With the recent rumor that Google’s YouTube unit was looking at acquiring video content company Next New Networks, it’s clear that anything can happen in the rapidly growing online videospace. While some are shocked to see that Google may cross over and own content, the rumor does sound plausible:
- Next New Networks generates the vast majority of its views on YouTube and if the companies were under one umbrella, it would remove some of the monetization obstacles and challenges Next New Networks probably faces when trying to sell their YouTube inventory.
- YouTube, meanwhile,has massive online video street credibility but totally lacks the human sensibility required in media and content in particular to take a rising star on the site and take them to the next level. That is Next New Networks’ business.
The combination would allow YouTube to fold in Next New Networks and use it as a talent management platform, basically, and give the video aggregation site the ability to create videos if need be.
Loaded with nearly $25M in venture financing, it’s not quite the initial public offering that some of their investors were hoping for, but let’s face it, an exit to Google is nothing to be ashamed of.
Close, but no cigar: IPO Talk Will Increase
In fact, while you can blame Sarbanes Oxley or a lack of credible initial public offering (IPO) candidates, it is likely that 2011 will come and go with very few, if any, major liquidity events in the public markets for online video startups. As such, the most likely path to liquidity for venture capitalists (VCs) remains mergers and acquisitions (M&A). With VCs having invested in so many online video startups and industry revenues still not matching the lofty expectations that whet VCs appetites in the first place, a lot of boards will cash out in 2011 when buyers come knocking.
Only Certainty: Dealmaking Will Continue
After many years of expected consolidation, 2010 saw a wave of acquisitions:
- AOL acquired StudioNow and 5Min (as well as TechCrunch, of course)
- Specific Media acquired Broadband Enterprises
- Undertone acquired Jambo
- VideoEgg acquired SixApart
- Tremor acquired Scanscout
Apart from Video Egg’s merger with Six Apart which was largely based on the shared VCs doing some financial engineering, with these deals, we saw examples of both vertical and horizontal integration.
- horizontal integration describes a strategy used by a business that seeks to sell a type of product in numerous markets. Horizontal integration occurs between two firms which are in the same industry and in the same stage of production, ex: a car manufacturer merging with another car manufacturer.
- vertical integration combines companies in a supply chain by a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.
AOL’s moves were examples of vertical integration:
- StudioNow gives it a platform to hire producers to create videos for its AOL properties and myriad brands.
- 5Min gives it the opportunity to distribute its own videos and those it has licensed to more places around the Web.
These deals have given AOL an end-to-end capability in video.
Meanwhile, we saw display banner ad networks venture into online video:
- Specific Media acquiring Broadband Enterprises and Undertone acquiring Jambo enabled giant ad networks in the display banner arena to enter the video market rapidly.
- Tremor acquiring Scanscout is plain consolidation among two competitors who probably got tired of tussling in the marketplace and eating into each other’s margins. The deal gives them a bigger footprint and a march towards an initial public offering.
In this context, horizontal integration occurred between potential or actual competitors.
There is nothing to suggest that 2011 will be less busy on the online video deal front. Here are some of the trends I think will drive M&A activity in 2011.
Ad networks are rife for consolidation and can be broken up into:
- The source of technology, Ad Servers: the software required to properly serve ads and offer the kind of targeting and reporting that advertisers and publishers expect these days.
- The source of media, Ad Networks: the matching and intermediating between advertisers and publishers
A few firms have footholds in both: Auditude (ad server) also runs Cross Point Media (the ad network), Tremor runs the Acudeo ad server; while some operate under the same moniker (Adap.tv). Some focus just on one space: LiveRail doesn’t have buy or sell media, it only offers an ad server.
With Jambo in the hands of Undertone and Broadband Enterprises part of Specific Media, expect display banner ad networks (such as Specific Media, Undertone or Tribal Fusion) to acquire video networks or see consolidation within video ad networks and servers. There are no shortage of remaining players: Adap.tv, Auditude/Cross Point Media, Brightroll, Freewheel, LiveRail, Overlay.tv, Panache, Spotxchange, Tidal TV, Video Egg, Yume . . . to name a few, with Tremor becoming a leading IPO candidate.
Big Media: A state of inertia
We have yet to see traditional media companies with their large purse strings step into the ring. It’s only a matter of time though, as Magna’s latest figures show that online advertising will overtake newspapers by 2013, though TV advertising will still command the lion’s share of all ad dollars through 2016, with an estimated 40 percent share at that point. Although, by then online video will account for $11.4 billion in global ad spend. Where online video trumps television advertising is in growth rates: online video will grow at an average rate of 19.6% through 2016 (with estimated 50% growth in 2011 alone), versus a 7.5% growth rate for TV advertising.
With large media companies hoarding more cash than ever, it’s fair to assume that those who attempted to “build” from within and failed will soon shift gears and look to “buy”.
But the reality is that big media, by and large, still doesn’t know what it wants to do in the arena. With Rupert Murdoch divesting from the Web in general and shifting focus from paywalls to iPad publications, it’s unlikely that News Corp. will ante up much for online video. How about CBS? With changes at the very top of’ management, I also don’t see them making too many shifts back into online video. Disney is more focused on gaming than online video. NBC Universal, now in the hands of Comcast, will probably be stuck in integration mode for most of the year. Time Warner seems intent on continuing its TV Everywhere initiative to maintain its margins and offline revenues.
Newspaper companies stand the most to benefit from online video, but they will spend the first half of the year wading through the oppo
rtunities to understand what strategy and targets will most help their business: technology to serve ads or video content to sell ads against.
The Portals and Major Online Companies
AOL certainly put itself in an enviable position with a series of moves, though integrating the various moving parts as its dial-up business continues to shrink will remain a challenge.
It’s now Yahoo!’s turn at bat. With Ross Levinsohn coming on board and being a content guy with a penchant for deal-making, Yahoo! w
ill mimic AOL and get more serious about video, but what they actually do is anybody’s guess. They just unveiled their local strategy. Is video next? Don’t hold your breath.
Microsoft shuttered its Soapbox property and it remains to be determined what it will do in online video. With Redmond admitting it offered Facebook a $15 billion offer and Steve Ballmer courting Twitter’s CEO Dick Costolo, I suspect Microsoft has priorities other than video.
Meanwhile, with $25 billion in cash and equivalents, Apple can move in multiple directions, namely:
- mimicking its acquisition of mobile ad network Quattro Wireless with an acquisition of a video ad network that could enable its foray into advertising; iTunes is a cash cow, yes, but it could hedge itself by monetizing its booming Apps business via advertising and the iPad is the perfect video consumption device
- it bought Lala to enter the music streaming business. By the same logic, it could buy a CDN company to stay one step ahead of the surging bandwidth needs of mobile video delivery and find a way to rely less on carriers (BitGravity, Edgecast, Limelight Networks or Panther Express are some targets)
- the acquisition of a major ad agency (or a parent holding company); this is one of the more unlikely of scenarios, but judging by some of the challenges Apple has had with its iAd initiative, it’s not crazy altogether
- a livestreaming platform such as Justin.tv, Kyte, Livestream/Mogulus, Qik, uStream
- a video search engine or discovery tool, to attack Microsoft and Google in the next area of search (it would be crazy to attack Google head on in traditional search) and it can find a plethora of companies looking to exit: Ramp (formerly Podzinger/Everyzing), Blinkx, Dabble, Pixsy, Cast TV, Clipblast, Mefeedia.
Amazon has its hands in storage (S3) and content delivery (Cloudfront). It’s possible it will buy a video player technology to offer end-to-end solutions. There won’t be any shortage of likely targets: Ooyala and Brightcove might be too expensive but the list of eager sellers includes bliptv, Kaltura, Feedroom and VMIX.
Ooyala and Brightcove will themselves look at tuck-in deals as they ramp up their own growth.
Facebook is a major player in online video, peaking at No. 2 in comScore’s August video rankings when it surpassed Yahoo! (though Yahoo! regained the No. 2 spot the next month in September). Facebook has a tendency to acquire companies for its people, but like Apple, it could also acquire:
- an authentification system to differentiate the massive amounts of video it is hosting
- a CDN company to ensure stabilityand lower hosting costs as it continues to grow
- a livestreaming platform such as Justin.tv, Kyte, Livestream/Mogulus, Qik, uStream
- an ad network to make money from video.
InterActive Corp. (IAC) is sitting on a lot of cash and investing in content creation efforts via Electus and Notional. It would be logical for them to now invest in some kind of distribution play to ensure that their programming is actually seen: potential targets include DailyMotion, Metacafe or Nabbr. It does own Vimeo, but that doesn’t offer the kind of reach marketers need. We saw Sony do this via their Grouper acquisition a few years ago, renaming the website Crackle and using it to showcase their programming. While the jury’s out on the success of that deal, we might see IAC pull a similar move.
Will any of these deals actually happen? Who knows. Predicting this kind of thing is a recipe for failure, but there is an adage that says “buy on the rumor and sell on th
e news.” With more hype and expectations surrounding online video, the buying will continue.