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Searching for profit in online TV and video

Here is a paradox: Television is still the most powerful advertising medium, so why has it struggled to generate significant revenue online and on mobile? Even the mighty Google does not find it easy to break even with YouTube while Britain’s biggest commercial broadcaster ITV, with juggernaut hits such as X Factor, has seen the number of monthly video views on its website fall 6% this year.

The answer has to be that online video hasn’t yet had the breakthrough moment that mobile enjoyed with Apple iPhone, when the consumer experience finally matched the hype.

Suranga Chandratillake, boss of video search engine blinkx, which makes its money through advertising, is betting that tipping point for online video will occur when our TV sets become fully internet enabled. Ad agencies’ thinking is beginning to change, he says, as they realise the breakthrough, when consumers embrace online TV, could finally happen soon — and fast.

As a British chief executive who is based in San Francisco but whose company is listed on AIM in London, Chandratillake has a unique perspective.

Unlike some who complain that the UK lags behind Silicon Valley, he is surprisingly upbeat. “London is an increasingly interesting place to be,” he says, pointing to innovations such as The Times internet paywall and YouView, the collaboration between the BBC, BT, ITV, Channel 4 and others, which will see consumers have TV set-top boxes linked into the web next year. “The UK is seen as a market that is very similar to the US, where companies are worried about their ultimate fortunes, and you can conduct a true test here.”

Chandratillake’s point is that the UK online market is large and mature enough to see whether a new product or strategy can work. In the case of blinkx, he says: “We have discovered that the UK and the US are the only two markets where you can make significant money in video advertising at the moment.” France, Germany and Italy are “just not that advanced yet” because broadband penetration is lower and consumers are less clued-up.

This two-speed approach to digital extends to the ad industry itself. “Ad agencies in the UK are much more aggressively adopting video advertising than continental Europe,” he says. “A lot of companies, especially European companies, tend to do their buying for video advertising through London.”

blinkx itself makes money in two ways from advertising. About 30% of revenue comes from consumers visiting its own website and the other 70% from blinkx using its search technology to power video on sites including Ask Jeeves, AOL and BBC Democracy Live. blinkx also offers users access to content from, YouTube and BBC iPlayer (Blinkx takes a share of ad revenue or, in the case of the BBC, a fee). While technology matters, he says: “We are a media business. Our sales people are media people.”

Chandratillake’s company, which he founded in 2004 as a spin-off from technology giant Autonomy and floated in 2007, has just reported a maiden profit of $2 million (£1.3 million) in the last six months. Annual revenues are on course to double to $60 million and the shares have quadrupled since May, making it worth about £250 million. Turnover should hit $90 million next year.

Chandratillake believes the opportunities will only grow because consumers will want search technology to find video clips and programmes easily. He claims blinkx’s “speech recognition” technique in video clips means it is more accurate than rivals, which rely on text next to the video on a web page.

But the blinkx boss is also convinced that traditional TV will remain a force to be reckoned with. Clearly, a top-rated show on commercial TV such as X Factor can command an audience of 10 million-plus in a single go that no website can match. While the total television ad market generates upwards of £3.25?billion a year in the UK, online video is worth under 5%. Still, even though ad rates for online video remain low compared to mainstream TV, he says, they are not far off a basic cable channel.

Digital evangelists like to dismiss traditional TV spots as inefficient because of their indiscriminate nature and claim that online advertising is a far more targeted direct marketing tool. “What it doesn’t address is that slightly Voodoo world about creating demand,” he says. “How do you persuade someone they really should spend $200 on a nice pair of shoes? TV, and to an extent newspapers, are still key for demand-creation marketing.” That helps to explain why ITV’s traditional ad revenue has bounced back 16% this year.

Yet it is clear that TV and online are going to converge sooner rather than later — particularly with YouView, which Chandratillake thinks will help Britain steal a march on America, where there are several rivals internet set-top box ideas. The targeting opportunities are immense for advertisers when they know about each viewer.

Mobile is the other key platform which is going to converge with TV and online. Chandratillake notes that it is still early days as it was only recently that the combination of the smartphone and wi-fi access has made mobile viewing a decent experience.

Fascinating trends are emerging — for example, a surprising amount of viewing in the home in the evenings is now done by smartphone. “If your wife is an EastEnders fan, she’ll happily put up with little annoyances like a little buffering [when the video is momentarily delayed] because it’s the content that people are going after.”

Chandratillake believes that points to a bigger issue: “If you are good at creating or collating content, you’re creating a lot of value.” Or put it another way, where the eyeballs go, the advertisers will follow.