Goo-Tube: First in Wave of Deals?

Oct 16, 2006  •  Post A Comment

Revver CEO Steven Starr, who started the video-sharing site last year, said his phone lines began lighting up last week when rumors started flying about Google’s plans to acquire YouTube.

“The interest in Revver has increased since Monday at 10:30 a.m.,” he said, referring to Oct. 9, when the biggest Web search site bought the biggest video-sharing site for $1.65 billion. “I am pleasantly surprised by how many people have Revver on their radar.”

Revver, ranked the 19th-most-visited video site by Nielsen//NetRatings, is among a profusion of Web sites that have helped establish video sharing as a bona fide social phenomenon in the past year. As sites including Break.com, Metacafe and Heavy.com gained users, speculation built as to when the business would start consolidating.

The purchase of YouTube, founded last year by two former PayPal employees, may kick off a run on video sites. But before that can happen, potential buyers such as Web giants, media companies and other investors will have to put aside concerns that the businesses won’t generate enough ad revenue and resolve fears about liability for copyright violations on some sites.

Keith Richman, CEO of privately funded Break.com, said he’s been approached for several months by big media companies, private equity firms, hedge funds and venture capitalists, but he isn’t ready to sell.

Mr. Starr also said his site isn’t for sale. Like many video entrepreneurs, he’s trying to build a business that’s distinguished from competitors in an industry where the content-user-generated or pirated from television networks-can be commodified by file-sharing.

Revver’s business model is different from that of sites that simply solicit and post homemade clips in that it matches ad content to videos, then splits the revenue with the creators.

The eye-popping sum paid for YouTube, which has about 60 employees, values the video site’s 27.6 million unique visitors at about $60 apiece, according to Nielsen//NetRatings numbers for September. However, audience figures can vary widely. ComScore’s most recent numbers, from August, placed YouTube at 19.1 million unique visitors. Whether that valuation will apply to smaller sites remains to be seen.

The YouTube purchase marked the latest change in the lineup of video-sharing sites, removing the biggest player that existed independent of a major Internet or media company. Now the five most-visited sites are parts of big corporations. Smaller sites, such as Break.com, whose 3.3 million unique monthly visitors rank it just below the five most-visited sites, remain independent.

Their smaller audiences may cool any immediate run on acquisitions as potential purchasers distinguish between targets’ technologies and user bases.

“Usually when something like this happens, everyone goes to their room, licks their wounds and figures out what to do next,” said Arthur Cohen, CEO of IKlipz and a former Paramount executive. IKlipz launched in July as a video site that showcases independent films. “They take one to four months to re-strategize … because the big ones are taken.”

Break.com’s Mr. Richman said investors are interested in video sites, even if purchases aren’t on the immediate horizon.

“We get a lot of offers for funding,” he said. “We actively talk to people. We’re not looking.”

Mr. Richman said that given the background level of interest in Internet video, it would be easy to overstate the significance of the Google-YouTube deal.

“People aren’t suddenly waking up and saying, `Online video is really valuable,”‘ he said.

With YouTube off the market, the next set of purchases will likely involve companies that have carved out a niche, such as long-form content or professionally produced clips, said Todd Dagres, general partner and founder of venture capital firm Spark Capital. Mr. Dagres is invested in Veoh Networks, which distributes longer-form content.

“If am one of these guys, do I want to go after a Google or YouTube? Or do I want to be a No. 1 player in a somewhat different space?” he said.

The absence of clear leaders in many video niches may delay a round of acquisitions, Mr. Cohen said.

The fate of YouTube, which will survive the Google acquisition as an independent video destination, should cheer Web video entrepreneurs reluctant to let their babies be absorbed by larger companies.

Potential acquirers may want to keep their presence as invisible to users as possible for fear of alienating the users who were initially drawn to the do-it-yourself ethic that built the sites’ popularity.