Video on the Internet is possibly one of the most well-worn buzzwords of the past year, both among site owners, who claim it is the best real estate territory around on the web, and surfers who increasingly prefer watching content on their computer screens rather than their televisions, and like posting personal video clips, in keeping with traditional user-generated content practices. However, generating revenue from Internet video is still difficult, at least for the time being, and not even YouTube, with the well-lined pockets of its new owner, Google, has managed to find a winning formula for video-based advertising.
Among those vying for space in the ever-more crowded online video sector is also one prominent Israeli representative, Metacafe Inc., which believes the Internet video market is still in its infancy. Although Google controls the lion's share of the market, Metacafe co-founder Eyal Hertzog, and VP R&D Yaron Finkel, believe the situation is not irreversible. And profitability? They're working on that as well When? They are unwilling to commit themselves when it comes to that.
Focusing on meta-data
Metacafe made headlines recently for the wrong reasons, with the disclosure of the departure of two other "co-founders", Ofer Adler and Arik Czerniak, who had been involved with the company since its inception, and the firing of seven of the company's 95 employees. The fears for Metacafe's future fuelled the sense of crisis people felt it was in. Hertzog, however, claims that most of the reports about what was happening at the company simply aren't true. "To say the founders left is simply wrong. I founded the company on my own, and I only brought in Czerniak as CEO three months later," he explains. "Because he joined quite early on, he was also given the title founder-partner." Hertzog adds that it wasn't until later that he raised money from Ofer Adler, who also advised the company on strategy and helped it when it first started out, "but he was never one of the company founders or an employee."
Hertzog, in any event, is not going anywhere, and he intends to remain with the company. "Czerniak's departure was planned," he says. "Once we decided to expand our focus to the US, I hired an American CEO, Erick Hachenburg, and Czerniak stayed on to assist him for six months to ensure the transition went smoothly. Only then did he leave."
Globes: And what about the recent firings? You cut 10% of your labor force.
Finkel:"The move enabled us to bring out a new product for users, and all our efforts are part of the strategic change that we've been implementing. It was not because we were in financial difficulties and it is not related to the weakness of the dollar. It was simply the outcome of a change in strategic focus."
According to Hertzog, more than 60% of the company's development resources are now invested in its change of focus. "We realized that we had to invest all our effort in this and that if teams were allowed to continue to focus on other things, it would only cause friction within the system, and that is not good for the company or the employees." 90 employees remain at Metacafe, 20 of whom are located in the US, and the rest in Israel (save for two in China).
The strategic change to which Finkel and Hertzog refer relates to a new product that Metacafe has developed, called WikiCafe. This is essentially a platform that enables any user to edit the meta-data on the video clip he is viewing - headlines, images, and any other item appearing in the video. Hertzog explains the rationale for giving users the opportunity to have a substantial impact on content. "We reached the conclusion that meta-data is more important than the video clips themselves, since a video clip with poor quality meta-data is like having a good television program that never gets aired," he says. "It's the easiest way for users to find the video clips they're looking for, and it was important for us to reach a situation where the meta-data was of the highest quality possible.
"This can only be done by giving users a say. What makes us unique is the fact that we don't allow content to be duplicated and we are not a platform for posting family or personal video content, but solely clips that will be of interest to the wider public," Hertzog adds, a comment that contains a hint of criticism of the content being posted on YouTube, much of which is of poor quality and has few viewers.
Generally speaking, Metacafe was one of the first leading sites to spot the potential in giving users a share of the profits, and YouTube later followed suit. "We were the pioneers in this field," claims Hertzog, "and today nearly every video site shares its revenue with surfers. There are thousands of surfers generating content for Metacafe, and we have one video clip that has already made more than $35,000, and an active creator who last year earned $100,000 from a number of clips he posted. That is quite a respectable salary." Metacafe's revenue sharing model is based on a fee of $5 for every 1,000 viewings above a threshold of 20,000 viewings, and a user rating of 3.0 out of 5.0. So far, more than $1 million has been distributed to surfers.
Handing out money to surfers is great, but what about making some money as well?
Hertzog:"Claiming that there is no money in Internet video is a common error, and people are unfamiliar with the history of video on the Internet. In 1998, when I first thought of setting up a video site, there was already a very popular site called iFilm (which was later sold to Viacom - N.P.), which was very successful and profitable, at a time when server costs, for example, were far higher than they are today. It managed this by being a bit a more aggressive in its advertising."
There were rumors that Yahoo! or Microsoft were interested in acquiring Metacafe for $200-300 million.
"Obviously, I can't comment on that, but I can say that there was interest. I think, however, that people made it out to be far more important that it really was. There's bound to be interest whenever there's an available asset that ranks among the top 200 sites worldwide. There were talks, but for certain reasons we didn't take them any further."
Hertzog believes that every large Internet company wants to be a potential buyer. "There isn't a company today that isn't giving some thought to a video strategy for the Internet, but I don't spend my days thinking about the possibility of us being acquired. It might come up occasionally when Hachenburg and I are having coffee, and he asks me as a joke, 'how much would you sell for?'" Hertzog, naturally, declines to say what his answer was.
Despite the fears of a recession in the global market, and in the Israeli economy in particular, Hertzog feels that the Internet industry is unlikely to be harmed. "I don't think there's any recession in high-tech, least of all, the Internet. It is the only market that is still growing and I will be quite happy if it continues growing at the present rate," he says.
The dollar, on the other hand, poses a difficult challenge. "The strengthening of the shekel is a problem, since it substantially increases development costs in Israel, and costs are now almost the same as they are in Silicon Valley - but we're learning to cope with that too," says Hertzog. He adds that companies whose technology base is located in Israel, are not about to fire employees, but it could happen at companies that only have a branch here. "In our case, the hub of our activity is in Israel," he says reassuringly.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2008
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