Technology

Online Video: Next Stop, Nasdaq?


With the popularity of online video, startups and their investors are deciding that now's the time to go public—and reap rich rewards

DivX makes video-sharing technology. It's also making a profit. That combination is helping the San Diego company make something else: a splash on the stock market, where it began trading on Sept. 22. The company's shares were priced at $16 apiece, above the $12 to $14 expected range. DivX (DIVX) raised $145 million in its initial public offering (IPO), blowing past the $100 million expected by Wall Street. And three days after its debut, the stock closed at $18.11.

Chalk up all those bullish figures to the success of online video. You can bet YouTube is taking note. So are lots of other companies, from software makers to equipment vendors to Web site operators—all specializing in technology that zips video clips around the Internet. Two other IPO candidates for 2007 include MobiTV, which delivers video to mobile phones and PCs, and BigBand Networks, a maker of equipment that helps telecom and cable companies provide video on demand.

OPEN WINDOW.

To see why, just follow the money. In recent years, some of the biggest venture capital firms have invested in video startups. Redpoint Ventures, one of the early investors in social networking phenomenon MySpace.com, has poured a "significant percentage" of funding into startups like MobiTV, multimedia-processor maker Mobilygen, and LifeSize, a supplier of high-definition videoconferencing gear, says Jeff Brody, a Redpoint founding partner. Other firms parking funds in related companies include Charles River Ventures, Cedar Fund, Sequoia Capital, and Oak Investment Partners.

And before long, the time may be ripe for VC firms to step back and let the public in. "I am starting to see companies thinking of going public," says Bruce Sachs, partner at Charles River Ventures, which invested in BigBand and GoTV, the latter of which delivers on-demand TV programming to cell phones.

The appeal isn't lost on would-be acquirers. On Sept. 25, Motorola (MOT) said it paid an undisclosed sum for Vertasent, a maker of on-demand video software. In August, networking giant Cisco (CSCO) spent $92 million for video-networking software maker Arroyo Video Solutions. The same month, Sony Pictures Entertainment, owned by Sony (SNE), purchased video Web site Grouper for $65 million (see BusinessWeek.com, 8/23/06, "Online Video: Tasty Takeover Targets?").

But many VCs would prefer to see the startups they nurture sell shares to the public, an exit strategy that often offers higher returns. Judging from the success of some recent IPOs, "it appears that the window [for going public] may be opening," says Sachs. "If that's the case, given how hot video is, we could see some interesting exits in 2007."

"ON THE FAST TRACK."

Indeed, the popularity of online video is on the rise. "It's a perfect storm for video," says Brody. Of homes in the U.S., 70% have high-speed Internet access, compared with slower-speed dial-up connections. That makes all the difference when it comes to downloading and viewing fat files. This year, downloads of branded content, such as Desperate Housewives episodes from ABC.com, could grow by more than 60%, from 18 billion streams served last year, according to consultancy AccuStream iMedia Research. This year, scads of media companies have launched their broadband video channels, and Apple (AAPL) and Amazon.com (AMZN) have introduced video services (see BusinessWeek.com, 10/2/06, "Still Not Ready for Prime Time").

Viewership of user-generated video sites like YouTube and MySpace is surging too. Serving up to 100 million videos daily, YouTube.com is already the tenth most popular Web site globally, ahead of eBay (EBAY), Microsoft (MSFT), and Amazon, according to traffic tracker Alexa (see BusinessWeek, 9/18/06, "YouTube: Waiting for the Payoff"). Consultancy In-Stat estimates that by 2010, user-generated video sites will lure 65 billion views, up from 17 billion this year. Their ad-related revenues, meanwhile, will grow 10 times, from $80.6 million this year to $852 million in 2010, figures Michael Inouye, an analyst with In-Stat.

If it doesn't get bought first, YouTube is a prime IPO candidate, some analysts say. While the site is still losing money, it's growing so fast that "there'd be a lot of retail and institutional interest," says Tom Taulli, founder of InvestorOffering.com, which helps startups find investors. "A lot of YouTube users would love to own a stock like this. I'd put this on the fast track." YouTube wasn't available to comment for this story.

"TV EVERYWHERE."

This video explosion also opens up opportunities for startups such as BigBand, which helps telecoms like Verizon (VZ) and cable companies like Comcast (CMCSA) and Cablevision (CVC) serve TV channels and videos on demand without hogging bandwidth. As the popularity of video on demand grows, the company expects its annual revenues, already exceeding $100 million, to grow at double-digit rates. It's planning an IPO in 2007. "We feel we have the mass, the customer base to go public," says Amir Bassan-Eskenazi, the company's CEO.

Then there are startups in mobile video. Worldwide, more than 250 million people are expected to watch mobile video by 2010, generating some $27 billion in sales, according to market consultant ABI Research. Enter Emeryville (Calif.)-based MobiTV, delivering video content to cell phones for Sprint Nextel (S), Cingular, Alltel (AT), seven U.S. regional telcos, and 25 foreign mobile operators. On Sept. 12, MobiTV also helped telco AT&T (T) launch AT&T Broadband TV, offering a cable-like lineup of TV channels online (see BusinessWeek.com, 9/13/06, "AT&T's Faulty Connection—Broadband?"). Longer-term, MobiTV might even provide TV channels in the living room, says Paul Scanlan, the company's chief operating officer and co-founder. "It's about TV everywhere," he says.

In July, the company raised $70 million in funding from a group led by Oak Investment Partners. And while it's already had discussions with potential acquirers and has considered going public, "We really feel like we are the beginning of a massive market opportunity," Scanlan says. "We are not looking for an exit right now."

Indeed, some of these companies may opt to sell out to a larger player if they stay in business at all. The market is crowding fast. There are easily more than 200 startups specializing in online video alone. But for the ones that are savvy and popular enough to survive and stay independent, the next stop may very well be Nasdaq.


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