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Downturn Could Drive Online Video

According to Web measurement firm comScore Inc. , U.S. Internet users viewed a record 14.3 billion online videos in December 2008 – up 13 percent over November 2008. YouTube Inc. remained the dominant player, with traffic growing a remarkable 49 percent.

Despite this growth, monetizing Internet video remains a challenge. Major video sites are experimenting with an ever-growing list of advertising formats, but advertising revenue is starting to dry up in the current economic situation. Investor emphasis is now increasingly on revenue, rather than just traffic, and only a few sites are well positioned to weather the coming year or two.

With increased pressure to break even, we're hearing more talk of subscription and transactional models. While that might work for a very small percentage of distributors providing extremely high-value content, we don't see the mass market paying for the vast majority of content or services online today. These companies are going to have to find a way to get advertising to work for them.

With video in particular, advertisers are more likely to be interested in high-quality, professionally produced content. Relationships with service providers could help assure QoS all the way to the consumer, adding value for advertisers. Service providers can also help create new targeted advertising formats, which could increase advertising revenue, assuming privacy issues can be addressed. And there's the opportunity for entirely new revenue models from technologies that can charge consumers to boost bandwidth for higher-quality services. Service providers can also help get the video to the TV, the preferred video viewing platform for most consumers.

Today the relationship between Internet video distributors and service providers is almost antagonistic. The current economic climate, however, is increasing pressure on online companies to generate revenue. The downturn could serve as an opportunity to drive new relationships between online companies and service providers, and end up facilitating the growth of Internet video.

— Aditya Kishore, Senior Analyst, Heavy Reading

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