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Picture Is Murky For YouTube Wannabes

Brian Deagon Wed Mar 12, 6:25 PM ET

A spark can cause a fire, as was the case when video-sharing Web site YouTube emerged a few years ago. ADVERTISEMENT

By late 2006, YouTube had become such a hit that Google (NasdaqGS:GOOG - News) bought it for $1.65 billion. Today, often motivated by YouTube's success, there are an estimated 450 Web sites where anyone can upload pretty much whatever video they've shot -- from stupid pet tricks to semi-professional 10-minute dramas.

But analysts say judgment day is coming for the vast majority of the YouTube wannabes.

"There will be a shake-out," said Daniel Graf, chief executive of Kyte, a provider of services people use to display videos and other content to multiple Web sites.

"The online video sharing world consists of YouTube and everyone else," said James McQuivey, an analyst at Forrester Research.

In January, users viewed more than 2.5 billion videos on YouTube, according to comScore Video Metrix. It's the lone giant in the space. While there are other large video sites, they are all affiliated with major media or Internet companies, such as Fox and Yahoo (NasdaqGS:YHOO - News).

The independent video site leader is Veoh.com, which had nearly 73 million views in January, says comScore. But that ranked it only No. 10 overall, and the company concedes that it is losing money. The No. 2 independent video site, Break.com, had 23.2 million views in January, to just sneak into the top 20 overall. No. 3 independent Metacafe.com had 20.6 million views.

If video-sharing sites don't already have an exit strategy, "I recommend they polish their resumes," McQuivey said.

Last month, video site Revver.com was sold at a fire sale price. The buyer was LiveUniverse, an online entertainment company led by MySpace founder Brad Greenspan. It reportedly paid $3.5million for Revver, which had previously received $12.5 million in funding from such investors as cable giant Comcast (NasdaqGS:CMCSA - News) and venture capital firms Draper Fisher Jurvetson and Bessemer Venture Partners.

Another video startup, Stage6.com, shut down operations last month. Stage6, owned by digital media pioneer DivX (NasdaqGM:DIVX - News), pulled the plug even though its viewership had been rising since November. It had 10.7 million views in January.

In a statement on the Stage6 Web site, DivX said it shut down the site because "the continued operation of Stage6 is a very expensive enterprise that requires an enormous amount of attention and resources that we are not in a position to continue to provide."

The video sites depend on ad dollars, and the math can be tough, says Rex Wong, chief executive of Next.TV (formerly Dave Networks), which provides video services for such companies as Walt Disney (NYSE:DIS - News) and ABC.

In general, he says, it costs a provider about $2.50 for every 1,000 views of a user-generated three-minute video clip. But that clip will bring in just $1 or so in banner ad revenue, he says. In other words, says Wong, profit can only be made when clips are getting tens of thousands of views. And with so many sites and so much competition, it's tough to get those kinds of viewer numbers, he says.

"There's no doubt there are too many Web sites in this market," Wong said.

Professional content is another story, Wong says. Such content can attract pre-roll, mid-roll and post-roll ads -- video ads that play just before, after or during a video. Such ads can bring in far more revenue. A ballpark figure, says Wong, is $30 per 1,000 views.

"The fact of the matter is that branded professional content is where the value is," Wong said.

The price disparity between user-generated video and professional video is partly because advertisers are leery of having ads next to user-generated content that might be risque or salacious. "Advertisers are not comfortable with some of the content," said Wong.

What it comes down to, says Angela Gyetvan, vice president of marketing and content for Revver, is that all parties are still trying to figure out the economics of online video.

Said Steve Mitgang, chief executive of Veoh.com, "You need to have a critical mass of viewers and video to make the whole ecosystem be attractive to advertisers."

Veoh, he says, has that. Yet, Mitgang confirms that the site is not profitable. "But we're on track with our revenue projections," he said.

Veoh entered the market two years ago and has received $40 million in funding. Investors include Time Warner (NYSE:TWX - News), ex-Disney CEO Michael Eisner and Spark Capital.

"It's a hard business," Mitgang said. "Getting traction with consumers isn't a trivial exercise. There's a lot of content out there."

Internet users in the U.S. watched more than 10 billion videos online in December, comScore says.

"We're still in an experimentation phase and what exists now may not be the most effective way to monetize video online," said Michael Pond, an analyst with research firm Nielsen Online. "There is a clear indication that some sites haven't been able to either monetize their site or gain enough viewers to the site, and I can see more of that happening."

Yet another problem is these sites can be hit with lawsuits from content owners for copyright violations.

"The networks have the advantage of owning this exclusive content that's in high demand and they can be very selective about where they wish to put that," said Heather Dougherty, an analyst with research firm Hitwise.

Hollywood and TV networks have been increasingly aggressive in getting their content onto the Web, usually on sites they control or in which they have a vested interest. Video site Hulu.com, for example, is backed by News Corp.'s (NYSE:NWS - News) Fox and NBC Universal. Video site Joost.com has agreements with Viacom (NYSE:VIA - News), Paramount, Warner Music Group (NYSE:WMG - News) and others.

"It's become more difficult to obtain premium content," said Dougherty. "You will see some fallout."