See below).
- Gawker Media? That might be an interesting addition. But I think Gawker Media founder Nick Denton wants to become CBS, and not sell to CBS. Anywa, Gawker Media lags in video, CBS needs to look ahead and not look back.
- Speaking of video, one company that might position it for future growth is Blip.tv, but Blip.tv does not own any content… so that is a risky move because CBS might buy a great video platform with amazing bells and whistles but then lose all of the content therein. [Disclaimer: Blip.tv is a partner of WatchMojo.com]. In the same broad category as Blip.tv are Brightcove and Video Egg. Bright Cove also does not own any content and is way too expensive, having raised $80M in funding. Video Egg ain’t cheap either, with $40M of funding in the tilt.
- Then there’s all of the YouTube/MySpaceTV competitors: Revver, Veoh, Metacafe, DailyMotion, Break, etc. Mind you, CBS invested in Joost… so what message would that send? As well, Revver was on the auction block and I presume CBS looked at it and then balked. Again, none of those companies own any content, CBS needs to be stronger in web content. That would be the hedge for CBS going forward, of course, it also needs better distribution. I see CBS works closely with Veoh… but is Veoh big enough as a distribution source? [Disclaimer: WatchMojo.com syndicates video to all of the sites listed here]
- Craigslist.org? Not sure Craig Newmark would sell, no matter how progressive Quincy’s team might be. This is Big Media after all… but Craigslist.org would not unleash CBS’ digital revenues.
- Glam Media? That would be a shot in the arm with regards to bolstering its female audience online… but here’s the problem: female audiences still watch TV… what CBS might be better suited for is getting access to a men’s audience. [Disclaimer: Glam Media is one of WatchMojo.com’s syndication partners, too]
- Digg? Not a fan of this one, frankly. Maybe a combo Revision3 / Digg? Even less of a fan of that. Revision 3 is way too niche: it’s too tech-oriented and relies on two hosts, largely. Given how Kevin Rose’s interest waned from Digg to Revision3, then to Pownce, I am not sure he’s buyable because he’s the main asset of Revision 3. [Disclaimer: if you look very broadly at all video content, then WatchMojo.com is more or less competitive to Revision 3, though I view them as rather complementary to our programming].
- Federated Media? Too tech-focused and they don’t own any of the content on the blogs they rep. Big media needs to own content to make it worth their while. Sorry, but that’s just the way media works.
- Gorilla Nation Media’s audience might be a better fit, but as an advertising representation firm, it faces the same challenges: You are buying a stack of contracts that at any point could be severed. Unless you own the underlying content, those contracts are not worth the paper they are printed on.
- Heavy.com? They have a men’s audience, for sure. But if CBS is to buy a destination, it needs to be an enormous destination, I am not sure Heavy.com would move the proverbial needle. In fact, in 2005, News Corp. bought IGN Entertainment, but IGN was doing over $70M in revenues on the strength of its Media Properties (IGN.com, RottenTomatoes.com, etc.), had a lot of technology (in-game advertising + digital distribution of movies, music and games). Moreover, IGN Entertainment was far and away the leader in terms of men’s 18-34 audiences.
However, if Fox Interactive Media has become a new media behemoth, it has more to do with MySpace’s burgenoning audience than with IGN’s properties. That being said: IGN Entertainment does give a lot of content and audiences that marketers look for. The challenge for IGN is that a major chunk of their inventory comes from their message boards, which are notoriously hard to sell and monetize.
This being said, when one looks at how instrumental MySpace and IGN’s acquisitions were, it’s fair to say that the ROI has hitherto been higher on the MySpace deal. I am surprised at this, I won’t lie. But this lesson would encourage CBS to look for a MySpace and not an IGN.
I am not that familiar with Heavy.com’s business, frankly, but I am not even sure if Heavy is an IGN.
- IAC is way too e-commerce oriented. Its search engine Ask.com does not really fit with CBS, either. So pass.
- There’s Meebo, but at $250M or more in value… I am not sure if CBS would even know what to do with it. And, who are we kidding: do marketers really even want to advertise in instant messaging communications? That one makes sense in theory but in practice? Not sure.
- There’s the barrage of search video tools: Blinkx, Pixcy, etc., but CBS remains a media company; it should be technology-centric, I think. What I mean by that is that its content should be compatible with all tech platforms to make it was widely available as possible.
- There are a number of ad networks: Tribal Fusion, Specific Media, Casale Media, Adconion etc. I think the obsession over ad networks will pass. Moreover, a lot of media companies will build and launch their own, which is a mistake as well. I am not sure if CBS should plunk down $100-$500M on an ad network. Advertising.com rescued AOL’s butt because AOL was transitioning from a walled garden to a normal website but the fact remains, that says more about how poorly AOL was doing than how great Advertising.com has done (for the record: it has done great).
Valueclick is publicly traded, but expensive.
If it was interested in ad networks, it might as well skip over display ad-based ones and dive into video networks such as Tremor Media or Broadband Enterprises. Again, I am not sure being in the ad network business is the best capital allocation move.
- It could - much like how NYT invested $29.5M in Wordpress - make a bid for Six Apart (makers of Movable Type) or even Wordpress. But, again, I am not convinced it makes sense for a media company to own a platform without the underlying content. News Corp. buying MySpace made sense because the content on those sites become News Corp. property, or at the very least, MySpace gets a license to profit from it…
- Slide? At the company’s last $500M pre-money valuation, I think CBS would gain street cred in one block on SF by buying Slide but see Wall Street punish it. Hey, just being honest here folks: that is one expensive widget company with moutain-fulls of unsellable inventory!
- There’s TheStreet.com, though I am not sure if it’s big enough or whether CBS really wants to get that deep into finance and investments. Bear in mind Wallstrip was all about investing… so this would be a doubling down on one category. Moreover, at a market cap of $250M, it would eat a lot of money the company could spend elsewhere.
- CNET remains very tech-oriented but it has embraced a lot of lifestyle properties, too. In fact, CNET would be a good fit with 100M uniques, $400M in revenues etc. In fact, trading at $1.2B, it’s not that expensive. CNET would give CBS some web DNA and CBS would open up swarms of traditional advertisers to CNET. This could be the best move yet: unlike most other options, CNET owns a lot of content. It also owns a lot of URLs such as TV.com that with CBS’ help could come to life.
Updated: Oh, wow, they listened to me: it’s official.
MERGERS
- CBS could in fact merge with Yahoo! I wrote about this and frankly, this remains an option.
- It could merge with Facebook; won’t happen. At a market cap of $14B technically Facebook is worth roughly the same as CBS. This would be a bizzarro world deal where Facebook trades in growth for CBS’ $14B in revenue… but this one is so loopy.
- As crazy as it sounds, it could undo the merger with Viacom; won’t happen.
SALE
What about a sale to News Corp.? News Corp. owns FOX, it would love to own CBS. But for this to happen, it would mean Sumner Redstone and my old boss Rupert Murdoch would have to come to terms; won’t happen.
Incidentally, last Friday, GE lost 12% of its value, or $40B. It could have bought two CBS’s. By buying CBS, GE’s NBC Universal would own two of the three main networks, making this an impossibility.
That same obstacle is present in a sale to Disney, who owns ABC.
CONCLUSION
As you run down the list… you realize that all CBS is actually a great media company that just needs some tweaking. Yes, indeed: “Nobody likes negative growth, from the guy who shines shoes to the C.E.O. Everybody feels the pain” the truth is no one wants to blow something up either.
My two recommendations for CBS:
- Buy CNET for $1.5B - $2B (that would be a 25% to 66% premium), which would take its digital revenues from “$200M” to $600M. Combining CNET with Last.fm would also yield a lot of upside in digital music and video tie-in’s. But even then: for a company with $14B in annual revenues, does $600M mean much? Many analysts only give credit to a media company’s stock if digital revenues account for 10% of total sales. Even News Corp. or Disney do not claim that.
CNET remains one of biggest acquisition targets that represent meaningful revenue opportunities, and even that won’t move the needle. So what other options are there?
OR
- Merge with Yahoo!
Actually, there’s also one more option:
GO PRIVATE?
One way that no one will care about a) Performance or b) Les Moonves salary is if it were not publicly traded. Moreover, Wall Street is being unreasonable: yes the company is shrinking, but it will take time for digital revenues to grow, anyway. However, if someone came along and took CBS out at $20B, I think a lot of shareholders would buy that (or I guess, sell for that).
It then allows CBS to d) clean house if they so choose to (and will have to). Kate Couric becomes moot in the grand scheme of things… but most importantly, it will allow CBS to roll up a number of smaller web properties, content producers and tech applications to bolster its overall portfolio. In 4 years - when video advertising will be $7.1B in the US (up from $1B) and all online advertising will be nearly $100B in annual expenditure - it can then be go public again…
This might very well be the best course of action. The question remains: does private equity have the stomach for a $20B debt purchase? With $16B in annual revenues… I think so.
All righty, that was a great use of 40 minutes of my time. Back to work.
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.
On Tuesday, Yahoo! CEO Jerry Yang mentioned that Yahoo! would be looking to invest in 2008. He did not name names.
Today Tech Crunch published a rumor that Yahoo! was going to be buying a video platform for $150M. Initially the rumor suggested it would be Brightcove, who’s raised about $80M in venture money, meaning a $150M buyout would not be sufficient to please investors. Then, some thought it might be Metacafe, previously rumored to be acquired by Yahoo!
Turns out the seller is Maven Networks. New Tee Vee confirms the price will be in the $160-170M range.
Maven powers videos for Gannett, Hearst, Fox News, Sony BMG, the Financial Times, Univision, TV Guide, CBS Sports, CNet, and Scripps Networks.
It’s worth noting that Yahoo! is making a bid for a platform for premium content, which is the exact opposite of Google’s M&A target YouTube, who is a platform for user-generated and pirated content. YouTube has since made a big effort to court TV and filmed entertainment content owners and “torso” content producers (such as WatchMojo.com).
It’s also worth noting that such a move comes with risk. When a media company buys a platform, there is a loss of clients. For example, will FOX remain a client, when you consider that FOX’s parent News Corp. has a deal in place with Google (for Fox Interactive Media’s search and contextual business) and Microsoft (for Dow Jones’ search and contextual business). While there is a merit to keep the video platform separate, as YouTube evolves and Google integrates Doubleclick and gets more and more serious about video advertising, expect this matter to come up in discussions. Judging by the client list, I do not see many major risks though, especially compared to the notable client flight risk that Google took on when it bought Doubleclick (and we highlighted - correctly - early on after that deal was announced).
But that is all secondary to the number of publishers that are about to check their contracts to see how quickly they can get out of the DCLK contract. And I’ve already addressed the number of advertisers who probably don’t want to work with a Google-owned ad server here. Just think of how eBay’s marketplace flopped. Sure, that was in TV, but who do you think Google is trying to win over with this deal? The major advertisers, who already fear Google’s ambition.
“I use DFP Reports daily to run the business. The ability to get detailed information on our ad operations has helped us to maximize our selling efforts and keep our advertisers happy.”
Matthew Goldstien, Vice President of Ad Sales Operations, MTV NetworksI really wonder how much longer Viacom’s MTV - the same Viacom who is suing Google for $1B - will be using Doubleclick’s (now Google’s) Dart for Publishers.
I expect competitors to start calling on Maven’s client list. Of course, as Yahoo! is searching for a video strategy (it’s already strong but needs fine-tuning), it’s worth noting that this could be seen as a major plus by clients who use Maven’s platform. Brightcove is a high-profile player in the space, it’s founded by Jeremy Allaire and has a cornucopia of big name investors, but an exit of $160-170M is a bad comparable given all of the money that’s been poured into the company.
Maven on the other hand “only” raised $30M from Accel, General Catalyst, and Prism Ventures. All in all, when you consider the buzz around user-generated content in 2006 and 2007, you start to see that that train has left the station and the market is moving up-market.
Expect a lot more consolidation in the video space, be it:
- platforms
- ad networks
- content plays.
In fact, you are seeing many VCs make calls to continue to fight in online video networks and platforms (by investing more money) or sell out. VCs have over-invested in file networks and platforms and this sale of Maven is, in my humble opinion, a manifestation of that. A $150M or $180M exit is fantastic, do not get me wrong, but for VCs who like to aim for the fences, this is not a grand slam by any stretch of the imagination, it is, I think, an admission that the network and platform space is crowded.
If the VCs owned 50% of the company, that means about $75M to $90M, split three ways, that is a $25M to $30M windfall for each. But the company’s been around since 2002. So six years after being founded, the VCs suddenly accept that kind of return? What happened to the bravado gents? I suspect once an IPO seemed implausible, then a sale became a good choice (why is an IPO out of the question? Exhibit 1: the stock market’s tepid start to 2008).
In fact, I’d argue that even sales are no slam dunk: when you think about it, when this rumor crept up, Maven was the third company that people thought of but there could be 10 others that come to mind.
The demand and supply dynamics are generally not in favor of your average, run of the mill platform or an network. I am not commenting on the businesses here, they are all fine businesses I am sure; I am commenting on these as VC case studies. Yahoo! could have made overtures to a number of these services and ultimately Yahoo! had a world of advantage over any selling party.
I personally see far better dynamics in the content space (a- the wheels have come off the UGC train, b- TV and Film content companies are still not confident in trading offline dollars for online pennies).
As such, the lead a company like WatchMojo.com is building grows… that still does not mean that VCs will or should invest in media content plays - as I had called for last year, I do not think most typical VCs understand media and content to dip their toes - but it does show that the upside to content plays is becoming bigger and bigger because the demand and supply dynamics are quite stronger in video content than platforms or ad networks.
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.
Jack Welch argued that you should compete in a market so long as you could be #1 or #2 in that market.
Apparently, a lot of current VCs are students of Jack Welch. YouTube is the undisputed king of online video, then the market is fragmented:
I’ll admit this much, I am probably very diplomatic because most of these sites are distribution partners of our company WatchMojo.com, but by the same token, that’s never stopped me from ripping our largest partner YouTube, either.
So, first, some context:
- first Veoh raised $40M
- then, Metacafe raised $30M
- today, it’s Daily Motion, who raised a whopping $34M
According to WSJ, via PaidContent.org (who is less diplomatic than we are, calling the post “The Race of Also-Rans: French Video Sharing Site Dailymotion Raises $34 Million; More To Come”):
If Veoh can raise $25 million, and Metacafe can up the stake to $30 million, then why not Dailymotion? The France-based online video sharing site has raised $34 million in its second round of funding. The round was led by Advent Venture Partners of London and AGF Private Equity of Paris, a division of Allianz AG. The site has raised about $9.5 million in October last year from Atlas Venture and Partech International.
Dailymotion, which is based in Paris and was launched in 2005, has grown rapidly to reach some 37 million visitors a month, the story says. It was recently fined a modest $32K by a court in Paris for unlawfully carrying a clip from a 2005 movie by a French director. With this big round, the copyright infringement stakes are going to get higher, for sure. Last month Dailymotion rolled out Audible Magic copyright detection software on its site, which catches clips after they have been uploaded.
Of course, GE operated in mature businesses, well, mature by the web’s standards. So online, the argument could be extended to competing in a space so long as you can be Top 5.
In fact, that makes sense, if you think of search, where Google, Yahoo!, MSN, Ask.com and AOL account for 99% of the market share and all boast multi-billion dollar businesses.
In fact, 99% of the total market capitalization of the search engine industry is
= Google’s $150B
+ Yahoo!’s $17.5B
+ MSN’s $10B
+ Ask.com’s $3.15B
+ AOL’s $3.15B
= $183.8B.
For our analysis of their respective search business’ worth, click here and scroll down to Part II. This link actually outlines the value of the video advertising business in 2011, and the parallel between search and video is eerie.
Today, the search industry accounts for 40% of all online advertising, or $10B worldwide per year. By 2011, the more aggressive projections by Understanding & Solutions call for video to generate a $10B market (more dovish projections by eMarketer call for a $4.3B market, but we digress).
If you connect the dots, the potential for the Top 5 video players can represent as lucrative of a market in video in 4 short years as it does in search today. Mind you, this is a massive leap of faith. Also, one problem is that there is no guarantee that the Top 5 “value-holders” will all be video file sharing sites.
Yesterday, for example, News Corp. and NBC finally baptized NewCo./Newsite Hulu, and that already boasts a $1B valuation according to provate equity bankers Providence. Then, like we’ve outlined previously, come the numerous video search players who are vying for a seat at the table of Top 5…
Translation: it’s not my partner status as executive producer/founder of content producer WatchMojo.com that makes me diplomatic, I actually think that some of the VC investments in late round stages makes sense because a lot of VCs want exposure to this space. Where I tend to respectfully disagree with the “smart money” is that most of the content that currently gets played on YouTube, Veoh, Revver, Metacafe, DailyMotion and company is not what advertisers want, meaning that a lot of the use of funds will go to subsidizing hosting and bandwidth.
Of course, other uses of funds include legal fees. Make no doubt about it. As ridiculous as Viacom looked today in the Web Junk snafu, expect more legal muscles to be flexed… Another use of funds, obviously, is building out sales teams. Right now, most of these companies don’t have the sales infrastructure required to capitalize on the booming market, which takes us to the most likely scenario surrounding many of these “also-rans” (to quote Rafat, of course).
I know what you’re thinking, looking at the Table above: “but Veoh, Metacafe and Daily Motion” are not in the Top 5″. True. But considering YouTube was acquired by Google, MySpace was taken off the market by News Corp., and then Google Videos, Yahoo! Videos and MSN Videos being corporate giants, in VCs eyes, they are Top 5 sites.
A lot of these companies will eventually get bought out… either for traffic, or technology, or simply out of sheer paranoia.
So, are VCs dumb or smart to back them, it depends… anyway, we’re seeing late stage VC investing in file sharing, where will we see Series A rounds?
PLAY
