Brightcove’s Zencoder Purchase Could Be The First Step In Its Transition To A Freemium Model

Brightcove announced its first acquisition as a public company today, with plans to acquire cloud encoding startup Zencoder for $30 million. And while the purchase will add a small amount of incremental revenue, the bigger strategic bet for Brightcove could be around making its video offerings more flexible and extensible, and hooking developers with more of a freemium business model.

First of all, Brightcove’s Zencoder purchase marks a huge opportunity to capture part of a fast-growing segment of the online video market. According to Brightcove CEO Jeremy Allaire, Frost and Sullivan estimates the market is worth $264 million today, and will grow to $630 million by 2017. For this year and next, the actual impact will be pretty small: Brightcove estimated that Zencoder would add $1 million in revenue in the second half of 2012.

There’s the opportunity to upsell existing customers. Brightcove plans to integrate Zencoder deeply into its core product, which means that it can provide cloud encoding as a premium service through its online video platform. And there’s also the opportunity to use Zencoder’s encoding product as a funnel to capture new customers.

But from a strategic perspective, Brightcove’s purchase of Zencoder isn’t just about adding new revenues, or plugging new functionality into its video content management system. On the company’s second-quarter earnings call today, CEO Jeremy Allaire said that Zeconder’s integration into the core Brightcove platform will mark the transition from its current software-as-a-service licensing model to a platform model where customers will be able to set started for free and add only the services that they need to use.

One key part of the Zencoder purchase is the acquisition of free, open-source video player Video.js. The HTML5-based video player is used by 24,000 websites around the world, and Brightcove estimates that 3 percent of the top 10,000 video sites currently use the player. Brightcove execs acknowledged on the call that Video.js could also be a strategic part of its future customer acquisition strategy.

Brightcove is in the earliest stages of integration Video.js into its core video management system, according to Allaire. But Video.js, as well as Zencoder’s encoding offering, could pave the way for Brightcove to create a platform of services, tied together via APIs, that its customers could pick and choose from based on need.

Many do-it-yourselfers in the video space don’t need the full suite of services that Brightcove offers, and Video.js is one way that the company could get them using its technology. Allaire, for instance, stressed Brightcove’s interest in courting highly influential developers to its products, and he said the preferred model of doing so is to get them started with an easy-to-adopt toolkit or API that they can build off of. That’s a lot different than asking customers to pay a certain amount each month or year for access to a totally built-out SaaS platform.

Brightcove is already moving in the freemium direction with its newer App Cloud platform, announcing at its Play developer conference that it would make the tools available under a free, open source license. Under that model, developers can use its toolkit and then pay for additional features as needed.

I could see Brightcove move in a similar direction with its legacy video platform. It already has a 14-day, free-to-try option for its Express service, as well as a $5 per month, per video offer to get people hooked. It’s all about the upsell, execs admitted on the earnings call — and in that respect, Brightcove is doing very well.

But to really move to more of a freemium, open source model, it might have to make some changes to its existing Video Cloud platform. In a phone call after the earnings report, Allaire told me that the company has been shipping big updates to its analytics feature set and to its video player, and that it’s looking to Video.js as a powerful funnel for converting developers to paid Express customers, and maybe, down the line, converting them to Premium customers.