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.
This morning I found out Vidavee sold for $6.6M to Vignette - a CMS company. That’s not a large number by any stretch of the imagination… but it’s even more shockingly low when you realize that the company raised $8M in funding.
I know that a lot of VCs are pulling the plug on companies that don’t represent big payoff opportunities. Combined with the fact that the company is losing money (I presume this was the case of Vidavee), then usually investors will pull the plug, as they did, here.
Tack on liquidation preferences and I presume the managers, founders and employees got nothing and the VCs salvaged some of their capital to reinvest in better areas.
Mind you, sometimes companies sell for a little bit more than the amount that they raised (GameTrust), other times it’s for less than they raised (Revver). Usually, companies and investors try to spin it in a positive light. In this case I presume the VCs just wanted to kill the project or sell it. I am not surprised they sold it. The product may be good, but the markat is saturated and Vidavee had no leverage, let alone pricing power.
Vidavee was one of the many, many, many companies to pitch us their services. We passed. I thought Vidavee had some interesting features, but they were a victim of a rapidly moving market, poor execution, confusing market positioning and frankly: free alternatives. I’d say that the last variable created a rapidly moving market which forced investors/managers to change their spiel in the marketplace… and they simply did not execute well. It’s not my style to say anything when a company is operating and all (especially if I have some kind of contact with them), but now that they have sold… I figure it’s a good case study and the parties there should read this, no matter how much it hurts.
But I’m not sure this is management or investors’ fault [alone]. I’m not saying they’re not at fault, but I don’t think it would have mattered what they did.
Let me chime in:
1- There’s just not that much money in technology plays anymore… before you think I’m a crackhead, let me explain:
2- Even though there are the occasional grand slams, most of those are media-related (ie. some advertising component)
3- The risk / reward tradeoff between media and technology is starting to tilt favorably towards media.
Nothing better illustrates this than MSFT’s major effort to acquire YHOO. Or if you doubt me, even Google is an advertising-supported technology play. The answer to this problem is that a lot of companies try to develop ad-supported business models but they can’t pull it off (man, I’d like to name names here). Vidavee did not attempt that, they went with licensing sales, but they were even more dead in the water as a result. This is why I think #1 above is true: tech companies are in a bastardly catch-22 these days.
For # 1 - Sure, call me biased as a media entrepreneur.
For # 2 - Look at the recent exits and you will see that the exits come with the promise of advertising one way or another (YouTube, MySpace, etc). Vidavee never played up that card, they sold licenses to their software and that is really not a defensible position because there are countless alternatives in the marketplace… and nowadays, everything has a free alternative.
As per # 3 - media, content and advertising is the major opportunity because:
a) there are usually less competition (because VCs funded less players) and
b) it’s not a #1 or #2 takes it all kind of game.
For purposes of illustration: I could - pretty much with the press of a button - change blogging platforms from Wordpress to Movable Type seamlessly. That won’t change the value of this blog and this company… Admittedly, to WP or MT’s parent SixApart, the loss of one user does not change things… but therein lies the problem: you will have 1,000 wannabes who have to invest a lot of resources to become the #1 or #2 in the space, the others might as well not bother.
It’s really no different in video… and Vidavee was neither Wordpress or Six Apart…
This is why you are seeing more and more digital media/content funds - more here.
Vidavee’s fate shows one thing: platforms are a commodity, I don’t care what anyone says. What exasperates this is that everyone and their uncle wants to be a platform.
Here’s a new reality for all you wanna be financiers and entrepreneurs: technology, patents, blah-blah-blah. They’re not all that defensible in the “who cares” sense:
- either they are not defensible because cheap hardware and open-source software makes them not defensible, or
- they are but no one really uses the service or it’s not practical.
Hopefully Vidavee now has a home at Vignette. In the meantime, I could list 5 or 10 other companies that will end up like Vidavee this year… but I won’t, that’s not classy.
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.
If there’s one thing I’ve learned producing a boatload of content in web video, it’s that technology ain’t cheap.
Storage, hardware, memory, computing power, bandwidth. It adds up. Of course, having built a successful content business from 2000-05, I am more than confident that I have, am and will continue to build a successful company, and not simply an expensive hobby at WatchMojo.com.
Last year, when everyone was drooling over the virtues of user-generated comments and technology platforms to serve video content and advertising, we were creating one of the more eclectic and broad libraries of digital content for broadband platforms.
This year, people value content and no one questions the virtue of building content custom-made for the Web. Last week we were one of the few online-only content providers joining Joost’s deck. We have many more announcements to make. Our core WatchMojo.com destination is growing in traffic as is our syndication business, one partner alone grew views by 23,490% in three months, from December 2006 and March 2007).
Last year, I also said that 2007 will mark the beginning of the euphoric end for technology platforms, and this started when YouTube got bought by Google.
Subsequently:
- Guba’s CEO jumped ship.
- Revver’s investors pushed two of the three founders off the plank when the CEO was on vacation (rather Robert Blake-esque if you ask me)
- Video Egg, a darling of many raised an additional $3M this, suggesting that it’s far from being anywhere near break even. In fact, since most of VideoEgg’s network is user-generated content, I would not be surprised if revenue is not where it should be, but traffic and views are robust, prompting investors to pony up more.
- And today, I learned that Trident Capital-backed Vidavee laid off a few people due to high burn rates. Vidavee has a really cool platform that if I could afford, I would have licensed.
I think Vidavee will prove to be very successful in the end, it’s got a few great clients and laying folks might be the remedy to ensure that it can serve these clients over time and make VCs happy, but the fact that investor sentiment is shifting does, like I have been saying all along, suggest that video content and video technology circles are about to go the same cycle that text content and text-based publishing tools went through in 2001-04:
=> Step 1: new media arises, cost of content creation goes down, a lot of people get into the business of publishing
=> Step 2: way too many tech platforms get funded to serve these content startups
=> Step 3: tech platforms need to recoup investment and experiment with numerous pricing structures
=> Step 4: media companies defer making technology acquisitions, licensing decisions due to falling cost and way too many choices
=> Step 5: technology becomes a commodity due to heightened competition, falling pricing and too little adoption
=> Step 6: fallout ensues with content players getting upper hand
=> Step 7: media companies make more and more revenue
=> Step 8: media companies wring out efficiency, boost margins
=> Step 9: media compaines can afford tech platforms
=> Step 10: value of tech platforms rises and the cycle continunes (see how CDNs get funded again now, and DCLK’s value rose from $1B to $3B).
Problem? In this era of cheap hardware, open source software and what not, will I the media company embrace a solution in step 9 or simply develop something custom-made in-house?
Like I say: to win in technology, you really need to be #1 or #2, in content, you need no such thing. Content, after all, is the new software.
PLAY
