Online Video: Tasty Takeover Targets?

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Online video sites are a bit like fish in the sea. Though they are plentiful, the tastiest ones are difficult to catch. So Sony Pictures Entertainment (SNE) may have made a good strategic grab Aug. 23 when it hooked online video site Grouper for $65 million. Sony may have acted partially in self-defense, since other major media companies may soon be trawling for online video companies of their own.



Online video's rapid growth must appear tantalizing to players in the mature, slow-growing media sector. Audiences and advertising dollars are flooding the Internet. This year, Internet advertising will jump 30% to $16 billion, according to estimates by New York research firm eMarketer. By 2009, the company predicts advertisers will spend $26.6 billion online. About $1.5 billion of that amount will go to Internet video advertising, the kind the Web video sites specialize in.



As one of the most popular video sites on the Web, Grouper was a shiny target for Sony. It had 542,000 unique U.S. visitors in July, according to comScore, not counting the videos Grouper shows through partnerships with popular social networking sites such as Friendster and News Corp.'s MySpace (NWS).



"Consumers are spending more and more time on sites like Grouper," said Michael Lynton, Sony Pictures' chairman and chief executive officer, in a statement. "We want to be where the audiences are." The acquisition also gives Grouper access to Sony's television and movie content, enabling it to develop video community sites around the new material, thus generating more traffic and ad dollars.



Grouper CEO and co-founder Josh Felser says his company's acquisition by Sony is likely to be the first of many deals between media and online video companies. "We are the first user-generated video site to be acquired by a major media company, and it is the start of a wave," Felser says. "All the major media companies will have meaningful, user-generated video portals within the next year.We are the start of a movement and the smaller [online video] companies that don't participate in that movement will be left out."



So who will catch the wave? We can't know for sure. But in this Five for the Money, we'll look at the private online video outfits that have proven themselves good swimmers -- and that might be acquisition targets for big publicly traded media companies surfing the Web for new audiences and revenue streams.



1. YouTube





Acquisition rumors frequently surround this company because it seems too hot to be ignored. The most popular user-generated video site, YouTube had more than 16 million unique U.S. visitors in July alone, according to comScore, and streams more than 100 million videos a day [see BusinessWeek.com, 7/14/06, "YouTube: 100 Million Videos a Day"].



Such traffic, however, doesn't come cheap. YouTube could go for $2 billion, according to speculation on Web-industry blog TechCrunch [see BusinessWeek.com, 8/23/06, "Grouper, Sony, and the Copyright Card"].



YouTube declined to discuss how much it would want or whether it was up for sale. If it did ask for $2 billion, however, the pool of buyers would likely shrink to the major media companies without a significant online video presence.



Robert Routh, an analyst at Jefferies & Co., says Cablevision Systems (CVC), Warner Music Group (WMG), or EMI Music (EMI) could be in the market for a video site. However, it is unclear whether they would want to spend that much.



And the very biggest of Big Media concerns may not be interested. Routh says the Viacoms (VIA) and Disneys (DIS) of the world are unlikely contenders because, for that kind of money, they would be better off using their existing resources and digital presence to build their own sites.



2. Guba





Guba CEO Tom McInerney says the company would be open to acquisition. The site already has distribution deals with Warner Bros. and Sony to sell and rent their videos, and McInerney said they are speaking with other companies about partnerships and possible acquisition. "It is easier for these companies to buy it than it is to try and build it," he says. "And it's clear that online is where people are spending their time."



McInerney calls Comcast (CMCSA) "interesting" and says his company has a "tremendous respect for Viacom," hinting it would be open to a possible acquisition from the MTV owner. Routh, however, says that's unlikely. "There is no reason for them to make such an acquisition because they have more than enough content on their own to make sure that their site is always interestingand that is something that the YouTubes of the world don't have," Routh says. He added that Viacom has recently acquired enough online sites, including iFilm and AtomFilms, to ensure a strong Internet presence [see BusinessWeek.com, 8/11/06, "I Want My GTV?"].



Routh says a more likely candidate could be National Lampoon (NLN). The multimedia humor outfit's CEO, Daniel Laikin, says that his company is looking into buying and merging with online video sites, as well as developing its own site, KnuckleHeadVideo. "Obviously we have been in talks with all the major online media companies in talking about different relationships and partnerships," says Laikin. "There are still a number of strong user-generated video sites out there."



3. Blinkx





Blinkx differs from the user-generated sites in that it concentrates on video search and related technology. Its site is one of the largest video search engines [see BusinessWeek.com, 8/22/06, "Blinkx.tv: Quality Content, Unique Search"].



Recently, Blinkx partnered with Time Warner's AOL (TWX) to provide video and other search capabilities on its educational site. CEO and co-founder Suranga Chandratillake says the company is making deals with other companies, though they are more related to exchanging technology and content than outright acquisition.



"Video sharing is really about a new kind of content that's appeared online and, unless you're one of the big players with useful traction, then it's got to be difficult to see a long, definite future, so an acquisition is probably a very sensible exit," he says in an e-mail. "I imagine we'll see more -- we've already seen Grouper, iFilm, and AtomFilms, after all."



4. Veoh





Veoh Networks is not only one of the most popular video sites on the Web, it's also backed by heavy media hitters. Michael Eisner, the former chairman and CEO of Disney, joined the company's board of directors in April. It also counts Time Warner and Spark Capital as investors.



The backers see great promise in the site, which had more than 1.3 million U.S. users in July, according to comScore. Eisner has said he expects Veoh to revolutionize television again. And it's hard to believe that, with such high hopes, it will not eventually be absorbed by a brand-name media concern.



What makes Veoh especially attractive to media companies is that it can deliver long-form, high-definition programming, said Rachel Lam, a managing director of Time Warner Investments, in a statement. "Veoh's unique combination of technologies creates a strategic content distribution platform as well as the opportunity to greatly enhance the consumer's experience with Internet-delivered video. We're excited to be a part of that," she said.



Even Grouper CEO Felser said Veoh had enough critical mass to be an attractive acquisition, along with YouTube and Metacafe.



5. Metacafe





Metacafe was founded in July, 2003, and has since become one of the most heavily trafficked video sites worldwide. The Palo Alto [Calif.] company has more than 20 million unique visitors and streams more than 450 million videos each month. According to comScore, it had nearly 2 million uniques in July alone, placing it in the top 10 in the U.S.



National Lampoon's Laikin said the site's traffic makes it an attractive candidate for an acquisition or merger. But it's not the only one.



"Obviously the major media companies have been acquiring. It seems like we are living in 1999 again, which is a little bit scary," says Laikin, referring to the dot-com bust. "But there is finally a revenue and an advertising model, and there is definitely the bandwith now, and people are watching content online."



As media and technology outfits grow increasingly eager to buy into the boom, more online video outfits may rise to the bait.