Editor’s note: This is the fourth in a series of posts by guest writer Ashkan Karbasfrooshan.Previously, he wrote about the State of Online Video, 12 Surprising Things Holding Back Online Video Advertising, and Context is King: How Videos Are Found And Consumed Online.  In part 4 today, he examines where he thinks the sweet spot is for making money in onljne video. Karbasfrooshan is the founder and CEO of WatchMojo.

In Search of Profits

Ten years ago, web companies didn’t generate much revenue.   These days, web companies are some of the most profitable around.  Online video is where the Web was ten years ago: in investment mode as video companies that are generating high revenue are not necessarily the most profitable.

Are those companies suffering low margins because they’re investing in the future or are they fundamentally lower-margin businesses?

Ad Networks Are Low Margin Businesses

This week, video ad network Brightroll raised $10 million from Scale Venture Partners.  Ad networks aggregate audiences and sell ads to marketers, sharing the proceeds with publishers/producers.  Scale’s Rob Theis’ argues: “the most strategic Internet investments are those that compete not with other Internet businesses, but with the much larger amount of money still being spent offline.”

Brightroll’s CEO Tod Sacerdoti added: “I think by this time next year the majority of the top five to ten video properties by any measure will be aggregator networks.  The best example for this is display advertising.”  Indeed, networks have an unmatched ability to scale but can also crash to the ground awfully fast.

The low margin is the least of their problems; differentiation and defensibility are.  Blue Lithium and Right Media hit jackpots by selling to Yahoo!  But those who didn’t sell (Tribal Fusion, Valueclick) suddenly found themselves under pressure from search advertising on performance and video on branding.

Content Networks Have Little Differentiation

Similarly, aggregators gather videos from content providers, sharing ad revenues.  iFilm (sold to Viacom, renamed Spike), Guba, Grouper (sold to SONY, renamed Crackle), Revver, YouTube (sold to Google), Veoh, DailyMotion, Metacafe, Viddler, blip.tv, are all vying for content, audiences and dollars.

YouTube is master of this domain.  Hulu is giving YouTube a run for its money, but the business model is anything but certain and its long term exit strategy is murky (Disney, News Corp. and NBC Universal/Comcast are shareholders but also competitors).

Ultimately, ad and content networks operate in a high-risk, winner-take-all game.   For publishers, it’s a lower risk world.  Consider the two acquisitions News Corp. made in 2005: Rupert Murdoch paid more for IGN ($650M) than for MySpace ($580 million), but MySpace’s subsequent growth made him look like a genius (for a while).  Today, MySpace is searching for its raison d’etre while IGN treks along as an unstoppable force in its sphere.

The Myth of Hyper Distribution?

In online video, producers are agnostic to distribution channel or platform.  To reduce risk, they diversify distribution, but the jury’s out on whether hyper distribution bears fruit.  Hyper distribution refers to syndicating one’s content as broadly as possible with little or no restrictions.

When it comes to generating revenues, is hyper-distribution wise?  Not according to Chris Pirillo, a prosumer video producer who leverages video to promote his empire but only counts YouTube as a commercial platform: “YouTube offers the largest audiences and generates most the revenue.  If you’re not YouTube, you have challenges in creating value for content producers”.  If that changes, look out for Freewheel, which according to CEO Doug Knopper allows “media companies and content owners to be able to monetize their video libraries across multiple channels and devices”.

Advertisers Follow Audiences…

Ex-Disney CEO Michael Eisner doesn’t pretend to know how the industry is going to play out, but he’s got no doubts what the end result will be: “I don’t know if the growth in content made for the Internet will be evolutionary or revolutionary, but it can’t not happen: a death march has been going on for other media who are in trouble because there is a more efficient way to share content around the world with the Internet.”

Business Models Take Time to Develop

Eisner made his fortune in television.  One VC who’s made his online has another opinion.  In Fred Wilson’s influential 2005 post “The Future of Media (aka Please Take My RSS Feed)”, he suggests to:

1 – Microchunk it – Reduce the content to its simplest form.
2 – Free it – Put it out there without walls around it or strings on it.
3 – Syndicate it – Let anyone take it and run with it.
4 – Monetize it – Put the monetization and tracking systems into the microchunk.

In theory, in the future when video streams monetize the way search queries have (whereby a search query is always associated with some kind of paid listing) then perhaps Wilson’s thesis will prove right.  But in practice, at least in the five years that have passed since the post, it’s been a recipe for financial disaster.

Hyper distribution is great for promotional purposes but not necessarily for commercial purposes.  Marketers do pay more attention as an audience grows, but they also pay a premium for scarcity and exclusivity.

This is the fundamental conundrum facing new media producers who rely on hyper-distribution to build brands and audiences but who weaken their pricing power and ability to secure guaranteed dollars by giving away their videos.  This can work if you can build ad-supported businesses, but that takes time and money.

Today, a few new media producers have managed to build ad-supported businesses, namely Revision3 and Next New Networks.  But between the two, they have raised over $30 million in venture capital.  Most producers don’t have that luxury.  For those others, I recommend creating content that other media companies will pay for, to buy them enough time to build a syndication business and eventually, a fully ad-supported business which commands the large ad dollars.

An imperfect but useful analogy I use is the banking model, where retail, corporate and investment banking fees can create a large business.

This diversified strategy provides:

• a safe income stream:  licensing, like retail banking, provides a recurring and non-volatile revenue base.
• a growth business: syndication, like corporate banking, requires other companies in the ecosystem to do well.  This can provide higher CPM rates by placing content in the right context.
• a wildly lucrative stream: advertising, like investment banking, takes time to develop, is speculative and seasonal, and risks drying up abruptly.  Notice how advertising revenue spikes each fourth quarter, for example.

The reason why I place content producers in the highest Profitability circle over time  in the first chart above is because only they can build such a business.  (The Profitability Index represented in the chart takes into account operating margins and total return on investment, including likelihood of a liquidity event).  And, yes, I am completely biased, since this is the kind of business I am trying to build with WatchMojo.  Aggregators and networks are solely advertising based businesses; just ask YouTube who generated $10,000 in a paid model test, even though it can generate billions in simpler ways.  Video advertising will be a bigger business, but not necessarily a higher-margin business.

Video will be Everywhere: on all Websites

Video on the Web is no longer just about entertainment.  It is also about marketing, instruction, and conveying information of all kinds.

• Content bellwether Wikipedia announced it will be rolling out videos soon enough.
• e-Commerce leader Zappos encourages users to submit their video experiences which increase sales 6% to 30%.  In 2010, it will create 50,000 videos.
• It won’t be long before organizations feature their accountants, lawyers, management, VCs in videos too.

Video will be Everywhere: in Ads

Videos won’t simply be on all websites; video ads will converge with rich media and display banners.  Publishers and ad networks will swap out low yield ad placements for videos that sell at a premium.  Rupert Murdoch is right to say that there isn’t enough advertising to make all publishing online profitable, but if you insert a video-enabled ad where a display banner exists today, maybe it will become more profitable, as video rates tend to generate a tenfold premium over display banners.  Of course, the flip side of that argument is that if video ad inventory lost all scarcity as display banners have, then it rates would also see a steep drop.

Video is the Anti-Search

Google’s dominance of the Web today stems from a perfect storm.  Search benefitted from low expectations.   Whereas Google’s competitors threw in the towel to focus on portaldom (or outright handed them the business), online video companies’ war chests seemingly have no bottom as they wage the war for the online audience.

With YouTube being a unit of Google, it’s hard to compete being a pure video aggregator.  Those who have tried are flailing badly.  Yet video’s expectations have always been high and will only get higher.

History Repeats Itself

Video will follow search in two ways though.

Search is software and Google is the only successful ad-supported technology company.  Video is media, which has a natural disposition to embrace ad-supported models.  As such, advertising will monetize video streams.  In fact, as large ad agencies and marketers shift online, they’ll embrace branding campaigns and push video advertising could eventually top search advertising.  Once that starts, online advertising will surpass television, it’s already happened in the UK.

Search for The Leading Ad Format

Everyone agrees that video advertising will be huge but what will the prevailing ad format be?

Stakeholders are obsessed with finding the ad format likely to follow television’s 30-second ad spot and search’s paid listings.

What might lead the way?

Pre-rolls are the equivalent of pop-ups (and mid/post rolls the equivalent of pop-unders) in that users hate them, but unlike pop-ups, I actually think pre-rolls won’t disappear, mainly because

• They’re the most in-demand ad format (according to Brightroll CEO Tod Sacerdoti)
• It is easier to include a pre-roll when you’re syndicating to other websites and platforms (says blip.tv co-founder Dina Kaplan)
• But largely because they’ll get more user-friendly: the 30-second ad will make way for 5-10 second interactive pre-rolls (SpotXchange CEO Michael Shehan).

However, there will always be properties which will forego pre-roll revenue to improve the user experience in order to build audiences, and all else being equal users will migrate to those sites.  So I’m not sure the pre-roll will remain all that ubiquitous.  The other problem with pre-rolls is lack of attention.  When a pre-roll starts, I tune out and look for my headphones or go grab a coffee.

That’s why I like the contextual display banner (and not necessarily the companion banner).  A companion banner comes bundled with the video pre-roll, but sits alongside the video  A contextual banner comes without the pre-roll.  Whereas most banners disappear quickly next to text with one downward scroll of the mouse, alongside a video player, that banner becomes quite valuable and top-of-mind since people are just staring at the video.

We’ve also seen the rise (and fall) of overlays, which is basically an expanded Picture-in-Picture (PIP) format; we know how that fared.

Of course, content producers are also salivating over branded content (more than product integration and product placement, the brand becomes central to the story) or outright sponsorships.

Finally, there’s the Web’s favorite offspring: the viral video.  Viral video is not an ad format, of course, but it is not quite branded content nor is it supported by ads.  As these become more common, achieving success with content alone becomes a sure-fire recipe for failure.  All content will need to be supported by a media buy or some kind of promotional push.  After all, on TV you spend millions creating an ad but you need to buy media spots to promote it.  It’s not going to be that different online.  Yes, it’s a meritocracy, but it’s a loud, cluttered one.

KISS: Keep It Simple Stupid

There won’t be a single dominant ad format but the holy grail will prove simpler than expected.  It always does.

Remember Don Lapre’s infomercials?  He would go on and on about placing “Tiny Classified Ads” in newspapers.  I never thought much of those ads until Google’s adoption of (essentially) little text ads next to search results led to their explosive growth.

Sometimes in business, the solution is simpler than you can imagine.

There are custom picture commenting plugins for WordPress and Movable Type available, but we should note JS-Kit is not only meant for blogs, as it can be installed on any Javascript-enabled website. According to the blog post announcing the new features, JS-Kit users can now attach multiple images to each of their comments on sites running its commenting systems. Images will be auto-thumbnailed and can be clicked on for full-size viewing.

The new features comes right after the announcement that Facebook Connect had been made available to any of the 600,000 blogs and sites that are using the JS-Kit commenting widget, and after the system enabled commenters to add YouTube videos to their feedback.

In other news, JS-Kit has also been upgraded to support OpenID 2.0, not really a surprise as DataPortability co-founder and evangelist Chris Saad works for the company.

YouTube has been criticized in the past for not offering the experience already being offered on services like Viddler or Vimeo where users can upload large file sizes and input video information while it’s being uploaded. But in an announcement that should make its users happy, YouTube has finally seen the light and has started offering a new Upload process redesign that will more effectively compete with other services in the space.

According to the company, the new video uploader, which has been in private beta for some time, is now available to any users who wish to opt-in. Once users opt-in to the new uploader, they will quickly find that they can input metadata like the clip’s name, description, and tags while it’s uploading, as well as upload multiple videos at once to streamline the uploading process. More importantly, the new YouTube uploader will allow users to upload files up to 1GB in size, instead of its previous 100MB limit.

Much of these features were already available from other services, but it indicates that YouTube really does have a view of what’s going on in the market and wants to stay competitive in that space even though it’s still the de facto leader.

If you want to sign up for the new uploader, click here.

This past Thursday, Viddler launched an advertising system that lets companies and individuals overlay advertisements at variously tagged points within the videos it hosts. The system is very similar to Google Adwords, except advertisements are within videos instead of search results, and advertisers sponsor tags instead of search terms.

Viddler’s embeddable player has always been unique in providing content producers and viewers with the ability to place comments and tags at various points within a video. If something is funny at the 1:39 mark, you can submit the comment “lol” and it will show up as a discreet overlay at that particular time during playback. Similarly, you can tag a video during playback with “bicycle” at a point where there’s someone riding a bike. As with other video services, you can also submit tags that describe videos as a whole, rather than just particular points within a video.

While CEO Robert Sandie says that these metadata features were not developed with monetization in mind, Viddler now provides a way for advertisers to run campaigns that take advantage of both global and timed tags (the former being tags that describe videos as a whole, and the latter being tags that describe points within a video). Anyone can advertise through this system by participating in a bidding process akin to Google Adwords. Viddler has also partnered up with Amazon, and is talking with the likes of Buy.com and Shopping.com, to serve up ads for products sold by those online retailers.

The bidding process involves the choice of particular keywords through which you want to advertise. It also involves the highest CPC (cost per click) that you are willing to pay for each keyword. If you are willing to pay more per click than anyone else who wants a particular keyword, you practically own that keyword, and your advertisement will show up as an overlay in any video hosted by Viddler that has been tagged with it. This will remain the case until someone else outbids your maximum bid threshold. Viddler will email you if this happens so you can up the ante if desired. As for Amazon, its advertisements will automatically show up as overlays for tags that have not already been claimed by bidders.

A note on so-called global tags: while the placement of advertisements for timed tags naturally occur at their respective spots during playback, advertisements for global tags show up 1/4 the way through videos. They are also represented as green dots in the timeline, whereas advertisements for timed tags appear black (and regular comments show up white).

Viddler has decided to split revenues 50/50 with content producers, and it has given them a good deal of flexibility regarding the service as well. Producers can opt out of the advertising system completely or sign up for multiple levels of deployment. For example, you can deem that only advertisements from bidders can be displayed, and only through timed tags that you as a producer have created. Or you can allow Amazon to advertise as well, and through tags that your viewers create in addition to your own. For bidders’ advertisements, you will only receive money when your viewers actually click on them (not just view them); and for Amazon’s ads, you’ll only receive money when your viewers actually end up buying something from them.

If you currently publish videos on Viddler, you can set up advertisements by first going to the “Revenue” section and clicking “Enable Revenue Share”. You’ll then have to provide a PayPal account email address and/or an Amazon Affiliate ID to get paid. From this revenue section, you can also manage the tags on your videos and track how many impressions and clicks you’ve experienced for each. You can also set the advertising preferences that will apply to all of your videos (per video settings are not yet available). Advertisers who want to bid on keywords can do so here.

Viddler’s new advertising system can be compared to Google’s Adsense for Video, which has yet to be rolled out fully on YouTube, or any other video sharing service for that matter. As you can see on YouTube’s advertising page, Google plans to deploy animated flash overlays and run video commercials once those overlays are clicked on.

Below is a demonstration video by iJustine for Viddler’s new ad service:

http://www.viddler.com/player/b64a55dc/

Time for another roundup, and this one coincides with a notable first-year anniversary: that of Google’s $1.65 billion acquisition of YouTube, confirmed on October 9th, 2006.

Since then, the name “YouTube” has become virtually synonymous with “online video sharing”. According to Comscore, the website maintains a sizable lead over competitors with 205,593,000 unique visitors per month. Second-place Yahoo Video trails with 48,026,000 visitors. But must YouTube remain the clear winner in the online video space? While they have certainly captured the largest audience – which may in the end be all they had needed to do to secure their position – we shouldn’t underestimate the many other companies vying for mindshare.

Even if YouTube remains the destination of choice for the vast majority of consumers, producers ought to take a serious look at the alternative services. They often support more file types, bigger uploads, and higher resolutions. They also place fewer restrictions and provide an array of features simply overlooked by YouTube. That said, a few of these services are mere YouTube clones and hope to follow in YouTube’s footsteps by providing very basic features.

These are the services we looked at: blip.tv, Brightcove.tv, ClipShack, Crackle, DailyMotion, Sony eyeVio, Google Video, Megavideo, Metacafe, Motionbox, Revver, Spike (ifilm), Stage6, Veoh, Viddler, Vimeo, Yahoo Video, and YouTube.

Since they are all about 80% the same, I’m not going to go through each of them one-by-one at length. However, there are some overall trends that ought to be pointed out, as well as some key differentiators. To get into the details as to how all of these websites differ, check out the comparison chart we’ve provided above. You’ll notice that there are some gaps, so please email me if you can help us fill in the holes.

First of all, only YouTube, DailyMotion, and Metacafe appear to place any hard restrictions on video length. With the rest, video lengths are determined indirectly by file size restrictions. While YouTube and several of these sites place the file size cap at 100mb per upload, others place it higher at 250mb, 500mb, or 2000mb. Veoh places no limitations on file size, but they recommend you use their desktop player for files over 100mb. If you’re willing to fork over some cash for a premium membership, Brightcove.tv and Motionbox will also let you upload files of any size.

While YouTube allows users to upload files only formatted as .WMV, .AVI, .MOV, or .MPG, other services accept a much greater range of file types. If you want to make your life easier, however, get into the habit of encoding in .MOV (Quicktime) and you’ll be welcome at almost all of these sites.

When it comes to video quality/resolution, it’s not perfectly clear how these services compare, because most of them don’t state their video bit rates or explain their transcoding processes. However, several of them clearly blow YouTube out of the water. Stage6, a DivX-based service, and Sony’s eyeVio, a Japanese-only service, support the most stunning video quality. Videos hosted by Veoh and Crackle also look very sharp.

Out of all these alternative services, blip.tv stands out as the most professional video sharing solution. The website and player are cleanly designed, they accept perhaps the widest range of file formats, they will automatically syndicate your videos to many other websites, and you can choose to place midroll, postroll, adjacent, and overlay advertisements in your uploads. Additionally, you can track your shows’ statistics quite closely and allow users to download your videos. I could go on and on about blip.tv’s useful features. The only major bummer with blip.tv is that you can’t seek ahead to points in a video using their Flash player.

It’s no surprise that shows like Rocketboom have decided to migrate over to blip.tv. We even decided to use them for our TechCrunch40 conference. And PC World agrees with us that blip.tv tops them all.

While we have a strong preference for blip.tv, the others have their own peculiarities that may make them more attractive to you. ClipShack, while mostly a YouTube clone, has an area where you can use a webcam to add movie, book, video game, and TV show reviews directly to the site. Crackle serves as a talent discovery system through which amateur producers can win a chance to pitch ideas to Sony and other media executives.

Dailymotion, Metacafe, and Megavideo support a wide range of languages. Sony eyeVio, which unfortunately doesn’t plan to roll out an English version, enables users to download videos straight to their PSPs, Walkmans, iPods, and mobile phones. Metacafe and Megavideo both have programs with which they pay content creators according to how many people view their videos. Motionbox, the most private of the services, has a video player with a unique filmstrip that can be used to visually locate segments in a video (they also provide a simple online video editor).

Revver provides a WordPress plugin so that video bloggers can upload and manage their content more efficiently. Veoh lets you both upload videos to other sharing sites and watch videos from all over the Web in its download client. Vimeo sports the best-designed website and a strong community feel. And Viddler’s player packs in a bunch of features, including the ability to leave comments in videos at particular points.

Since embeddable video players are the faces of these services, we have placed screenshots of them below (click to enlarge). We are also in the process of uploading a sample video to each of these websites so you can compare their video qualities. Links to these videos can be found in the comparison chart.

A few startups are focusing on creating transcriptions of podcasts and video content (see Pluggd and Podzinger, for example), which search engines can then index.

And many people are tagging audio, video and photo content. YouTube, Flickr and others allow this (and see Google’s efforts to tag photos using humans). Tags help describe the content and are usable by search engines as well as humans. But highest level tags, when they are present, don’t capture all of the content, so a lot is missed.

Figuring out how to search the meta data around rich content (tags and lots of other descriptive data) is big business. Truveo, a video search startup that launched in 2005 and was subsequently acquired by AOL for at least $50 million, helped solve this problem (but still falls woefully short of perfect). A new unlaunched startup, CastTV, takes rich media searching another few steps forward (much more on them in a later post). But even these new search companies can’t find all of the content in a video or audio file, and certainly can’t take you right to where that content is presented.

That’s why I like the idea of deep tagging. It requires human labor but for many publishers it’s worth it. Instead of simply being associated with a file, a deep tag is associated with a clip from the file. Click on the tag and jump right to that part of the clip.

We’ve covered a few companies that are facilitating deep tagging, such as MotionBox, JumpCut (acquired by Yahoo last week), Viddler and Click.tv. Also, Google recently added a captioning feature to video, as well as the ability to permanently link to any time spot in a clip.

Veotag is doing this as well (we haven’t covered them yet but a few commenters have pointed them out in the past). Today I received an email from Howard Seibel, Veotag’s VP Marketing. He pointed me to this page which is a better version of a TalkCrunch podcast I recorded last week with Om Malik and Robert Scoble. He’s added deep tagging, so listeners can jump right to certain parts of the show.

I like the fact that I can embed the Veotag player right into the TalkCrunch website, and people who listen to the podcast on the site can utilize the deep tags (right now we have a simple Flash player). I’m having our trusty analyst Nick Gonzalez look into integrating Veotag into TalkCrunch sometime soon. If you know of other startups addressing deep tagging, please let us know.

Company lead Robert Sandie lives today in Bethlehem, PA but has a background managing Adobe flash servers for enterprise clients. The distributed team is made up of designers Andrew Smith and Chris Tingom in Arizona and developers Lukasz Hankus and Kasper Cecek in Poland. The vision for the product is deeply inspired by Flickr and it shows. The business model, for one thing, will be driven not by pageviews and advertising but by subscription for premium features. I think that’s smart. The premium features will be announced later, but they look good.

The keystone feature here is the ability to add tags and comments tied to particular points in a video. Those tags are then searchable, so if I want to find the particular point in one of my videos that I tagged “touchdown,” that’s easy to do. I can also have a conversation with other users regarding a particular moment in a video and choose to embed the video on another site in it’s entirety or only from a particular point I select. While users can link to particular points in a Google Video as of last month, that’s easier and is just the beginning in Viddler.

Multiple videos can be uploaded at once and upload doesn’t pause your work in the interface. Videos are served as streaming files, so they can’t be downloaded and will thus be preserved from copyright violation.

Different services are trying different things to really harness the dialogue that video sharing makes possible; I think that Viddler’s focus on time specific interaction could prove both easy and enjoyable for a wide variety of video publishers and viewers. The interface is appealing and if the forthcoming premium features are as well put together as the preview of the basic service I saw today – Viddler’s future could look good.

Online video sharing is obviously a very crowded space, but I think there is plenty of room and time for new players to establish themselves. While Viddler isn’t about downloading video, the fact that Pew estimated last year that only a quarter of US internet users were downloading music or video indicates to me that very few are uploading video yet and the market has lots of room to grow. See also our review of many players in the market last December (“Comparing the Flickrs of Video“). There really are a lot of video services launching, but surely there’s room for more than a handful to come up with a winning strategy.

Viddler will launch in September but you can visit their site and sign up for notification of the launch today.