Monday, November 19, 2007

Top Video Search

I’ve frequently written on how Google managed to leverage a perfect storm to become the fastest growing and most valuable web company ever.

The factors include:

- Google was not the first search engine, so its technology was not lagging, quite au contraire, it was arguably better than that of its peers

- Due to the lack of business models in search, all of the larger search engines - AltaVista, Excite, Lycos - embraced portalization and left the pure search business.

- Google managed to “borrow” from GoTo’s pay per click business model and took advantage of the fact that lacked direct to consumer distribution to make the model its own.

- Somehow Tim Koogle, Jerry Yang and David Filo got convinced to showcase Google as its default search engine on the world’s largest portal, Yahoo!

- The dot com bubble burst, so no one was competing with Google aggressively while Google rose to prominence>

- By virtue of being a private firm, Google did not need to disclose financials until it filed for its IPO. Only then did competitors realize just how profitable search and Google were. But by then, it was too late for others to step on the offensive.

- By the time Yahoo! decided to get serious about search by buying Inktomi (algorithm) and (then called Overture), it got entangled in an integration nightmare, giving Google even more time to build on its lead.

- Looking back, search advertising benefited from the bust because pay per click was a relatively low risk advertising proposition for advertisers.

These factors, in a nutshell, explain why Google became a dominant player in search, and has since leveraged its quasi-monopolistic position in the market to extend its grip on ad dollars onto display/banners (acquisition of Doubleclick), newsletter/emails (Feedburner), video (YouTube).


Clearly, search accounts for the lion’s share of ad dollars, at 40% of the total pie. Google, in turn, accounts for 40% of the ad dollars spent online, at least in the US. Combining these two, Google’s position has drawn envy, jealousy and criticism, hence the potential blocking of the Doubleclick acquisition…


Because Google showed just how valuable an online advertising supported business can be, investors have aggressively invested in what they consider to be the next high growth area of online advertising, that of video.

There has been a very large investment in video file sharing networks as well as video advertising networks. We personally think that the top 1, 3, maybe 5 players in each space will do well, but only 1 or 2 will represent the 10x, 100x, let alone 1000x return investors want.

In fact, in file sharing, YouTube has already emerged as the winner, though like Google demonstrated, it is possible for someone to emerge as a winner even if they are not one of the first players in a space.

Then again, Google managed to win not by being the first search engine, but because it emerged out of the bubble…


While we might invariably experience a slowdown in the euphoric state we’re in, we will never have a 2000-2002 style of meltdown and nuclear winter because few of the companies are public and investors that are exposed remain private ones such as VCs, well-funded corporations and private equity behemoths.

But because Google has created believers out of many, I simply expect investors to keep funding the top 5 players in each space while the laggards vanish. This will certainly happen in both the file sharing space and the ad network space, too.

In fact, you have already seen Daily Motion, Veoh, Metacafe all get Series B, C, D and E rounds of financing. Likewise, companies like Video Egg et al. are getting follow up rounds of funding… but some of the smaller, less fortunate players will not. We won’t name those here because that’s not the point of this post and if we did, we’d like them to have a chance to answer the allegation that they will go out of business. Although we don’t think they’ll go out of business, they will simply get consolidated as the video market amalgamates.

Ultimately, the problem with the current investor risk / return profile is that investors seem to have bet on many of the file sharing and ad network services expecting them to become a Google of video, but what they fail to realize is that unlike in search, in video, you will never have one company own the market like Google owns search… and if one company does own video does dominate video, it would be currently be YouTube, incidentally, acquired by Google. Though over time, we doubt that YouTube will win over many traditional media companies who would rather see their content go unseen than add more firepower to the Google / YouTube juggernaut, whom they accuse of raiding their business.

As such, ironically, if Google pulls off the acquisition of Doubleclick and continues to improve YouTube, then the Google of Video might be Google, and not anyone else… this would put a dent in a lot of investors’ dreams because those companies will fail to get the kind of revenues and margins that their current funding rounds would call for.

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