Sometimes VCs say the funniest things:
From SAI:
SAI: What has to happen in the next year or so for Web video to start producing profitable businesses?
Lee: Infrastructure, consumer behaviour and advertisers all have to catch up. Once they do, the economics will be more understandable, and more repeatable. Advertisers will learn what to buy and what not to buy. We are in the third or fourth inning of this thing. If in 5 years video advertising isn’t $3 billion business, I would be pretty surprised.
Canaan Partners‘ Warren Lee, who led the VC firm’s investments in Tremor Media, Motionbox and Associated Content, after previously leading video investments for Comcast Interactive Capital.
Maybe I am off, but Forrester pegged online video ads to be a $7.1B by 2012 - so 4 years from now. If online video ads is a $3B business five years from now, or 2013, we’re in trouble people. The video space has raised $6B after all in the past 2 years… and tack on YouTube’s $1.65B exit and a few smaller deals, that means $8B has gone into chasing the big elephant.
What’s wrong with this picture people? Here’s my biased thought:
SAI: You’ve mentioned your company’s bias toward infrastructure and services over consumer-facing video and content investments. Are there sectors you see reaching profitability first?
Lee: Certain categories will have a shorter time to profitability. Companies like ThePlatform, FeedRoom, Brightcove and Maven Networks, which sell software to businesses and get paid a license fee. I suspect these kinds of companies will be profitable first.
Online advertising isn’t as solid as it should be right now (total online ads in the US represented a $25B industry in 2007) yet videos only clocked in $750M in that year. This year, that figure goes to $1.35B, according to eMarketer… but as I’ve outlined, I think most of that money is being generated by traditional media companies, not any of these new media players… at least not in meaningful ways.
The problem is simple: traditional media will see a cannibalization of total revenues as they get more aggressive with shifting content libraries online, so they won’t be doing that with as much ferociousness and velocity as advertisers would like to see. What’s worst: as Canaan admits in the Q&A, they had a bias against content… so long term, there won’t be enough high quality video content to get advertisers excited about online video opportunities… which in turn means everyone loses, including companies like Brightcove et al. For this reason, I highly doubt Brightcove can see profitability at the end of the tunnel. Brightcove’s clients, in theory, would gladly pay license fees, but if and only if advertising revenue was greater. Right now, it’s just not. That is why companies like Blip.tv are doing great (disclaimer: Blip is a partner of ours).
This all seems simple enough to me… but I’m not a VC, I’m a mortal executive, and in my humble opinion, this miscalculation will lead to the downfall and fatal blow of many of these VC-funded companies who ride the wave of UGC-driven growth in bandwidth but won’t see a corresponding spike in online video advertising revenues to make the growth sustainable.
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