Why Online Video Sites
Are Hot Targets
As TV viewing habits
change, media companies—and advertisers—are looking elsewhere: They've set their
sights on a new breed of startups
By Steve Rosenbush of BusnessWeek, October 2, 2006
Mark Cuban, the tech entrepreneur and owner the Dallas Mavericks, said on Sept. 29 that
anyone who buys YouTube, one of the most popular video sites, is a "moron." His
comments came the same week that analyst Jordan Rohan of RBC Capital Markets argued that
MySpace, the social networking site that generates a huge volume of video traffic, could
be worth $15 billion in three years. At its heart, this debate is over what role these
Internet video companies will play in the media world—bit players, important
supporting actors, or the new media stars.
Update to this article: Google buys YouTube for
1.65 billion October 9, 2006.
VALUABLE VIEWERS. While the value of each company
clearly depends on its particular performance, the factors that are proving important for
Net video players are quite different from those of traditional media companies. In
traditional TV, more viewers mean more money. The correlation is direct, although
advertisers pay a bit more for younger viewers.
That's not necessarily so online. A smaller audience may be more valuable than a big one,
if the small one does the sorts of things that advertisers like—such as clicking on
ads, buying products, or visiting related content. The bottom line is that Net video
companies can be judged on a wider range of factors than traditional media companies,
which makes some of them worth more and some worth less.
In September, a group of investors, including Maveron, a venture capital firm founded by
Starbucks Chairman Howard Schultz, put $12 million into VideoEgg, a small but promising
video site (see BusinessWeek.com, 9/27/06, "VideoEgg
Gets a Jolt of VC"). One thing that encouraged the VCs was the rate at which
viewers clicked on advertising from VideoEgg's sponsors. The "click-through"
rate, as it's known, was well in excess of 1%, compared with an industry average of a
fraction of 1%. In other words, VideoEgg's audience could be worth as much as a site with
twice the number of viewers, because it delivers so many more of its viewers to
advertisers.
MONEY POURING IN. Investments are pouring into the
sector to get a piece of this emerging media world. Besides the VideoEgg deal, Sony (SNE) paid $65 million for Grouper, a startup
known for its online video audience and its technology. Time Warner (TWX) and Michael Eisner have invested in
online TV site Veoh. The founders of Web phone service Skype, which was acquired by eBay (EBAY) last year, are launching a new online
video site, currently operating under the code name of The Venice Project (see
BusinessWeek.com, 7/24/06, "Kazaa,
Skype, and now 'The Venice Project'").
News Corp. (NWS) undoubtedly got the
bargain of the bunch with its purchase of MySpace for $580 million. While Rohan's $15
billion valuation may be overstating it, there's little question that MySpace is now worth
several times what News Corp. paid for it. News Corp. is now shifting more assets into the
Internet (see BusinessWeek.com, 9/18/06, "Murdoch
to Bid Satellite Goodbye").
CHANGING HABITS. Behind the flurry of deals are
fundamental changes in the way consumers use technology and media. Investment bankers say
traditional media companies and older Web portals such as Yahoo! (YHOO) are alarmed by the habits of younger
consumers. Members of the so-called Millennial generation, who were born starting around
1980, don't watch TV the way their parents did.
"We believe the value of (television) station assets will decline as Millennials
become the most powerful user of media and (the) coveted target for advertisers,"
research firm Frank N. Magid Associates said in a report. "Millennials are
multitaskers with cluttered lives, shared attention and a wide array of appliances in
their lives—TV remains one of them, it's just not used in the same manner." The
report said Millennials spend 2.48 hours a day online, the same amount of time they spend
watching TV, and about 2.2 hours a day listening to music.
Media conglomerates are racing to get in front of changing demographic habits. "And
Web portals such as Yahoo, which viewed themselves as the main gateway to the Internet,
are alarmed, too. Millennials don't view the portals in the same way that older users
do," said investment banker Jay MacDonald, of the media banking firm DeSilva &
Phillips. Younger Internet users are more likely to turn to MySpace, Facebook, or YouTube.
ANOTHER THORNY ISSUE. At the same time they're intrigued
by the possibility of online video, investors and potential acquirers are skittish about
its uncertainty. No one knows how much advertising can be generated from online video or
which sites will benefit the most. The rapid rise of sites like YouTube raises fears that
such sites could fall out of favor just as quickly. As a result, most VCs and media
companies are sticking to small deals that get them into the game, without taking on the
risk of major moves.
A $20 million or $30 million investment is one thing; a deal for YouTube, which could top
$1 billion, is entirely different. "Buyers aren't just basing these deals on current
revenue or profits, but on a host of things a company might do for them in the future.
That makes them difficult to value, which is why buyers are often more willing to take a
bet on a smaller company," MacDonald said.
Sorting out the intellectual property rights issues of video on the Web is another thorny
issue. That's what Cuban had in mind when he made his comments about why it didn't make
sense to buy YouTube. The site has become so popular with its mix of amateur and
professional video that people view 100 million videos there a day. There have been rumors
that YouTube has been looking to sell itself for $1 billion or more, although the site's
rising popularity has pushed up its operating costs to an estimated $900,000 to $1.5
million a month (see BusinessWeek.com, 9/18/06, "YouTube:
Waiting for the Payoff").
EARLY PAYOFF. Cuban argues that YouTube is at risk of
being sued by content owners who say YouTube violates their intellectual property rights.
He thinks that it could be sued just as media giant Bertelsmann was sued in early 2003,
after it acquired file-sharing pioneer Napster. "I don't think an acquisition would
be smart until all the copyright issues are decided. It would be reminiscent of BMG buying
Napster," Cuban said in an e-mail to BusinessWeek.com. "Personally, I think
YouTube, like Napster, can help drive sales of products. But my personal opinion isn't
copyright law. The (unsuccessful) arguments in favor of why Napster should be allowed to
continue in 1999 were similar to the ones being made for YouTube (which raises doubt's
about YouTube's future)," Cuban said.
Yet MySpace offers an interesting contrast in how online video is already beginning to pay
off. MySpace is used for online distribution of TV and film from News Corp.'s Fox
Entertainment. The site, built around a network of home pages laden with messages and
photos, already generates a huge volume of video, according to comScore Networks. A
comScore report on Sept. 27 said MySpace generated 1.5 billion video streams during the
month of July, beating out No. 2 Yahoo and No. 3 YouTube. The survey only ranks free video
streams. If the market is measured by the number of video users, as opposed to the number
of videos watched, MySpace ranks third behind Yahoo and YouTube.
As film and TV make their way online, advertisers want to take advantage of the rising
popularity. The process has started. "MySpace is currently sold out of video ad
inventory," Rohan said. Advertisers are very excited about online video, which is why
the value of sites that tap into the market is so high, according to Ryan Jacob, manager
of the Jacob Internet Fund. Jacob, who owns shares of News Corp., said video is "very
alluring" to advertisers because it's "easier to monetize" than other forms
of advertising.
"A SHOW-ME PERIOD." Although skeptics may
scoff at the idea, advertising may be integrated into amateur video, too. Maveron partner
Jonathan Fram, who led the firm's investment in VideoEgg, says he thinks the startup could
become a very big company. It has found a niche helping individuals and companies that
can't afford or don't want to manage their own video infrastructure put video on their
sites.
There are plenty of compelling investment ideas, media executives say. "I think there
is some really great innovation going on out there. I continue to be amazed by some of the
creativity of these companies," says Ross Levinsohn, president of Fox Interactive
Media, which includes MySpace. "But the jury is out when it comes to the question of
how any Web 2.0 property is going to make money. We're all in a show-me period."
The last bull market in the Internet sector ended in disaster for many companies. But for
all the failures, a few winners such as Yahoo and Google (GOOG) emerged. Despite the risks of
investment, few big media or Internet companies are willing to sit back as the next group
of leaders emerges.
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