Brightcove, the online video service provider, has seen its share of ups and down in its short three year history since it launched. It has raised about $80 million since it was founded in 2004, and expectations have been high since the start (Barry Diller is an investor and on the board of the company). Whether it has delivered on it is debatable, though the company thinks it is too early in the lifecycle of online video sector to judge.

Recently it has been in the news for closing its consumer service and focusing on bigger media companies. Earlier this month I spoke to the founder and CEO Jeremy Allaire, about the company’s progress and lessons it learned, as well as his view on the future of online video.

The full audio of the interview is here for download (32 minutes, 12.8 MB)

Rafat: There has been a lot of coverage about Brightcove in the last couple of months, about your closure of the consumer service, and other issues.  So the learnings the company has had, some changes in focus if that’s what you think it is for the company, how has 2007 been for Brightcove? How have the things changed since the money came in? Lots more in the extended entry…

Allaire: I’ll go back a little further than that just for context. When I started the company in 2004, the notion of Internet TV didn’t really exist and it was pretty clear that there’s going to be a lot of transformation on video. We had a lot of ideas and the approach that I took very early on was to recruit a pretty senior management team and take advantage of access to a capital and capitalize more than the startups would capitalize. 

As we looked at the marketplace in 2005 and into early 2006, we decided to take what I would call a portfolio approach to experimenting in the market and I think that’s what entrepreneurs do. They take risks. They make multiple bets and they figure out what works. The great entrepreneurs ultimately find the things that work really well and double down on those and grow those.

The first bet we made was that media owners would need a platform that they could use to operate their broadband video businesses and programming businesses. That’s the first thing that we did back in 2005 and all through most of 2006 and that grew a lot and that continues to grow. Then about a year ago, we placed a couple of other bets and one of those was an offer to use our platform for small producers where we connect them with ad networks and they could use our service in a very cost effective way, so rather than just focusing on large media companies, also figure out is there a way to get the mid-tail publishers.  Long tail to me now means user-generated content.

The other bet was to see if all the professional media that we’re working with could be offered an integrated consumer facing destination, so we made that available too. So, a few different bets along those lines and we raised quite a bit of capital that closed in January of this year, still within 2007, so in a good place to be able to reasonably invest across these.

When we looked at the marketplace in the middle of the year we looked at the next 18 to 24 months where could be confident that we were going to be in a dominant position.  From our board’s perspective, from my perspective, we didn’t want to be invested in businesses where we would be number 5 or number 10 or even number 3 or number 4. So, we looked very closely at those and while the consumer facing product grew a lot—I think comScore (NSDQ: SCOR) has 8 million unique in August—just on a relative basis, it was not at a scale where we felt confident that that was going to be a product line that we’d be dominant in. 

I think the other issue was that it created conflict to situation with the media companies that we work with. “Why are you building a consumer facing product? That’s our business.” So, we eliminated the conflict and ensuring that 100 percent of our investments are on a platform just made a lot of sense. That business has done incredibly well starting 2007.  We’re growing an enormous amount on the revenue side.  On the user side, we’re now hundreds and millions of streams a month. We have 4000 commercial publishers that operate with us, hundreds of major brands going worldwide and our platform reaches about 120 million unique users a month. That’s 120 million users that access these Brightcove-based media experiences through over 10,000 sites.  As an entrepreneur you double down on the things that are doing incredibly well and you diminish the things that you’re not confident are going to be huge.

Rafat: You think YouTube has won the battle on the consumer side?

Allaire: On the consumer side, they clearly have the largest audience of users that access video. On the sharing sites, they are just absolutely dominant. They crush everyone. For about 9 months or 10 months or so, we allowed end users to publish through our site and we just announced that we’re turning that off because why even bother? It just creates copyright issues and other things. I think there are a number of second tier folks that have pretty good scale, but nowhere near their scale. But, for YouTube, it’s not clear to me if they’re winning on the consumer facing side with respect to premium commercial programming.  They still haven’t cracked that, not entirely. 

The largest broadcasters that writes most television product are pretty adamant about not working with them and their own efforts of are actually pretty good.  So, we’ll see what happens there. 

One of the things that I outlined in this ”Internet TV Platforms Come of Age“ piece that I just wrote is you have this bifurcation in the marketplace and we saw that emerged in 2007.  I think it will just be more well defined in 2008, but basically you have aggregators and the platforms.

Aggregators, there are three types. There are viral sharing sites or consumer-oriented sharing sites that are also playing roles as an aggregator. You have commercial video portals, which are not about consumer sharing, but they’re about leveraging their own distribution whether that’s MSN or Yahoo (NSDQ: YHOO) or AOL (NYSE: TWX) would fit in that category. We put social networks in aggregators as well even though they’re not taking the same approach in terms of building these formal content distribution relationships, although MySpace is.  The others, they’re kind of open platforms or they’re aggregated platforms from an end user perspective.

Then there are platforms and there are three major platform categories we’ve seen emerge: Internet TV platforms; these uber ad platforms that combine ad serving technology with ad monetization networks; and then community platforms is the last category, which has really emerged in 2007 as a real category.  We have the likes of Ning and KickApps and others.  So, the platform sites are all about getting those services embedded everywhere throughout the web.  The aggregators are obviously about being focal point destinations.

Rafat: From Brightcove’s perspective as a technology company now, what is the killer app on the tech side?  Because anybody who knows a little bit of Flash and coding can create a sharing site.

Allaire: Interestingly, what we have seen happen over the last year is the requirements for running an actual online video business or using online video as a core part of their business have just gotten more complex, not less complex.  For example, there are all of the things that go around managing editorial and managing programming and managing rights and all the things that are associated with that become key pieces. On the user experience side, I think people are investing in not just having a player with content, but they’re looking at how do they deeply integrate that programming throughout their sites, how do they do that in automated ways, how do they leverage recommendations and social recommendations to drive that.  I think we’re also right on the cusp of pretty big breakthrough in terms of quality of experience and so this is an area we’re putting a lot of attention right now.

Rafat: Yeah, you’re working with BitTorrent.

Allaire: Yeah.  We have a product line, an extension of the Brightcove service called Brightcove Show, which is all about high quality experiences and sort of taking the immersive kind of theater mode-like experiences, new delivery technology to provide up to HD quality delivery, new ad formats that support that both for short form but also very much for long form content.  We have about 50+ TV networks we work with.  Many of them are planning to do more and more long form. That high quality piece is nontrivial. It is not just here as a clip, you put it up in a little Flash player, etc.  The ad arena is getting more complex, not less complex.  For the first time, publishers at large are very eager to experiment with things like pre-rolls and as a result they need technology that allows them to figure out how and where to place inventory and video, policies that they can set across their own sites, but also across all the sites that they syndicate to. Which leads to the other big piece, which is the first generation of efforts in online video mostly focused in 2006 and 2007, mostly focused on putting up programming in your own sites as a media company.  Now that the kind of Hulu deal structure got put in place, there’s now a kind of framework that content players find acceptable, which is, “Hey, if it’s a 90/10 deal and I sell the ads, that’s a good deal.  I’ll do that.  I’ll do that until the cows come home.” So, now there’s a deal structure and the content levers are opening up and there’s a whole set of requirements around what we like to call “audience networks”, which is the name CBS (NYSE: CBS) gave it.

Audience networks will become the sort of thing everyone’s going to want one in 2008 and that’s a nontrivial task across a lot of different dimensions of the business.  So, at one level, we’re growing with complexity and the richness of what people are trying to do.  On the other hand, we actually think on a mass market basis that we’re just getting started, meaning that online video and the other kind of rich media that augments it are going to be staples of almost every web property.

Rafat: Do you think HD can truly be enabled online?  There’s some arguments back and forth whether the backbone can handle it or not.

Allaire: First of all, HD is definitely possible today for a small subset of users. It’s not like HD is a ubiquitous thing.  So, the formats are there and the codecs are there.  I think the critical problem to solve and this is a problem that we are solving is how do you ensure that any user that comes to interact with your content gets as high of a quality experience as possible and how do you do that in an entirely dynamic way?  Essentially, what that means is if you’re an end user and you come to, whatever you call it, TV network A or music label, that the technology would essentially say, “Okay, this is how much bandwidth you have.  I’m going to dynamically address the signal up to the maximum amount.” Let’s say it’s up to HD.  Let’s say they’re on a big fat cable modem or FiOS or whatever. Adjust that up, but as the circumstances change, let’s say, in a family there are sisters who gets online, starts playing an online game and brothers doing this or a father sending an e-mail, that you can dynamically adjust that quality down, but if the user comes in with an average DSL connection, they get as good of a possible signal as possible.  So, there is what we call stream thinning, which is dynamic quality of service so that you can get as best a picture as possible.  It’s something that we’re working on right now and will be releasing.  It’s not all about HD.  It’s about how do you ensure the highest quality experience possible and HD is a piece of that, which is, again, limited to the end users that have the highest capacity in terms of bandwidth.

Rafat: What about Microsoft’s (NSDQ: MSFT) Silverlight?

Allaire: We were one of the early companies to announce that we’re going to support Silverlight and that is something we have not rolled out yet, but we intend to introduce.

Rafat: What chance do you give it?

Allaire: That’s a good question.  The bottom line is just going to be distribution for that whether they get to a place in terms of distribution so that there’s a strong incentive for people to use it and that’s not there yet. It’s still in beta basically, but my assumption just having watched Microsoft over the years is first and foremost, the platform they’ve created from a development and design and technology perspective is quite good.  It’s the first real viable competitor to Flash and it’s a very meaningful competitor.  Again, I think they will get distribution over the next couple of years and then I think you’ll start to see much more activity on Silverlight, but I would say also Adobe (NSDQ: ADBE) responded incredibly swiftly and improved the security and video formats and quality in their environment very quickly and are going to get to ubiquitous distribution for those new things in under 12 months.  I think they sensed the competitive threat and have been responding.

Rafat: But aren’t you amazed at how Flash video adoption has expoded? Three years ago people didn’t even know what Flash video was.

Allaire: Yeah, I know.  That was a big project that we worked on when I was CTO of Macromedia was to transform Flash from being an animation tool into a platform for rich media applications, interactive applications and we actually launched Flash video in 2002, in the spring of 2002. I took a sabbatical over the summer and all I did is play around Flash video and came up with all these ideas for how you could build commercial media applications, user-generated content applications.  The next project I was working on, which we never shipped and I actually left when the company didn’t want to build it was ironically called Vista. It was a self-publishing application for consumers where they could just quickly ingest the content from their desktop converted into Flash video, create a little output template.  You could post it to a blog, send it in messaging, etc.  It was a very simple user-generated video application.  That was back in the fall of 2002.  It was very clear at that point and I left Macromedia in early 2003 that Flash video was an incredible platform to have enormous latent power and obviously it’s unbelievable what’s happened.

Rafat: Tell me, what do you think of the Adobe Media Player? How feasible is that?

Allaire: We put it into the aggregator category.  So, when you look at commercial video aggregators, basically aggregators that have a commercial distribution offer to content owners, you got websites like the traditional portals and then you have desktop players.  The desktop players basically are Juice, Adobe Media Player, iTunes.  That’s where I kind of put that as an initiative.

Rafat: What do you think of desktop players themselves?  Do you think they will gain any traction?

Allaire: I’m very skeptical.  We’ve seen incredibly limited adopted of Joost.  I don’t know anyone who uses it.  It’s not a good experience to have to go off into the desktop to get on-demand media when 10 years of being used to getting instant gratification and contextual framing through the web is just so powerful for users.  It’s not clear that it will add some significant value, especially as the quality levels continue to rise.  I think right now those have fairly limited adoption.  The only reason iTunes has any adoption for videos is because of portability and there’s a subset of people that want portable video, but for desktop-consumed content, there doesn’t seem to be a huge value added.

Rafat: What about downloadable stuff for you guys?

Allaire: About a year ago, we launched our first downloadable content capability and transactional support behind it so people could sell content, but we have seen very limited adoption of that.  That was one of those “bets” that we made.  We sort of said, “Okay, let’s put a little bit of a bet over here and see,” because it seems like iTunes is popular, maybe people want to buy content for download; very little interest in it both from a consumer perspective and from a content owner perspective, extremely limited adoption.  I don’t think it’s just technology.  I just think that the predominant model is instant gratification.  I think downloadable content might make sense in a world where you’ve got seamless connectivity into larger monitors and other things in the home, but even then I think the on-demand stream-based model is going to end up being superior.

Rafat: In 2008, what do you worry about in terms of your business becoming a commodity business?

Allaire: Well, I think the first thing is we would like our business to become a commodity business.  We would like the Internet TV platforms and these kinds of broadband media platforms to be technologies that are ubiquitous.  Commoditization generally means that something becomes ubiquitous.  I think we’re in an interesting place to be a company that helps do that, so create additions of our service that can be broadly adopted on a mass market basis.

Rafat: But then you will get undercut by some of the other players too if that happens.

Allaire: Not necessarily.  If we can create a model where our service can scale from small publishers to enterprises that are diversified media companies and as organizations grow in their use and the complexity of what they’re trying to do, that they can grow with us. One of my key passions has always been about kind of the ubiquity of video as a format, as a form of communication. I think we’re in the very early stages of that. We’re getting economies of scale in technology, in operations, in an infrastructure and all of the different pieces that are required to run a business and at a certain point that becomes a pretty significant competitive advantage both from a cross structure perspective, but also because they end up being network effects inside the business as well.  We’ve got 4000 commercial media businesses in our service.  As those media businesses think about audience networks and the sharing of content in other places, we’re in a really good position to help facilitate that.  So, being part of our system creates a network value potentially for people over time. 

I think when businesses go mass market or they start to get broader scale, it’s not just “is there a substitute good and does it cost less?” Generally, that isn’t what determines what products and services and other things get real broad scale.  I think market leadership and whether there is a true ecosystem built around the platform is a pretty big piece of it as well. That’s another part of what we’re focused on is broadening that ecosystem of developers and technology companies and solutions companies and production companies and all the folks that sit would around something like we do.

Rafat: What about video search? Do you think it will be solved?

Allaire: We continue to meet with a lot of companies in that space.  It is a hard problem.  We haven’t seen a huge need to solve it.  Really, the only category where there has been a significant demand for it is in the news category where people really want to make sure that their content is discoverable in that way.  We’ve seen some experimentation there.

Rafat: In terms of revenues for your company, where is the bulk of it coming from?

Allaire: From our platform and it’s predominantly from media organizations that are launching direct-to-consumer and syndicated broadband programming businesses. They’re all selling their own advertising.  They’re paying for the use of our platform on a usage basis. 

We’re not profitable right now, but the market has grown quite well and we’re barely scratching the surface in terms of market penetration both here but also worldwide.

Disclaimer: Brightcove is a sponsor of paidContent.org.