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Why VCs Will Miss the Video Revolution

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Venture capitalists did the right thing five years ago -- they got excited about video. Back then, video meant hardware. Pipe. Technology. It was a big problem, and to lots of folks, it seemed like there could be a big winner. So VC's bet big. Famously big.

Companies like Move Networks, Revver, Veoh, and more. You know who you are.

These were 'boil the ocean' bets, we're going to own 'web video', or 'entertainment', or 'consumer revenue.' Big money. Big vision. Big exits! Only it didn't happen. In fact, no exits -- OK, YouTube, but really no others. And meanwhile the web, being the web, continued to lay fiber and hook up to broadband and add bandwidth and get smarter about compression and buffering.

Simply put -- what was extremely hard in 2006 became magically simple in 2010. Damn you, Moore's Law, for making everything change so fast! (shake fist here)

So, VC's got discouraged. Video's golden age of high barrier to entry was ending. And, therefore, the idea that the special sauce that they can distribute (cash) was less necessary.

Of course, they were wrong.

Video isn't one thing, it's two. It's like calling hardware and software 'a computer'. Yes, software runs on hardware, but they aren't one thing. And just because the video hardware space is mature, that doesn't stop VC's from investing in software. In fact, there's a huge influx of capital into software, social media tools, and networks and other things that live on the hardware platform.

Video is two distinctly different things: it's the network, and it's the software that operates on and organizes the software on the network. One is mature, the other is just arriving.

So confusing the pipe and the servers that hold and move video with the things people do with it -- and increasingly the software innovation that will happen around video -- is simply playing with blinders on.

So we need to do a few things. First of all, we need to shake it off. Yes, there were some ugly false starts, and folks lost money. But that is why they call it 'venture' right? Like -- nothing ventured, nothing gained. Or 'adventure'. It come with risk. But then, we have to look ahead because the future of video software, in all of its emerging awesomeness, is going to power next gen e-commcerce, community, media, entertainment, travel, and brands. Its going to power THE web. And that, ladies and gentlemen, is a big space.

The game has just begun.

  • GoogleTV is going to rock the world--powered by Android.
  • AppleTV is going to rocket the impact of micropayments for content.
  • Netflix is going to be like Switzerland (sort of)
  • Boxee (now powered by the Intel Atom Processor) could be the secret GoogleTV hardware
  • platform.
  • Amazon. Great library - slow tech right now, but they're paying attention.

(*insiders tell me that Smart TV, the partnership between Intel, Sony, Google, and Logitech will OWN CES this January--far overtaking last year's 3d trend).
Pipe. Platforms. Revenue Models. Built and about to be deployed.

Hmm... which leaves only one thing. Software.

So, for the VC's or angels who are still reading -- here's the difference between being a cattle farmer and owning a steakhouse: wholesale vs. retail.

Wholesale is the tech -- it moves video around the web. On the free side, you've got YouTube. On the corp high-end side you've got Brightcove and Oyalla battling it out with their respective 100 million and 44 million dollars in venture capital. And you've got Akamai, a public company with a market cap of something around $6.87 billion, doing all the back end work. That space is fine.

But on the retail side of things, you've got a massive market of sites, verticals, behaviors, and customers who are balanced on the tipping point, and about join the fun.

What's so odd about the way VCs view video is that they, as a group, think it's just the box and the wire. They confuse software with 'content' which they view as a universally bad investment. I won't debate whether content is a good or bad investment, certainly lots of people have lost money on films or Broadway shows, but web-based software that is built around video is a whole new thing.

Here are some categories of video software that are ripe for innovation and investment:

  • Community
  • Ecommerce
  • Direct Response
  • Curation / Publishing

Think of video like old fashioned dial tone. Video is just the signal that provides a delivery mechanism for images and sound. Dial tone. And video is dial tone on steroids. Don't get me wrong, there are companies in the video enabled software space, and some of them have found funding. But overall, the VC community has had a big red flashing light around video, even as they double down on Facebook apps and Twitter platforms. There's no doubt that they value is social media, but if what we're looking for are ways to capture human intention, connect customers with needs, and facilitate the buying and selling of goods -- both virtual and physical--then video is going to be the game changer.

OK -- so who's going to start a early stage video fund? Who's going to launch the equivalent of TechCrunch Disrupt for video software? What about a start-up camp for video entrepreneurs.

As they say in Hollywood: Quiet on the set... and ACTION!

Footnote: One notable exception is Boston's Spark Capital -- who bet on video early and continued to double down. Based on today's reports that their portfolio company 5Min is selling to AOL for 50+ M (with 13 in the company) that's a respectable return. Spark's portfolio includes Adap.tv, Boxee, Kickapps, Next New Networks -- all companies that are playing in the TV 2.0 space.

Steve Rosenbaum is founder and CEO of Magnify.net, a NYC-based Web video startup. He has been building and growing consumer-content businesses since 1992. He was the creator and Executive Producer of MTV UNfiltered, a series that was the first commercial application of user-generated video in commercial TV. Follow Steve on Twitter @Magnify.

*Disclosures -- I am a customer of Akamai, and I run a video software company


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