Monday, May 19, 2008

Investors Target Web Video

Internet the Link for Venture Capitalists Aspiring to Showbiz

This time, will it be different for investors who come to Hollywood seeking riches by creating content?

Venture capitalists with long, successful records are pouring money into content, betting that the Web video economy will change the rules that for decades have made show business an effective mechanism for separating outsiders from their money.

With a checkered history of investment failures, Hollywood and the venture capitalists who rule Silicon Valley, Boston and New York have never been the best of friends. Investors historically have been reluctant to pour money into a hit-driven entertainment business.

Internet video has become the bridge between the two worlds. Venture capitalists poured $461 million into online video services and software companies last year in 68 deals in the United States. In the first three months of this year, they’ve already funneled $217 million into such ventures, according to Dow Jones VentureSource.

The new guard of investors at firms like Velocity Interactive, Spark Capital, Greylock Partners and others say the current go-go investing will avoid the pitfalls of the millennial dot-com boom and bust. They insist the Internet video revolution has altered the fundamentals of investing in content. They say the advertising potential for Internet video is well documented, that targeted content on the Web can yield high ad prices and that the Web mirrors the cable world of 20 years ago, when niche channels were being built.

“ESPN, History Channel, CNN, Discovery, Lifetime, MTV … were created when cost and the stranglehold on distribution was reduced by cable,” said David Sze, partner with Greylock Ventures, which is invested in online TV network Revision3. “All were thought to be nichey. All ended up being huge franchises, arguably more valuable than the networks in sum.”

Shifting Behaviors

Their willingness to pony up for content is a change. Venture capitalists have traditionally preferred to wager on technology. But consumer behavior and ad dollars both are shifting in a major way, said Jonathan Miller, partner with Velocity Interactive Group and the former AOL CEO. Velocity has invested in online Web studio Next New Networks as well as online video ad network Broadband Enterprises, which has achieved profitability.

“You follow the consumer and then you follow the money,” Mr. Miller said. “You have advertisers who have moved online and are moving online, and the infrastructure to deliver video and rich media and advertising is in place now.”

The question remains whether there will be enough digital video ad dollars to go around. EMarketer predicts advertisers will spend $1.4 billion on online video ads this year; that’s forecast to jump to $4.3 billion in 2011. That enticing growth rate outstrips any other ad medium, Mr. Miller said.

The Internet also has changed the cost model for content, said Brent Weinstein, CEO of 60 Frames, which distributes and finances Web video productions.

“If you can get people to tune in and target those people, the economics on the Internet are so much better,” Mr. Weinstein said.

Some venture capitalists are backing that argument with cash.

“One of the things that is causing folks to think about it differently is people are investing in content that has a demographic against it, and we see ad models existing on the Web for this,” Mr. Sze said. “The video programs are consistent with the demographics already on the Web.”

But doesn’t niche content yield niche returns? Not so, investors say.

Look at cable, said Ross Levinsohn, also a partner with Velocity.

“Most cable channels are niche. The Web is starting to mirror that, but in an even more targeted way. The advantage the Web has is all analytical. You actually know how many people are watching, in some cases who they are, what their likes and dislikes are. Thus, the CPM [cost per thousand advertising impressions] you can charge should be higher.”

Revision3, which produces about a dozen Web shows that generate about 4 million views per month, has said it charges CPMs ranging from $60 to $80. Online video service Blip.TV has sold sponsorships with CPMs ranging from $30 to $100. With improved metrics, CPMs may rise further.

Besides, programming and technology are almost inseparable on the Web, said Todd Dagres, partner with Spark Capital, which has invested in Veoh Networks and EQAL, the new online video studio established by the creators of “LonelyGirl15.”

Investors know you can’t bat 1.000 —not even close. They also know that big broadcasters are watching them and could try to duplicate their model. But some established media companies have tried already and flopped. NBC’s failed experiment with flipping Web series “Quarterlife” to TV is a case in point. Also, earlier this month Turner Broadcasting folded Web video site into its Adult Swim site because failed to take off on its own.

“I am not sure that the Hollywood and broadcast machine is going to be good at creating the authenticity the Web video segment has…. The edginess, grittiness, lack of high-polish realness help this at the margin,” Mr. Sze said. “Over time there will be incumbents that make some hits. And I think many of the early startups won’t survive. But some will and they will do very well.”

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