Hyped Web Video Sector Starts to Hurt

The suddenly hyper-saturated market for online video is facing an imminent, recession-induced shakeout.

In recent weeks, companies ranging from pure Web production firms like 60Frames and Revision3 to branded video sites like Break.com to aggregators such as Veoh have all had layoffs. At the same time, several high profile original Web series have disappointed.

While layoffs may indicate prudence rather than panic, many predict that further casualties are on the horizon as venture capital and ad support are likely to become constrained by the recession. Insiders say that simply too many companies rushed into the space before business models and viewership patterns were firmly established. “There was a lot of cheap money out there,” explained Jake Zim, COO Safran Digital Group, who added that last year’s writers strike accelerated the flood. “It created more product than there is demand for.”

And while most of these firms continue to peddle new Web series, digital buyers are finding it harder to convince clients to underwrite unknown projects, particularly before they prove they can deliver an audience—a change from just a few months ago, say observers.

“In this economy the predictability factor becomes important,” said Jeff Ratner, managing partner, digital director, Mindshare Interaction. “There are fewer exploratory dollars.”

Ratner said that doesn’t mean that clients are no longer interested in Web video—since viewership is undoubtedly increasing from a macro perspective—but that it’s easier to buy an online episode of a show like Fox’s Family Guy than a Web original.

Meanwhile, the conventional wisdom that distributing video content on multiple sites will automatically translate to audience is proving false. “That spray and pray model doesn’t work,” said Zim.

Several Web companies, such as Next New Networks, have built their businesses based the “super distribution” concept for online video: post your shows on the YouTubes, Hulus, Veohs and DailyMotions of the world, and users will find you.

But the spray and pray approach won’t do for a certain breed of advertiser who in this economy “need guaranteed impressions and view counts,” said Break Media CEO Keith Richman, even for projects that promise product integration.

Marketing is as important as distribution, said Sean Carey, senior executive vp, Sony Pictures Television, which manages Crackle.com, yet another hub for original video content. Carey said that most of Crackle’s various distribution arrangements include some level of promotional guarantees, and when they don’t, Sony account managers are constantly contacting partners looking to receive better placement for Crackle’s shows.

So as deals get tougher to land in a medium that is still finding its business model, can all these companies make it? “I believe the answer is no,” offered Jordan Levin, CEO of Generate, which just completed a modestly successful run for its politically-themed Web series Republicrats on MSN. He predicts: “Original online video companies that do not have a diversified revenue stream will not all survive.”

Levin added that major TV players are likely to scale back on Web production. That might be the case for ABC/Disney’s digital studio Stage 9, which previewed sci fi series Trenches during the Four A’s media conference last March. That series still has yet to find a home. Stage 9 execs did not return calls seeking comment.

NBC Universal said it continues to move full steam ahead on several Web projects. That’s in spite of the low buzz generated by the recently launched sci fi series Gemini Division, which stars actress Rosario Dawson.

Though NBCU has thus far declined to make viewership numbers available for Gemini Division, Cameron Death, vp of digital content for NBC Digital Entertainment, said the show has been “absolutely a success…It exceeded our expectations. We haven’t released numbers out of respect for some of our ad partners.”

NBCU’s also recently partnered with the digital production studio 60Frames, which was formed out of United Talent Agency in 2007. That startup had been rumored to be facing trouble after laying off six of 14 employees just a few weeks ago. But a spokesperson said that the company’s business remains solid, and that 60Frames continues to pursue new projects.

Another company rumored to be struggling in a crowding market is Ripe Digital Entertainment, one of many video-centric brands targeting a young male audience.

According to comScore, the company’s monthly audience has dropped from 1.7 million unique users in the U.S. to less than a million in the past year, though execs at Ripe claim its audience is at 15 times larger.

That points to a recurring complaint in the Web video space, i.e. that third party audience tracking is insufficient at best, and completely non-existent for individual series. The lack of ratings-like data for video makes it tough to gauge whether a Gemini Division or similar shows have truly broken through. “Hits would really help the business,” said Zim.

For his part, Ripe CEO Ryan Magnussen acknowledges things are about to get tougher for everyone, but also sees room for opportunity. “I expect a major shakeout,” he said–yet if TV spending takes a hit during a recession, companies like Ripe are “potentially better positioned than ever. Advertisers look at us as a value proposition.”

Indeed, despite some troubling indicators, many in the business remain bullish. Break’s Richman said his company’s just enjoyed a record revenue quarter—almost making downward forecasts seem inconceivable.

Sony’s Crackle.com just completed work on its first million-dollar project, an episodic movie called Angel of Death. The site now promises at least one new episode of one of its series each day. “We continue to invest significant dollars,” said Sony’s Carey. “What I think you’re seeing is advertisers moving up the curve in terms of quality.”