So where's that Web video shakeout?

The ranks of video start-ups were supposed to have been trimmed by now. Is the predicted thinning of the herd just tardy or is there really gold in the sector?

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
4 min read

The predicted thinning of the herd of video-sharing start-ups launched in the last few years hasn't--at least so far--gone according to naysayers' projections.

Last month, Revver, the video-sharing site famous for splitting advertising revenue with videographers, was sold for pennies on the dollar. The same month, Stage6, the YouTube competitor started by video-technology maker, DivX, abruptly closed.

Other less well-known companies have folded, but it certainly hasn't been the bloodbath that many expected. Two years ago, pundits and executives alike predicted that YouTube would grab the lion's share of the sector's money, audience, and talent. Indeed, some of those prophecies came true. YouTube has amassed an audience of 78 million unique U.S. users and dwarfs any other video destination on the Web, including those belonging to such entertainment conglomerates as Viacom and NBC.

"Nobody has found out how to make money yet. There's no doubt that it will be found."
--Erick Hachenburg, CEO, Metacafe

But look around. Plenty of one-time YouTube competitors are still chugging along.

CNET News.com interviewed CEOs from a half dozen start-ups that made names for themselves during the online-video craze of 2006. They say that while profits are scarce and plenty of companies may yet crash, the keys to their survival have been keeping costs down, dumping "me too" business models, and motivating themselves with the knowledge that eventually, a large chunk of the $70 billion TV advertising market is headed to the Web.

"The one consistent thing we have in common is that we're all racing to figure out the business model," said Erick Hachenburg, CEO of video-sharing site Metacafe. "Nobody has found out how to make money yet. There's no doubt that it will be found. Video is such a central part of storytelling and entertainment and the Internet...we know there's a lot more to do."

You don't have to look very hard to find proof of television's migration to the Web. Internet video is booming.

According to ComScore, more than three-quarters of the total U.S. Internet audience (75.7 percent) watched at least one online video in January. The major TV networks and entertainment conglomerates are all posting their content online. The most recent example came earlier this month with the launch of NBC's and News Corp.'s video portal, Hulu.

The public proved the experts wrong. Turns out people enjoy watching video on computer screens after all. But where's the profit in this?

Google, which paid $1.65 billion for YouTube in October 2006, doesn't reveal earnings figures for the video-sharing site. Most of the CEOs interviewed, however, said they believe that with the site's huge bandwidth costs and ongoing struggle to find an advertising model, YouTube at best ekes out a small profit.

If the Web's biggest and most successful video player barely makes money, how is anybody else supposed to?

More to video than YouTube
Only a handful of companies can still be considered legitimate head-to-head YouTube competitors.

YouTube is the undisputed king of video sharing, the practice of allowing the public to post videos online. Nonetheless, companies such as Metacafe and DailyMotion continue to vie for audiences, albeit mostly overseas.

Metacafe, the largest independent Web site, saw only 6.8 million users in the United States in January but recorded 23 million more from outside this country. Despite attracting more than $40 million in venture capital, there haven't been any spending sprees at Metacafe. Hackenburg said CEOs have learned to stretch dollars.

Video image

The kind of public financing that flowed freely during the bubble era isn't as readily available today.

During the dot-com halcyon days, hundreds of companies filed for initial public offerings as investors threw money at tech plays. An IPO equipped companies with the cash to gobble up competitors. But in 2006, everybody in video understood the capital markets would be less generous.

"Without the kind of currency from an IPO, we knew you wouldn't see a classic consolidation," Hachenburg said. "Everybody knew they had to be smart with their funding."

Other video companies have tried to take a larger hand in producing videos themselves. Grouper (now known as Crackle), bought by Sony in August 2006 for $65 million, has launched Crackle Studios, a sort of video production incubator. Break.com bankrolls promising videographers and also partners with production companies to produce higher-quality content than amateur-made clips.

Where the money may be
But while all the glamour to this point has been in video sharing, selling software services and video know-how to companies that want video on their sites may be where the money is.

Brightcove has become the frontrunner among the so-called white-label companies. The 130-employee company boasts such customers at CBS, The Wall Street Journal, 20th Century Fox, Time magazine, and Sony BMG Music Entertainment, just to name a few.

"The first thing we launched was our software platform," said Jeremy Allaire, Brightcove's CEO. "That was right at the same time that consumer sites were taking off. We experimented with a consumer site, but literally within six months, we moved exclusively to the business we're in now. We saw the huge demand from other media companies and we believed those other investments could not amount to a meaningful scale."

Brightcove has already received more than $80 million in venture funding. Allaire wouldn't comment on whether his company is profitable, but said it won't need any more venture funding.

Greg Kostello, CEO of vMix, followed a similar track in the spring of 2006. The San Diego-based start-up undertook a labor-intensive effort to repackage its in-house technology--originally built to service its user-generated content--into enterprise software. Among vMix's customers is the Tribune Co., parent company of The Los Angeles Times. "I looked out at the 200 other videos sites out there and realized that it was really going to be hard to compete," Kostello said. "We made a quiet transition, and it was the right thing for us."