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The sharp growth in online video viewing, increasing availability of TV online, and proliferation of high-quality, web-originated content has made it easy to point the arrow for online video advertising up and to the right. But while video will probably continue to be a bright spot of growth in a dull economy, that’s mostly because it’s just getting started. The reality is revenues will be close to nothing for a long time, and the growing number of tech entrepreneurs and creative types in the space should probably be worried that industry watchers are now cutting their expectations for growth in online video revenues based on factors other than the shaky U.S. economy.

eMarketer, which has been putting out good research on online video recently, back in August chopped its estimate for 2008 U.S. video ad revenue by more than half, to $505 million from $1.3 billion. That’s a pretty significant downgrade more than halfway into the year, though eMarketer warned it was “more a change of methodology than of perspective.” But even with the methodology revision, eMarketer is forecasting growth to start declining after 2012.

In a market in which CPMs (cost per thousand impressions) for very similar ad formats can range from $10 to $100 depending on where they’re shown, it’s worth trying to pin down the factors affecting video advertising pricing. Everybody agrees that prices for video formats such as in-stream ads and overlays will stay at a premium vs. banner ads, but it’s not yet clear where rates will settle.

Jason Glickman, CEO of video ad network Tremor Media, attributes the major fluctuations in CPM prices for in-stream (mostly pre-roll) ads over the last two years to a combination of a few key factors. Initially, he says, there wasn’t much inventory, so CPMs were “north of $20 to $25 on a constant basis.” Then inventory started to increase, causing prices to drop to a range of $12-$20 about a year ago. They’ve managed to stay stable since then as budgets have started to migrate from television. Today, the most pressing factors affecting CPM prices are better accountability measures (a plus) and pullbacks on budgets (not a plus), according to Troy Young, chief marketing officer at competitor VideoEgg.

Video accounts for a tiny part of the $70-$80 billion spent on TV in the U.S. each year, and that’s barely starting to change. TV networks like CBS say they have always been able charge higher CPMs for the same shows online vs. TV, but that their digital revenues are not yet significant enough for that difference to be meaningful. Even by 2013, when eMarketer thinks advertisers will spend $5.8 billion on online video ads in the U.S., that will amount to just 7.6 percent of total TV ad spend and 9.8 percent of total Internet ad spend.

So going forward, what else might depress video advertising CPMs? First, online audiences in a post-TiVo world don’t much like ads, and in the “lean forward” online video-watching environment, they are more likely to reach for the mute button, employ ad-blocking software, or switch to another window. Second, the aforementioned demand for better tracking and accountability drives forward less lucrative performance-based ads. Third, while more intensive kinds of advertising like sponsorship and product integration are becoming increasingly popular, they’re even harder to measure. Fourth, the amount of inventory will only continue to rise, with more and better video being released and syndicated further out across the web.

“We recently brought down the average CPM again, to between $15 and $35, because of the development of video widgets,” said Brett Garfinkel, SVP of the original online content site maniaTV. “We can now reach more eyeballs for the same cost and afford to cut costs to advertisers and remain competitive.”

A big question for further growth is when advertisers will start to be comfortable with user-generated content. At this point brands are still extremely cautious about being associated with new content producers, perhaps unreasonably so, given that many of the big viral hits come out of nowhere. However, advertisers are becoming comfortable with a new kind of inventory — made-for-the-web content with high production values — and also with so-called professional content that is made for a lower budget so as to fit in better online.

But should advertisers accept UGC, it would open the floodgates for online inventory, which would surely come at a lower price. This is especially relevant for YouTube, which dominates the U.S. audience but only sells ads when it has a revenue-sharing relationship with the video’s creator, partly as a safeguard against profiting from unauthorized uploads. That means YouTube only makes money on an estimated 4 percent of its total videos. The site has recently been trying to milk that segment for more money by offering content owners the option to monetize copies of their shows and movies caught in YouTube’s copyright filter, and automatically playing post-roll video ads after partner videos end.

On the whole, video ads are still looking like a good market. But just like everybody else, online content providers would be well-advised to keep an eye on their balance sheets.

This article also appeared on Businessweek.com.

With all the hype and excitement surrounding the release of Google Chrome yesterday, I, like so many, was eager to try the browser out for myself. What I didn’t expect was the overwhelming sense of déjà vu it would trigger in me.

I am a veteran in this industry, one whose first PC was a portable Hyperion I used when managing the sales of some graphics plotters back in the mid-80s. I went on to manage AST Computers’ Canadian operation, and from there went to Quarterdeck Corp., whose primary product was a DOS multitasking environment called DESQview, which was supported by QEMM, the most popular PC utility from about 1990 until the Windows 95 launch in August 1995. QEMM was a memory manager for PCs limited to 640K of primary DOS memory that effectively allowed them to create multiple 640K virtual machines. Simply put, DESQview allowed you to run Lotus 1-2-3, WordPerfect, cc:Mail and Harvard Graphics concurrently, taking advantage of the virtual memory architecture of the 386 and subsequent processors. Both AST memory boards, as well as their later line of computers, took advantage of DESQview and QEMM.

Reading the Google Chrome comic strip made clear the parallel to the emergence of QEMM and DESQview: All today’s browsers are effectively single tasking, in that only one tab can be actively processing, say, a JavaScript application at any given time (”inherently single threaded”), yet the tabs are interactive to the point where the misbehavior of an “application” in one tab can impact — and sometimes crash — the operation of the entire browser. Web 2.0 has brought about an array of browser-based applications and activities that require a more robust, stable, multiprocessing browser with each process assigned to its own memory space and associated data structures — which is basically how DESQview operated. Indeed, when I pointed this out during yesterday’s SquawkBox, someone labeled Google Chrome as “DESQview for the cloud.” Talk about “Back to the Future“!

But then Chrome goes beyond simply providing a true multiprocessing capability for web browsers. It eliminates memory creep/leak issues that I experience with Firefox; it has a “Task Manager” feature that allows you to view all running tasks and shut down any misbehaving tab without having to shut down the entire browser. Its JavaScript virtual machine architecture supposedly introduces speed, robustness and automatic memory management features. Its “Omnibox” feature combines the address bar, desktop/web search bar and browsing history to enhance, yet simplify, both the browsing and search experience. It addresses a range of security issues such as malware and phishing. But the real gem is that the entire development is based on freely accessible and reusable open-source code.

I installed Chrome and ran it on a quad-core desktop PC. Not only is it fast, but introduces an altogether different browsing experience than any I’ve ever had. For example today I had three windows open and when one crashed, sent a report to Microsoft and closed, the other two windows remained open and fully operative. The real test, of course, will come from using it over time, to see if it provides a smoother, more technologically transparent user experience as you add tabs and leave it running for a while.

In summary:

1. Chrome was developed from scratch as Web 2.0 has evolved to include a wide range of browser-based applications, thereby bringing new architectural and user interface demands to the browser experience.
2. But, as Alec Saunders points out, while it allows you to run web-based applications, it’s not an operating system that abstracts the hardware from the software. Leave that part to Microsoft, Apple, RIM, Nokia/Symbian and other platform vendors. Google wants the browser to act as an application platform, independent of operating system.
3. It brings out features that Google encourages other browser developers to incorporate into their respective browsers for a more stable, robust and secure browsing experience.
4. It’s beta, so there will be some bugs; and much like the Skype 4.0 beta, they’re looking for user feedback on the entire experience. The big question, as with some other Google applications, is whether it will ever come out of beta or will the key features first migrate to other browsers?
5. It’s not a threat to Microsoft, Mozilla, Apple or any other browser developer but rather a challenge to them to improve their own browsers such that all Google applications as well as any other browser-based applications can run smoothly and fully transparently to the underlying technology.
6. It has the potential to be an extension of the mobile Google applications I run on my Blackberry and Nokia N-Series phones, yet it can address more generically the issues of running any browser-based application on smartphones and other mobile devices.
7. As it matures, it has the potential to become a seed for developer innovation.

In addition to opportunities for application innovation, of course, fully transparent, smooth user experiences lead to significantly enhanced opportunities for Google ads. Nobody has ever made any significant revenue from a browser itself. Again I am reminded of my Quarterdeck days. We had a browser back in 1995 (including a feature equivalent to “Tabs”), but did not recognize it as simply a critical infrastructure component whose content and applications, not the underlying technology, would be the key to revenue generation. Been there; seen that.

Jim Courtney is an associate editor of Skype Journal.

When was the last time you bought software that came in a box, an actual CD that you put into your disc drive in order to load it onto your computer? It’s probably been a while, since most applications are now downloaded straight from the Internet. Today a growing number of companies are buying their computing capabilities that way, too. Instead of buying a rack of servers from IBM, Dell or HP, or a dedicated box hosted in a data center, businesses are buying compute power in the form of services from companies like Amazon, GoGrid and Mosso.

Such services are generally referred to as cloud computing, and the game-changing potential of those services has venture firms sitting up and taking notice. Indeed, after spending the past few years pouring money into Facebook applications and me-too social networks, venture firms are starting to invest in infrastructure again, with both hardware and software plays tied to the cloud.

“Clearly there is a renewed interest and investment in infrastructure,” says Bernard Dallé, a partner with Index Ventures. “Twenty-four months ago it was all about the consumer Internet and still a lot of money is going after that, but it has been rebalanced. Now firms see the value that EqualLogic and virtualization has generated, and it’s time to invest.”

So far this year, companies providing cloud services or building services on top of the cloud have raked in more than $70 million. That’s nothing compared to the $14.9 billion that VCs invested during the same six-month period overall, but interest is picking up.

Just this week, 10gen raised a $1.5 million first round from Union Square Ventures to create a platform for programmers to build products on top of the cloud. Appirio, a company trying to help enterprise customers link their data among clouds offered by Google, Salesforce and Amazon raised $5.6 million from Sequoia. And earlier this month, EngineYard raised $15 million from New Enterprise Associates, Amazon and Benchmark Capital to build out a development platform for programs built using Ruby on Rails.

These companies join a growing ecosystem of startups trying to create utility and business models built on top of thousands of servers. If you peel back the fog surrounding cloud computing there are several layers of services. It all starts with a virtualized server running a hypervisor. Between the hypervisor and the operating system — such as Linux or Windows — sits a class of service providers, among them Elastra and Enomaly. They provide tools and services that help an IT manger build out, monitor and manage the virtual hardware inside the cloud.

On top of those are development platforms that can be tailored to a specific cloud, such as Amazon’s, or tied to a programming language, such as Ruby on Rails. Startups here include Bungee Labs, EngineYard and Coghead. Once developers have their programs built on the cloud, they need to monitor and tweak them using tools from the likes of RightScale and Hyperic. With the exception of Enomaly and Coghead, all of these startups have scored venture funding this year.

Coghead raised $8 million last year, and Reuven Cohen, co-founder and CEO of Enomaly, says he’s fielding about 40 calls a week from venture firms that want to invest in his profitable, boot-strapped company. “I’m not in any desperate need to raise funding to keep the business afloat, but we could grow substantially faster,” Cohen says. “We are open to it and from what I can see, there won’t be a better time for valuations.”

Valuations might be on the rise, but VCs are still focused on capital efficiency. For example Sunil Dhaliwal, a general partner with Battery Ventures, says he’s not interested in investing in any cloud provider that wants to build out thousands of servers as there are plenty of companies — among them Google, Amazon and Rackspace — doing that already. In fact, he’s approaching the entire cloud space with caution.

“We’re so early and there’s still plenty of money to be lost — and I underline lost here — and plenty to be made,” Dhaliwal says. “I think there is going to be a lot of trial and error. People are defining and building solutions without people knowing how they really want to consume them.”

He believes the big opportunities will lie with firms that can help corporate customers connect their existing IT networks to the cloud, as well as with those that provide computing as a service to small and medium businesses that don’t want to manage their own IT networks. One way or another, the move to computing delivered as a service is a huge change in the way businesses and even consumers will consume information technology. As far as venture dollars floating amongst the clouds, this is only the beginning.

This was originally published on BusinessWeek.com.

Updated at the bottom: We have short memories in Silicon Valley, which is both a blessing and a curse. We forget the bad times as quickly as we forget the good times.

At the turn of the century, everything went to hell with the dot-com bust. Then the pendulum started to swing the other way; the pessimism that once reigned supreme was being replaced by wild-eyed optimism. Now Silicon Valley is in for a long-overdue reality check, one that should worry one and all. Why? Because the news coming out of advertising-focused companies is not good.

Yesterday ValueClick, a display advertising network, said it now expects its second-quarter revenues to range from $162 million to $164 million, lower than the previously forecasted $170 million. The company also cut its full-year 2008 sales guidance by about 10 percent, to between $655 million and $675 million. It blamed weakness in its display and comparison advertising business, and flatness even in its lead-generation business.

Time Warner’s Platform-A advertising division isn’t doing so well either, according to some of my sources. The company is instituting wide-scale belt-tightening measures, including freezing travel budgets. Pali Capital in a blog post today forecast, “AOL’s display advertising revenues down about 8% in Q2 (Q1 ‘08 was down about 10% organically), with the back-half down mid-single digits.”

Microsoft, in its fourth-quarter 2008 earnings call today, also admitted that online advertising was tough. “The one proviso to that is in the online advertising space…it was weak in the fourth quarter. There is a direct impact and we’re not immune in the online space, ” Microsoft CFO Chris Liddel said in a conference call with analysts. “The online advertising area is part of the business that we think is most challenging…the online advertising area is very difficult at the moment.”

And if that wasn’t enough, Google just announced spectacular growth in its second-quarter revenues — about 39 percent over the same period lat year — but fell short of Wall Street’s profit expectations. Between The Lines blog notes that Google CEO Eric Schmidt, in his company’s conference call with investors, said they would survive the downturn because there will be a flight to quality, and that they will provide a better return on investment. Maybe! Larry Dignan hit the nail on the head when he wrote:

“Color me skeptical. Anyone that lived through the dot-com bust has heard these lines before and no company is immune if there’s a recession.”

Like him, the skeptical me went straight to the traffic acquisition costs (TAC), which is where I think the real story lies. If you look at the image below you’ll see that Google’s traffic acquisition costs have declined rapidly while its revenues have ballooned. TAC in general and AdSense specifically are like a black box – no one quite knows how much Google gives out. Sometimes it feels like Google can use this “black box” to come up with pretty much any numbers it wants to.

We’ll get a better sense of the overall health of the market when Yahoo reports its latest numbers, but the way I see it, things are sort of troubling. We wrote about this nagging problem back in May. I think that as we go forward things are only going to get worse — and even Silicon Valley can’t ignore what’s been going on in the overall economy.

The housing crisis is being replaced by a much scarier problem: the personal credit crunch. In a recent report, American Express noted that it has started to see a sharp increase in late card payments. Now folks, this is American Express, whose customers skew towards the affluent, especially compared to those of its competitors. The company has boosted loss provisions for its U.S. card business, profits have declined, and defaults are up.

Will these problems escalate? Probably. Consumers struggling with the housing crisis and rising fuel costs — and thus higher basic living expenses — will be forced to cut back on other spending, which will lead to slower sales and in turn, less money for advertising.

We know the housing and financial sector-related ads have already declined drastically, now we’re going to start to see other sectors cut back on advertising, too — and that is going to have a negative impact on everyone from large social networks to ad networks to Yahoo and Google to small startups, including weblogs like ours. I guess Provigil sales are going to take a nosedive in the Valley as we stay up all night worrying about everything.

Update: And there’s more bad news today. The Wall Street Journal reports that General Motors is going to sharply cut back on advertising. GM is one of the big spenders in U.S. — last year the company spent about 32 percent of its $2.3 billion dollar ad budget on newspapers and 11 percent on television networks — but it looks like those expenditures are going to get hacked. It’s not clear from the report how this move will impact Internet advertising.

Photo courtesy of ZDNet

Dietrich Bonhoeffer, a German writer, once noted that “if you get on the wrong train, running down the aisle in the opposite direction really doesn’t help.” HBO series The Wire co-creator Edward Burns used that quote to describe the drug culture, bankruptcy of the political establishment and eventual fall of some of the great American cities in an interview with Reason magazine. You might as well use the same words to describe Yahoo!

Over past few months, Yahoo’s destiny has become fodder for headlines and cheap shots including some by myself. What hasn’t really been discussed is the systematic rot that has set into the once proud company. What hasn’t been discussed is that the company isn’t really facing up to the fact that its layers of management have resulted in a state of masterful inactivity, masked perhaps as a culture of consensus. This starts at the top - from the company’s board and senior management down to VP level where people are prone to organizing and attending twenty meetings before deciding the fate of a project.

Some senior managers including the ones who are deserting the company are skillful players in this game of hiding ennui behind grandiose plans and a great future that never happens. Others who have been wishing upon a change had realized the hard way about the futility of it all. Look at some of the public statements by those who have left recently and you will realize that the rot is very deep seated in this company. In past few weeks that has emerged as the single issue many Yahoo employees have discussed with me.

Instead of addressing these issues - Yahoo is finding itself releasing memos to the media, writing letters and announcing yet another reorganization. They should have read the writing on the wall when the vice president exodus began two years ago. But instead, the company played executive version of musical chairs. Sort of how Rome’s rulers were busy reading tarot cards when the empire was collapsing.

Earlier today, Kara Swisher broke the news that Zimbra co-founder Scott Dietzen will become the new Senior VP of communications and community properties. Dietzen is a very capable executive, smart, adroit and understated. He is the right man of the job, and can crack some heads if needed be. But can he succeed in an environment that rewards medocrity. Can he bring about change, or will he leave frustrated (but rich) like some of the other founders such as Stewart Butterfield, co-founder of Flickr who sold their companies to Yahoo.

As part of changes announced today:

Yahoo! is making changes to its technology organization, led by Chief Technology Officer Ari Balogh, to better position the company to execute on its strategic priorities. Principal changes are developing a world-class cloud computing and storage infrastructure; rewiring Yahoo! onto common platforms; and creating a stronger partnership between product and engineering teams.
In order to expand its cloud computing capabilities, the Company will form a Cloud Computing & Data Infrastructure Group, charged with developing a computing infrastructure that balances scalability with cost effectiveness. It will move all consumer-facing platform teams to the Audience Technology Group, led by Venkat Panchapakesan. In addition, it is putting new leadership in place behind Yahoo!’s search group, naming Prabhakar Raghavan to direct search strategy and Tuoc Luong as the interim leader of the search product team. Both Prabhakar and Tuoc will also continue in their roles as the leaders of Yahoo! Research and Search Engineering respectively. In addition, David Ku will lead the Advertising Technology Group within Search.

New CTO Ari Balogh is jazzed about cloud computing and storage. He should be - Yahoo is a big champion of Hadoop, an open source effort that can be immensely disruptive in years to come. Despite that, I don’t buy the spin Yahoo’s PR department put out today. At our Structure 08 event yesterday, Yahoo had very little representation.

Amazon.com’s U.S. retail site became unavailable around 10:25 AM PST, and now appears to be back up. Amazon’s not naming names — all that director of strategic communications Craig Berman would say was that: “Amazon’s systems are very complex and on rare occasions, despite our best efforts, they may experience problems.”

Berman did confirm, however, that neither Amazon Web Services nor international sites were affected.

So what happened? Let’s look at the facts.

• Traffic to https://www.amazon.com was getting there. So DNS was configured properly to send traffic to Amazon’s data centers. Global server load balancing (GSLB) is the first line of defense when a data center goes off the air. Either GSLB didn’t detect that the main data center was down, or there was no spare to which it could send visitors.
• When traffic hit the data center, the load balancer wasn’t redirecting it. This is the second line of defense, designed to catch visitors who weren’t sent elsewhere by GSLB.
• If some of the servers died, the load balancer should have taken them out of rotation. Either it didn’t detect the error, or all the servers were out. This is the third line of defense.
• Most companies have an “apology page” that the load balancer serves when all servers are down. This is the fourth line of defense, and it didn’t work either.
• The HTTP 1.1 message users saw shows something that “speaks” HTTP was on the other end. So this probably wasn’t a router or firewall.

This sort of thing is usually caused by a misconfigured HTTP service on the load balancer. But that would happen late at night, be detected, and rolled back. It could also happen from a content delivery network (CDN) not retrieving the home page properly.

So my money’s on an AFE or CDN problem. But as Berman notes, Amazon’s store is a complex application and much of their infrastructure doesn’t follow “normal” data center design. So only time (and hopefully Amazon) will tell.

Site operators can learn from this: Look into GSLB, and make sure you have geographically distributed data centers (possibly through AWS Availability Zones.) It’s another sign we can’t take operations for granted, even in the cloud.

When it comes to the operations of Internet businesses, 99.999 percent uptime, or five nines, is one of the critical metrics of reliability. Yet that metric — essentially the ability to say that users will reliably be able to reach a business’ web site 99.999 percent of the time — still eludes nearly every of them.

99.999 percent uptime for a web site equates to just 5.26 minutes of downtime per year. That is the total amount of downtime — planned or unplanned — as seen by users. According to a report last month by Pingdom, only three of the top 20 most popular web sites achieved this metric in 2007: Yahoo, AOL and Comcast’s site for high-speed Internet customers (eBay’s site was close, with only six minutes of downtime in 2007). Another report by Pingdom shows that most of the popular social networks did not achieve even three nines (or less than 525.6 minutes of downtime) in the first four months of 2008. Moreover, none achieved anywhere close to 99.999 percent uptime.

When I ask people about web sites that are down more than they would like, the most common response I hear is that the web site is a nice-to-have feature of their lives and not a critical element that they absolutely rely upon. If one search engine is down, you can use another. If a social network is down, then there are other ways of reaching your friends.

In other words, web sites are seen as unreliable, a perception that drives down user adoption, increases churn, reduces page views, limits ad impressions and increases abandoned shopping carts. I believe the converse to also be true — highly reliable web sites have high user loyalty and return rates, lower churn, more page views and advertising revenues and more sales.

While some may dispute the accuracy of Pingdom’s measurements, clearly being unreliable is not a trait that any person or web site strives to achieve. An unreliable person in life is not someone you invite home to meet your parents and not someone you want working on your critical business project. When interviewing candidates for jobs at my portfolio companies I have never heard anyone refer to their redeeming quality of being unreliable and absent more than expected — so why is that same quality so visible on web sites across the Internet?

It’s always better to be known as the reliable person in, any situation, whether for personal or business reasons. I wish that the Internet web sites that I use frequently in both aspects of my life had the same redeeming quality. Is 99.999 percent uptime too much to ask?

It is a sad commentary on the state of affairs in Silicon Valley when Carl Icahn, a known corporate raider from the go-go 80s, is used as a lightening rod to bring two of technology’s major players, Yahoo and Microsoft, to the table to strike some sort of a deal. And there seems to be some sort of a transaction in the works. And that’s not necessarily a good idea.

Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties. There of course can be no assurance that any transaction will result from these discussions.

As you might remember, Microsoft made a $31 a share bid for Yahoo, got spurned, and then raised the bid to $34 a share, only to see it rejected it again. At that point Microsoft walked. Many Yahoo shareholders weren’t cracking smiles when that happened, prompting Icahn to step in with his idea of a board. Ichan’s move to put a new board in isn’t all that bad: Yahoo needs to clean house, as I had said a long time before holier-than-thou Carl showed up.

The New York Times reports that there were talks that “center on a partnership or joint venture for search-related advertising” as the two companies find a way to beat Google. Kara Swisher says that Microsoft “wants most of all to grab Yahoo’s search ad business to become a credible No. 2 in the important sector.”

This is Microsoft, once proud company that would have gone to any length to win, and it is going to settle for second spot. What does it really say about Microsoft? Never mind, it is a rhetorical question.

The combination of Yahoo and Microsoft in the search business is not going to be a winning combination. Essentially Microsoft is in the market to buy eyeballs – ones that have been declining in numbers. Both Yahoo and Microsoft continue to lose market share to Google in the search market.

Just take a look at the April 2008 data for US searches from Hitwise. According to comScore data Google now outranks both Yahoo and Microsoft. So building a search-advertising business makes no sense. (Read Kevin Johnson, Microsoft’s President of Platforms & Services Division memo about Microsoft’s online effort.)

For Yahoo it might not be a bad idea, since the company doesn’t solely rely on search/search-based advertising to make money. Instead, a substantial chunk of its revenues come from (what I like to call) produced pages, email and other content related efforts. If Microsoft wants to pay up for that, that I guess is palatable defeat for Yang & Co.