The past five years saw a wave of investment in all types of video companies.Now expect to see a lot of consolidation in the months and year to come.

Video companies tend to fall in the following buckets:

1. Editing Software and Compression Tools: Adobe, Apple, Avid, JumpCut, Sorensen, On2

2. Content Producers: DECA, DBG, Eqal, Fora.tv, For Your Imagination, Funny or Die, Generate, Howcast, Katalyst Media, Machinima, Mania TV, Next New Networks, ON Networks, Revision3, VideoJug, and WatchMojo.

3. Content Management System (CMS): blip.tv, Brightcove, Feedroom, Justin.tv, KIT Digital, Livestream, Ooyala, Maven, Mogulus, Permission TV, Qik, uStream, VMIX.

4. Content Aggregation, File Hosting, Sharing and Distribution: 5Min, Break, DailyMotion, Hulu, Kaltura, Metacafe, Nabbr, Revver, Vimeo, YouTube.

5. Advertising Creation, Management and Networks: Adap.tv, Auditude, Brightroll, Broadband Enterprises, Freewheel, Overlay.tv, Panache, Scanscout, Tidal TV, Tremor Media, Video Egg, Yume.

6. Content Delivery Networks (CDN): Akamai, BitGravity, Edgecast, Grid Networks, Limelight Networks, Panther Express.

7. Search, Discovery and Recovery: Blinkx, Cast TV, Clipblast, Dabble, Everyzing, Google, Mefeedia, Pixsy, Truveo.

This being MediaPost, we will focus on what consolidation will look like among:

a)     Content Producers

b)     Advertising Creation, Management and Networks

c)     Content Aggregation, File Hosting, Sharing and Distribution

The deal-making has already begun:

–        Yahoo just bought Associated Content and might buy the Huffington Post;

–        AOL bought Studio Now

This is happening for a few reasons, mainly because VCs made out best before the 2008 econopocalypse, when the valuations were all out of whack with reality.  For VCs to keep investing in these portfolio companies, they need to do “down rounds,” which affect morale and hurt retention.  Conversely, VCs themselves are operating on a shorter leash, so they will prefer to double down on the potential winners.  As a result, a lot of companies will be offered the option to merge with an industry competitor or sell.  However, with big media companies still trying to determine what to do with online video, often a merger is more likely than an acquisition.

So let’s see the main trend affecting each of the three sectors:

a)     Content Producers. We  have already seen a wave of producers shut down or shift strategies and emphasize aggregation, curation or representation.  Those who stay in the race will look to consolidate because the effective CPM that many producers get will remain low.

In theory, niche producers should command premium ad rates, but in reality, the ad rates many get are anemic.  Those who have premium content and sales forces will be able to command higher ad rates in a relative sense, but even in those instances it is not certain that ad dollars will be large enough in an absolute context.

b)     Advertising Creation, Management and Networks. If we splinter this group into the ad networks and the technology vendors, we can look back at the evolution and consolidation of display advertising players to project what might happen in the future.

Right now, ad networks are competing with one another for market share and ad dollars, which means the margins will dwindle over time as infighting for ad inventory and publisher accounts rise.  Meanwhile, as marketers begin to spend increasingly large amounts on video, they will negotiate harder than ever, further applying pressure to ad networks, who essentially will be played off against one another.

Technology vendors might have an edge, but over time any edge one has will be lost as competitors and copycats catch up to the market.  However, the real catalyst will be the reality that no technology is worth much if YouTube (and to a lesser extent, Hulu) don’t open up their sites.  We have already seen a large number of bleeding-edge, early-adopter technology solutions fall by the wayside due to a lack of adoption and traction.

c)     Content Aggregation, File Hosting, Sharing and Distribution. YouTube continues to “own” this space, increasingly moving away from the UGC and prosumer segments to expand premium and super-premium space.  The VEVO partnership shows just how important YouTube has become as a platform.  With the inevitable outcome being a natural monopoly, expect a few of the laggards to hook up to save on R&D and bandwidth and to offer advertisers and content owners more scale.