Musical Chairs for the Video Sites
By Om Malik

(Business 2.0) – Too many dotcom startups, not enough seats at the party. No, we're not talking about yesteryear's bubble--we're talking about today's online video market, stuffed full of entrants with names like Broadsnatch, Eyeka, and Gkko. In April alone, three video companies got $30 million in funding. But with the number of services now at a staggering 173, including 85 that host and share videos, investors are starting to worry. "It's not possible that this many video-sharing sites can exist and make money," says David Hornik of August Capital, a backer of video services company VideoEgg.

True believers point to the rise of Palo Alto-based YouTube, which now serves 40 million videos a day. In theory, it could embed ads into videos and sell them for at least $1 per 1,000 views, or $15 million a year. But since a large slice of that content is ripped from TV or movies, advertisers are likely to be wary of copyright infringement. And a content-sharing company the size of YouTube could easily be spending $5 million a year on bandwidth and hardware alone. "People underestimate the costs and overestimate the inventory," says one veteran Silicon Valley investor who has shied away from the space.

Video company CEOs like Mark Sigal of vSocial and Tom McInerney of Guba agree that a shakeout is coming. "There'll be a lot of casualties in the next year," McInerney predicts. So Sigal and McInerney are scrambling for other revenue models--selling video-hosting services and content distribution to bigger brands--in hopes of finding themselves in chairs when the music stops.