GigaOM

Anyone know if they have a sales team? They don’t have any open reqs listed on their website for a sales team. They don’t have any info about ads obvious on their site.

Man, that is an very odd/risky business strategy. Grow big by being a bit illegal, clean it up once big enough from showing copyrighted content, then make money. Do they realize how much money can be made from contextual ads? It isn’t that much when the people are using the service to view videos, not to search for a webpage. I don’t see how they are really going to make a good amount of money. They probably would struggle to just break even with just ads. They would also need to blast a ton of annoying ads to make even more money. Look at iFilm, Launch, MTV overdrive and other more older video places. They need to put ads before videos play, after the video plays, and all over the page to make a buck. They should start experimenting with making money ASAP. It takes some time to develop, much more that that 3 mil would last, that is probably why they got more money now. I wonder how people would like the service once there are ads everywhere, but I guess that is part of their strategy too, get them hooked, then ramp up the ads.

They have a bus dev guy…without going into the details I know of at least one partnership that was thrown their way where they could monetize their traffic (not through ads) and they outright turned it down. Theirs is an aquisition business model.

Aquisition is not a business model, it’s an exit strategy.

At the rate and volume they’re taking VC money an aquisistion will a) have to be huge >100 mil and b) unless they were very strong on the term sheet (as far as liquidation prefs and multiples) likely to make the VC’s far more money than the founders.

Their expenses are growing at a tremendous rate. They burned through 3.5 mil in 5 months, at the rate they’re growing the series B 8 mil will probably last about the same. So they’ve got a ticking clock, sell the company within 5 months or need to do a series C and take even more dilution.

The big difference between Napster and YouTube is that YouTube has “substantial non-infringing use”, which was the critical legal issue in the Sony Beta-max case. If a product or service has “substantial non-infringing use” than it can not be held liable for contributory copyright infringement. However, individual users could be sued for copyright infringement.

I was a VP at the original Napster so I am fairly familiar with the legal issues. I wrote a blog about this today at http://dondodge.typepad.com/thenextbigthing/2006/04/thelegal_issue.html

what part of what they are doing has a long term defensible competitive advantage except for the acquisition? Business model is the same as MySpace and flickr, which worked out OK for them. Get big get bought.

Yes, they do have substantial non-infringing use, but they also have substantial infringing use. The copyright laws might need to change a bit, because I am such copyright owners will quickly get tired of writing noticies to YouTube. It can change things now that it is becoming more easy for many people to infringe all the time. It is like a new method for mass infringement, something needs to change to control that.

Also if they are burning money that quickly, they should realize it does take time to ramp up on cash flow. They should start working on it as early as possible. It isn’t likely to just come out to a new business model and have it make money quickly. You need to tweak and improve the system. That will take time and time will take money.

They will need to come up with something innovative to pay for that much bandwidth. YouTube didn’t do anything new. Anyone could have let anyone post unlimited videos online for free and would have become popular. No one did because there was no way to pay for it. Youtube has the approach that they will just become popular first by giving a ton out for free, they figure out a way to make money. The key question is if they will figure out a way to become profitable, because many companies in the dot-bomb tried to grow big first, but didn’t figure out the money thing at the end. They got popular, but then died once they figure out there was no way to make enough money and ran out of funding.

Normal business thinking would say to sacrifice growth speed for figuring out a way to create a sustainable, profitable business. They are way ahead now, it is time to get serious and stop running blind.

Business model is the same as MySpace and flickr, which worked out OK for them. Get big get bought.

I believe Flickr was cash flow positive when purchased. Don’t know how much VC cash in, but I’d guess not so much. I believe that MySpace was running pretty lean too.

YouTube’s problem is not getting bought, it’s that they HAVE to get bought. Until you’re cash flow neutral you have very few options. YT is probably burning ~2 mil a month and growing fast.

When you need to sell you get screwed on price. Assume SeqCap has liquidation prefs and multiples (say 3X), more than 50% equity, and need to move the needle on their fund soon (don’t know if any of these are the case but none would surprise me) and end up putting in 25 mil (which would be likely if a series C is necessary). Then YT sells for a healthy $75 million, then the founders would get nothing.

The key is to take as little as possible, build a big audience and get to cash flow neutral.

I have to chime in here because I think that people have fairly faulty and simplistic pattern recognition on this topic (disclaimer: I am co-founder of vSocial, the video clip sharing community, which serves up 50M videos a month).

Number one. This is not Napster. In the case of Napster, virtually every single instance of sharing was the lowest common unit of value for the music producer — i.e., the single song or the full CD — so if it was shared, the outcome was zero sum for the record producer. They lost a sale.

In the case of video clip sharing, users are uploading and sharing excerpts of programs, UGC content, etc. that they find compelling and distributing them virally using embedding tools, email and the like, creating a kind of virtual water cooler. I am not a lawyer, so I won’t try to speak to fair use, but when 20M people view a Family Guy clip, blog about it or post it in a MySpace page, do you really think that Fox is being harmed? Could they pay for that kind of attention? If you were an independent film maker or a local band, and you could secure 1M views of your music video for free, would you be crushed, or thanking god for such services? These are both real examples on the vSocial network that cover the gorilla and the mom and pop.

To be clear, this is independent of respecting content owners of all stripes and taking down content if they ask. My gut is that for every NBC, there are 50 MTVs, but obviously that chapter is just being written.

Two, I find it ironic that some in the blogosphere have such black and white view on this (read: Jason Calcanis), yet think that it is perfectly reasonable to excerpt a portion of a news site article and blog about it. There is a reasonable assertion that this too is copyright violation, but because that perspective never got out of the driveway, we have 20M blogs, and what people think of as Web 2.0.

Three is that this is not Pets.com. There are multiple monetization paths that are legitimate, proven, profitable and don’t break the user experience, and others that are being baked in real time.

Bear in mind, Google became a $7B company indexing OTHER PEOPLE’S CONTENT, organizing it, selling advertising around it, and no one cried fowl. Web site owners were just thrilled to be found, and Google provided mechanisms for those that did not want to be found to be removed. Once upon a time, search was a dead end category. Now everyone wants to be Google.

I still assert that this is the year of Internet video, that the proof is in the pudding from a consumer adoption perspective and that while there are a lot of players and a lot of legitimate questions, that there will be a number of great companies that materialize out of this space over the next 12-18 months.

Cheers,

Mark

vSocial: The Video Clip Sharing Community: http://www.vsocial.com
Tell stories, start conversations, extend the web — with video

Hi,

Really interesting thread. Fred von Lohmann from EFF posted a comment on our site on the legal aspects of this that you might find interesting. I could cut and paste it into here, but wouldn’t want to without Fred’s permission.

So, here’s the link.

http://www.businessweek.com/thethread/blogspotting/archives/2006/04/youtuberaises.html

My Disclaimer, I’m a co-Founder of Vidiac.com. To the best of my knowledge we were the first dedicated video-only sharing service starting in early 2004, growth was pretty slow until February 2005 when we launched our version 2 service and are currently the third largest service behind Google and YouTube according to Nielson NetRatings. Don’t bother with our Alexa as it only shows our corporate site, we provide services to 300 video sharing portals to sites like http://videos.streetfire.net

Since Mark is in this thread I want to congratulate him on making such a fantastic service. I honestly think VSocial offers the most user friendly and useful tools of the video service pantheon and their growth reflects that. Great Job!

I see two issues being discussed here, business model and legality and I would like to address both.

Business model
Video hosting is exploding today because of the convergence of numerous factors. Inexpensive bandwidth and inexpensive storage and systems. Combine that with the tipping point of broadband penetration and the conditions are finally right. The cost to run this type of service is much cheaper than you would think and most of our costs are tied up in HR. Without going into specifics I will say we started Vidiac in 1999, got burned in the dot-com bomb and decided to launch self-funded in 2004. Without taking an investor we sacrificed a lot of publicity and strategic partnerships, but in the end it was the best route to get us where we are today. We are now profitably operating with 6 employees, a third of YoutTube’s traffic and actually paying a dividend back to the owners. Now, we accomplished this primarily on Google and Yahoo text ads.

Is this YouTube’s path?
Of course not. I think Vidiac is on a slower more “Mom and Pop” growth arc from the others. Call us the “Craig’s List” to their “eBay”. I’m sure Acquisition is on Sequoia’s mind after the MySpace deal and well it should be, every VC needs an exit strategy and it hasn’t been “IPO” in a while. But is purchase by Yahoo or Google realistic? Yes, just as Clear Channel bought up all the radio stations we will see something similar in this space too. The money is pretty easy math. Disney and NewsCorp are set up to sell video advertising at ~$30CPM for UN-TARGETED TV ads. That means if you have a small video hosting site only streaming 1 million videos a day, the networks see you as having the potential of $30K/day or more per million videos streamed a day. (Some studies have shown advertisers are willing to pay a 2X premium for target video ads). Now of course this is all if you killed your users with advertising, but I just wanted to show some potential. Since our service, YouTube and all the others are still growing like crazy there is still considerably more demand than capacity so 100m/streams/day or more is very realistic.

Now, here is something else to consider. Why do we not see “Friends” and “Sienfeld” being broadcasted online? If Internet video is in such high demand why not put it out there? The reason Viacom and the rest seam slow to reach this market isn’t because they don’t want to be in online, it’s that they can’t be online. There is decades of syndication contracts and advertising contracts associated with media as well as acting unions, royalties and even syndication rules. It will take ten years or more to unravel this “old business model” from a Broadcast (one to many like TV) paradigm to a singlecast (one to one) paradigm. That is why YouTube is so appealing to a major broadcaster. There are no acting unions or major advertising contracts keeping them from Internet broadcasting user-generated media. This is almost free money for them, because the 20 people that run YouTube is a fraction of the overhead they would normally pay to reach an audience that size through traditional Radio and TV broadcast. For legacy broadcasters, video services are a cheap way to buy an audience and then have a new sales channel for their existing advertising sales groups. Nevermind the additional monies earned by grabbing the next “Numa Numa” video or “This land is your land” video.

Legality
This is where Mark and I have different ideas, and I respectfully must disagree with him. In its June 2005 ruling in MGM v. Grokster, 125 S.Ct. 2764 (2005), the Supreme Court announced a new form of secondary liability, which it described this way ( http://www.eff.org/IP/P2P/MGMvGrokster/ ) if a creator of software service or technology draws benefit from users using their service to infringe copyright, then the makers of that technology, service or software are at fault if it was their intent to induce such actions. The Supreme Court cited internal documents where Grokster knowingly created services to cater to copyright infringers in order to promote their service for non-infringing purposes.

This means
If YouTube was ever taken to court and there was an internal document that said something like “Employee A: hey user XXX uploaded a copy of `The Family Guy’, should we take it down? Employee B: No, leave it up as it draws traffic to the site, we’ll wait for a cease and desist”. That statement would make YouTube liable for copyright infringement under the new Supreme Court ruling.

Now we had already been operating for a year and a half when this happened last summer, but thankfully we have always PROACTIVELY removed clear violations of copyright infringement. With thousands of videos uploaded a day it is difficult to catch it all, but we wanted to make extra sure that we showed due diligence on our end to remove obvious offenders.

Vidiac has suffered for this somewhat as we watched YouTube pass us this pass January, but since we lack Sequoia’s deep pockets and legal team we’ve always had to be extra anal. Youtube has drawn serious benefit from copyrighted material, and so has Google video for that matter. I think both are playing a dangerous game. Everyone loves the story of the “Bad Boy” that cleans up to become the hero which is what YouTube is angling for. Call it a lack of vision or Ambition if you will but Vidiac has chosen to stay out of the Kazaa court room from the get go. We launched our service in 2004 with the intention of opening a “neighborhood coffee store” instead of “inventing the next Star Bucks” so we’re pretty happy sacrificing publicity to quietly run our little profitable net business. As I said in the beginning we’re turning out to be the “Craig’s List” of the video sharing world.

This market has a ton of potential, I just ask all my fellow video hosting companies to show some responsibility, and let’s try to take the high road on this one.

Adam Bruce
Vidiac.com

Heather,
Do you have another link for Fred von Lohmann’s post? I went to the link you provided and got a 404?

-Adam

VSocial is great! They have allll the copyrighted stuff that got taken off YouTube:
http://www.vsocial.com/video/?d=3186
http://www.vsocial.com/video/?d=14294

Plus they have a great way of making money off of all the copyrighted stuff. What a great business…

Hey Adam,

I will try cutting up the link. You’ll need to put it back together. But it’s also at our blog, Blogspotting.net

http://www.businessweek.com/thethread/blogspotting/
archives/2006/04/youtuberaises.html#comments

xphitwbi…

zetcsuqc rpathqdw lkdfgslkg…

I think its a mistake to argue legality on an issue such as this. As we saw with music downloading, the crunch will come when an industry player starts feeling the pinch financially. It is true that having segments of ‘The Daily Show’ acts as an inducement to watch the show, especially if its free with your cable, however, who happens at the next stage when the entire show is available? NBC may well be happy that more people can see ‘Seinfeld’ (so long as there is some way to make SOME money out of it in the future), but that double edged sword cuts the other way when nobody is watching your new fall lineup.

That is where they should be looking at the change, not on the internet. The ’six minutes then two minutes of commercials’ is what kills them, and greed is a large percentage of that. Seinfeld probably cleared enough for a good percentage of production just by saying “Yoohoo… no thanks…too fruity” on the show. Although the assumption was that the next generation could ‘zone out’ commercials since they’ve become ubiquitous, its turning out the opposite, kids are heading to video games, online chat, online video, etc., no doubt in part to avoid commercials. Personally, I simply can’t watch television because the commercials are SO insulting to the intelligence.

The legal issue is always decided by the money people. When youtube is pissing off enough broadcasters who are losing money, they’ll get dragged into court. By that time, of course, a bittorrent or emule flash stream will have been built around the model and business will carry on as usual.

[...] This means that almost 25% of their income comes from 1 customer. So if Youtube runs through its last $8 mio of funding (around September 2006, say), it will make for a painful quarterly report for [...]