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Online Video: Internet VCs Are Missing Out on the Future of Entertainment

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In this current financial crisis, the Internet venture capital (VC) world is currently suffering from the same two diseases that have long afflicted their counterparts in Hollywood: group-think and paralysis. Over the past six months, I have heard many of the top Internet VCs speak at seminars and events about being open to innovative companies and ideas. However, it seems Internet VCs are all going into the same fields and investing in these areas only after one major VC firm has made a commitment in that particular space – making it ‘safe’ for the rest to enter in.

One area that Internet VCs were funding in 2007 and early 2008 before the financial crisis, was the development of online video content. However, the field has improved in many ways since then. The mass use of iPhones and other smart phones, the mass acceptance of social networking sites such as Facebook, and the ability to watch online video on regular TVs has created an encouraging situation ready for an explosion in this space. Unfortunately, the previous experiences of VCs and their industry group-think have caused them to back away completely from this space. However, continuing to ignore this space will mean that these Internet VCs are missing out on the future direction of entertainment.

We are not speaking about a marginal field. In June, Eileen Naughton, Google’s Director of Media Platforms, spoke at the OMMA Video Conference and stated that 77% of all Americans watch Internet videos and online video viewing grew over 40% from last year. This trend is only going to continue. Even with economic slowdowns, everyone keeps their high-speed Internet access and watches even more videos. eMarketer believes the number of online video viewers in the US will grow 31 percent in the next five years, from 144 million this year to 188 million in 2013.

This viewing crosses gender lines, with almost equal numbers of men and women going to video sites. Plus, people watch at different times of the day, with a high percentage watching during lunch hour from 12-2pm and in the evening after 9pm.

Not only is the audience growing, but major Hollywood talent is now starring in online shows including Whoopi Goldberg in the series Stream, Rosario Dawson (Men in Black II, Rent, Sin City) starring in the NBC web show Gemini Division,  and Michael Madsen (Kill Bill, Reservoir Dogs, Sin City) in the Sony-produced series Coma. Other high profile talent that has recently moved online includes Lisa Kudrow (Friends) in the Lexus-sponsored series Web Therapy and comedienne Chelsea Handler (own E! show Chelsea Lately) in the Sprint- and Suave soap-sponsored online show In The Motherhood.

Besides a new way for content to be distributed, online is the place where creative content can be created without the Hollywood executives either shooting it down or turning it into asinine filler. Will Ferrell on Funny or Die has developed an entire site of original short form content while Joss Whedon (Buffy the Vampire Slayer) created the very popular online series Dr. Horrible’s Sing Along Blog.

In addition, this creative freedom is why TV show CSI creator Anthony Zuiker is launching Level 26 featuring his original content, and actor Danny DeVito’s new site, The Blood Factory, is featuring short horror films that he personally produced.

Recent advances in technology and software are now enabling online video to  be viewed directly on the millions of big screen LCD TVs in homes. This is becoming easily available thanks to hardware such as Apple TV and Roku and software such as Boxee. TVs that can connect directly to the Internet are rapidly growing in number and The Yankee Group estimates that annual sales of web connected TVs will reach at least 50 million by 2013.

The growing audience for online content is driving advertising money to follow it. According to eMarketer, online video brings in more actual revenue per viewer than television ($0.17 per person per hour of viewing versus $0.13 on TV). In addition to the online pre-roll ads and ads in the middle of longer shows, advertisers are using the formula from the early days of TV when one advertiser would sponsor and underwrite a particular show. Paramount Studios (owned by Viacom) is now working with Mountain Dew to create its first web series Circle of 8, debuting on MySpace in October while NBC just launched the online show CTRL in conjunction with Nestea.

Also fueling the growth of online video is the emergence of mobile video – with iPhones and other smart phones being another unique platform for viewing online content. According to Nielsen, 13.4 million people watch mobile video every month, up from under 9 million a year ago. Moreover, social networking sites such as Facebook and MySpace are also greatly expanding the reach of online video.

Even without the proper amount of Internet VC investment, this field is growing rapidly. It is time for the Internet VC investor world to wake up! Now is the time to invest and enter aggressively into this field. If not, many investors will be kicking themselves for missing these enormous opportunities. Either Internet VCs will enter early on the ground level in the online video field and reap an amazing ROI or spend an outrageous amount later to have a small percentage of a booming company and a very small ROI.

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About Gil Margulis

  • Web shows are getting more and more popular and you’ll definitely want to start your own web show if you haven’t started already. It will give you an opportunity to express your ideas and talent, and each time it will get better and better.