The online video 'shake-out'

While the economy is in a tailspin and consumers and enterprises alike are slashing budgets, online video companies have largely been spared from a major downturn. At least, on the surface they have.

In numerous conversations I've had in the past few weeks, industry participants and observers have hinted that 2009 might be the year of the great online video "shakeout." Across all segments of the space, people are saying there are too many players chasing the same companies and revenue opportunities, and that runways are getting shorter for companies who haven't recently drawn another round of funding.

The consensus seems to be that major acquisitions and flame-outs are on the horizon and will happen sooner rather then later. So, which niches in the online video industry will the shakeout hit? Which companies might be viable acquisition targets?

The first area where there is obvious overlap and redundancy would be online video advertising. There are multiple companies offering online video ad services, such as BrightRoll, YuMe, Tremor Media, and PixelFish, just to name a few. While media buys are trending toward online and away from print and eMarketer estimates $850 million will be spent on online video advertising in 2009, there is too little total revenue generation to support everyone.

Even if eMarketer is spot on with its estimate (and that would be a first), once revenue shares for sites hosting the ads, content owners and resellers are taken away, there isn't that big of a pie to be divided amongst all of the companies in the space. Expect consolidation as successful companies gobble up a smaller, hobbled rival running out of VC funds. Company closings are also likely in this group, as the healthier companies might not see anything to be gained by buying a rival that doesn't offer a lot of key partnerships or a robust customer base.

I see analytics firms as the best target for acquisition by larger online video players. Most video platform companies have an analytics piece either developed in-house or through partner technology. Some of the innovative companies doing behavioral analysis, sentiment measurement and viral video tracking could be a nice, relatively inexpensive add-on for a larger company that sees a better case to buy rather than develop the technology.

I've also heard rumblings that the enterprise video space is due for realignment. Similar to the online video ad space, companies that are running low on cash will find it harder to refinance or draw more funding. Companies that haven't reached profitability will find it hard to compete with bigger names like Brightcove, thePlatform and theFeedRoom, which have already started to move down market as the top video publishers they historically targeted have mostly chosen a video platform.

Consumer-facing video sites not named YouTube or Hulu will struggle in 2009, as CPMs drop and UGC continues to draw little advertiser support or commitment. If YouTube can't get solid revenue from 5.7 billion video views per month, good luck to everyone else in the space doing a fraction of that traffic.

The fate of content delivery networks in 2009 is a little more opaque. Pricing has been slashed due to newer entrants cutting rates to compete with leaders Akamai and Limelight, but bandwidth usage from streaming video continues to soar. It will be interesting to see the effect Amazon's cloud offering and thePlatform's bundled CDN offering will have on pricing and new directions and partnerships for companies in this space. Overall, however, things aren't as dire here and if there is one company that has the cash on hand to make a major acquisition, it's Akamai, which reported having $772 million in cash and cash equivalents in its most recent earnings announcement. It's not clear what sort of company would make a good target for Akamai, and it hasn't voiced any interest in M&A, but it could get a very good deal on a struggling company in this market environment.

As always, I'd love to know what you think and have heard about M&A opportunities in the space. 

- Pete