We’re three years and some $8 billion into the Web boom, and the story to date is a bit unsettling: The runaway leader in the space, YouTube, is a money pit even though it accounts for well over 50% of the market. Its competitors continue to raise money and struggle for scale and ad dollars.
Time to panic? No, says Canaan Partners‘ Warren Lee, who led the VC firm’s investments in Tremor Media, Motionbox and Associated Content, after previously leading video investments for Comcast Interactive Capital. Lee explained to us why he believes the Web video market is pretty much right where it should be, and why he doesn’t think we’re looking at a bursting bubble. Next year, though…
Silicon Alley Insider: Does it bother you that no one seems to be making money from Web video?
Warren Lee: Companies shouldn’t be focused on profitability. If a year from now now there aren’t a lot of profitable companies, then there are serious questions about this category. Today it’s still early. This is the time where smart startups are establishing their positions in the marketplace as opposed to hitting profitability.
SAI: What has to happen in the next year or so for Web video to start producing profitable businesses?
Lee: Infrastructure, consumer behaviour and advertisers all have to catch up. Once they do, the economics will be more understandable, and more repeatable. Advertisers will learn what to buy and what not to buy. We are in the third or fourth inning of this thing. If in 5 years video advertising isn’t $3 billion business, I would be pretty surprised.
SAI: You’ve mentioned your company’s bias toward infrastructure and services over consumer-facing video and content investments. Are there sectors you see reaching profitability first?
Lee: Certain categories will have a shorter time to profitability. Companies like ThePlatform, FeedRoom, Brightcove and Maven Networks, which sell software to businesses and get paid a licence fee. I suspect these kinds of companies will be profitable first.
SAI: You’re invested in Tremor, which is one of the bigger video ad networks. Yet there are many, many others. Do you expect consolidation?
Lee: Our concern was that as video becomes more important, some of the general ad networks would be consolidators in the space. What has been amazing is that none of that has happened. It’s not to say it won’t happen. But it’s taken longer than expected.
SAI: What’s to stop an AOL’s Advertising.com, Google or Microsoft from adding a network and dominating video ads as they have search and display ads?
Lee: Video is unique compared to text and banner ads. It requires a diffrent technology than serving a text ad or banner ad. It’s clearly a different technical and delivery challenge. Video today doesn’t have surplus of inventory that text and banner ads have. Video has higher CPMs because of its limited inventory, and advertisers care more about brand and quality. Pricing is going to be significantly higher than any other type of ad format.
See Also: YouTube Exec: We’re Selling Ads Against “Less Than 3%” Of Our Videos
The Cost Of Online Video: $8 Billion And Counting
Google: We Can’t Figure Out How To Make Money On Web Video, Either
Debating The Online Video Bubble: When Will It Burst, And Who Wins When It Does?
Business Insider Emails & Alerts
Site highlights each day to your inbox.