Timberlake will play a major role in developing the strategy and creative direction of Myspace, according to Specific Media. Both parties plan to unveil details of Myspace’s new direction later this summer.

“There’s a need for a place where fans can go to interact with their favorite entertainers, listen to music, watch videos, share and discover cool stuff and just connect. Myspace has the potential to be that place,” Timberlake said in a statement from Specific Media.

Timberlake doesn’t have much experience on the business side of social sites beyond his portrayal of Napster founder Sean Parker in the film The Social Network. But he is a veteran of the music industry and an investor in startups Stipple and Miso.

Online advertising firm Specific Media acquired Myspace from News Corp. for $35 million in a deal announced earlier today. Irvine, California-based Specific Media was founded in 1999 by brothers Tim, Chris and Russell Vanderhook and operates offices all over the world.

The $35 million price tag might seem too high for a site rumored just months ago to be shutting down. Using the news of Myspace’s sale to leverage media attention about the partnership with Timberlake was a smart move on Specific Media’s part.

The Timberlake partnership underscores that Specific Media will focus on Myspace’s music features. VentureBeat has yet to hear back from the company regarding whether music licensing deals made under previous owner News Corp. would carry over. Considering that News Corp. is retaining a small stake in the social site, it’s likely that prior licensing deals will remain in place.

Justin Timberlake pictured above in a popular Saturday Night Live episode.

However at a measley $35 million Newscorp stands to take a massive loss after it bought Myspace from its previous owners for $580 million.

I suspect Mark Zuckerberg, co-founder of Facebook has a plan to counter the next Facebook ;something MS failed to do and is paying dearly for it.

dk

The acquisition by the Irvine-based advertising network is expected to be completed Wednesday.

News Corp., which acquired Myspace in 2005 for $580 million as part of a bold digital strategy, plans to retain a small stake in company. The media conglomerate had hoped to fetch as much as $100 million for the site, which has been steadily shedding users and advertising revenue over the last several years.

The sale marks a significant fall from grace for Myspace, which once commanded a billion-dollar valuation and was the premiere online hangout for musicians, actors and their fans to interact. But the site peaked in popularity in October of 2008 with 76.3 million users. The number of monthly visitors has since dwindled to 35 million in May, according to ComScore Digital Analytix.

What do you think anyone would even use the site for? How promising are child molesters as a business’s target audience? What do you advertise that doesn’t have to do with music: a box, candy, a ruler and piece of string?

Read More: http://latimesblogs.latimes.com/entertainmentnewsbuzz/2011/06/myspace-sold-to-orange-county-based-ad-network.html

The deal will pay out a mix of cash and stock to Specific Media, an online advertising company, with News Corp. retaining about 5 percent of Myspace, according to the report.

Significant cuts to Myspace’s 400-employee staff are expected to follow the sale, according to sources within the company. CEO Mike Jones and other top-level staff will likely remain on for an interim period, the report states.

News Corp. purchased the California-based social network in July 2005 for $580 million. Myspace’s revenue peaked at over $900 million in 2008.

Specific Media outbid other potential Myspace buyers such as private equity firm Golden Gate Capital. The company is expected to focus on Myspace’s music features.

“Myspace is a recognized leader that has pioneered the social media space. The company has transformed the ways in which audiences discover, consume and engage with content online,” said Specific Media CEO Tim Vanderhook in a press release. “There are many synergies between our companies as we are both focused on enhancing digital media experiences by fueling connections with relevance and interest.”

Irvine, California-based Specific Media was founded in 1999 by brothers Tim, Chris and Russell Vanderhook. The company operates many offices around the world.

What happens when social networking platforms fail to connect with their demographic? We learned the answer to that question today as MySpace sold (allegedly) to advertising company Specific Media for $35 million. For those of you keeping score at home that is $545 million less than the $580 million News Corp originally paid for ownership of the MySpace brand.

The deal includes a halving of MySpace’s staff of 400, as well as other cost cuts. It’s likely MySpace CEO Mike Jones and other top staff will remain only for an interim period.

Reportedly, it seems that present owner News Corp will retain between 5-10% share of the company, though the deal has not yet been finalized. To this point there have been no reports regarding what Specific Media plans to do with the MySpace site, brand, or the company although many believe they will simply use it as means to furthering their advertising efforts.

Irvine, California-based Specific Media has been in business since 2006 and claims itself as the 4th largest ad network presently in business. The company has raised $110 million in funding over the years, with the last round coming in November of 2007.

Specific launched its video advertising product earlier this month after an acquisition of BBE in October 2010. Since that time, the company has been somewhat quiet on any consumer-facing news, but this will surely change that fact.

We’ll keep an eye on the acquisition for any surprises, but I don’t expect them at this point. The $35 million purchase is simply a property grab, where Specific Media will be able to own an entire network for its advertising products.

To be clear, the data on Infochimps does not personally identify users. “The data MySpace sells through Infochimps is intended to help someone track certain types of behavior at a bird’s eye level, such as how many users are in certain zip codes and how many times a certain word is mentioned on the service. The records in these data sets are completely anonymous,” a representative wrote in an email.

But the acquisition today by Specific Media is quite different. They bought the profiles lock, stock and barrel. Now they will use them for their core business, ad targeting. Considering the going prices on Infochimps, Specific just got a great bargin, picking up between 50-65 million user profiles for about fifty cents a pop.

Like Facebook, Myspace holds on to data from inactive acounts. So even users who left long ago may now become an open book for Specific Media’s clients. The company recently won a court case brought against them for the use of flash cookies. These are the so called “super cookies” or “Lord Voldermort cookies” that the WSJ is always making a big deal about in their hand wringing What They Know series.

The truth is that this is a completely new situation. Never before has a social network of this size gone on the chopping block. Are personal details about medical history, sexuality and political orientation fair game for Specific to use in as they help clients, which range from hotels to auto dealers. What about that picture Kanye West sent of his dick?

According to it’s blog, “The company is an active and longstanding member of the Network Advertising Initiative (NAI), Interactive Advertising Bureau (IAB), and Digital Advertising Alliance (DAA), coalitions committed to building consumer awareness and reinforcing responsible business and data management practices in the industry. Additionally, the company was the first to implement the Advertising Option Icon across its entire network, a proactive step that empowers consumers with a better understanding of and more control over the ads that they see.”

Will there be a new icon that let’s people know when the pre-roll ad in their video was sent to them based on their old Myspace profile they forget to get rid of? According to TechCrunch Myspace has already laid off 150 of its 400 employees and given another 150 a few weeks notice. It’s possible they are simply trimming own to skeleton staff before they try to initiate a turnaround. But its more likely Specific Media bought Myspace for its trove of personal data.

We have reached out to specific and their PR firm for comment and will update with any reply.

From what I’m hearing it’s been a rocky morning at the social network, which was bought by Newscorp in 2005 for $580 million, as job cuts went deeper than expected. The most significant departure? CEO Mike Jones will be leaving the company and is currently on a two month transition plan.

Myspace has steadily lost influence and value as Facebook’s “one graph to rule them all” campaign grew to dominate the space. On a more hopeful note, I’m also hearing that several of the laid off employees have already received calls from recruiters representing a mix of Silicon Valley and Southern California companies.

From: Mike Jones
Sent: Wednesday, June 29, 2011 11:26 AM
To: Myspace All
Subject: IMPORTANT COMPANY NEWS
Importance: High

Myspacers,

Today, we are announcing that Myspace will be acquired by Specific Media, one of the world’s leading online media and advertising platforms. Over the next few days you will be hearing from the team at Specific, including their CEO, Tim Vanderhook, regarding their exciting plans for Myspace and how it fits in with the overall vision of their company.

In conjunction with the deal, we are conducting a series of restructuring initiatives, including a significant reduction in our workforce.  I will assist Specific with the transition over the next two months before departing my role as Myspace CEO.

I wanted to take a minute to thank you all for the incredible experience it has been to lead this company and to work closely with all of you over the past several years. While I regret we won’t be working together at Myspace any longer, I am very proud of the work we have done here and believe we have performed with excellence – even under extremely difficult circumstances.

My time here at Myspace represents the most engaging and challenging time of my professional career. I have found our team to be comprised of the best people I have come across in our industry.

You can read the press release below.  Once again, thank you for all of your hard work and dedication.

Thanks,

-M

SPECIFIC MEDIA ACQUIRES MYSPACE FROM NEWS CORPORATION

Los Angeles, Calif. — June 29, 2011 – Specific Media, a digital media company, today announced it has acquired Myspace from News Corporation. As part of the agreement, News Corporation will take a minority equity stake in Specific Media. Additional terms of the agreement are confidential and will not be disclosed.

“Myspace is a recognized leader that has pioneered the social media space. The company has transformed the ways in which audiences discover, consume and engage with content online,” said Tim Vanderhook, Specific Media CEO. “There are many synergies between our companies as we are both focused on enhancing digital media experiences by fueling connections with relevance and interest. We look forward to combining our platforms to drive the next generation of digital innovation.”

Specific Media is an innovative global interactive media company that enables advertisers to connect with consumers in meaningful, impactful and relevant ways. Founded in 1999 by brothers Tim, Chris and Russell Vanderhook, Specific Media is currently headquartered in Irvine, CA and operates offices around the world.

About Myspace

Myspace, Inc. is a leading social entertainment destination powered by the passions of fans. Aimed at a Gen Y audience, Myspace drives social interaction by providing a highly personalized experience around entertainment and connecting people to the music, celebrities, TV, movies, and games that they love. These entertainment experiences are available through multiple platforms, including online, mobile devices, and offline events.

Myspace is also the home of Myspace Music, which offers an ever-growing catalogue of freely streamable audio and video content to users and provides major, independent, and unsigned artists alike with the tools to reach new audiences. The company is headquartered in Beverly Hills, CA.  http://www.myspace.com/pressroom/

About Specific Media

Specific Media is a digital media company driving viewership for content owners, engagement for brands and relevance for consumers. With capabilities spanning original programming, cross-channel distribution and addressable advertising, the company connects audiences, content and brands, adding meaning to each touch-point. As people discover new ways to consume content, Specific Media creates impactful media experiences no matter where they are.

www.specificmedia.com.

[crunchbase url="http://www.crunchbase.com/company/myspace" name="MySpace"]

AllThingsD is reporting that News Corp has agreed to sell MySpace for a tag of $35 million, well below the $100 million price tag they were asking for.

According to the site, News Corp will keep up to a 10% stake in the struggling social network. This is in a vain attempt to try and recoup the $580 million News Corp spent when they purchased MySpace.

They needed to push this sale through so they could have it off their books by the end of their fiscal year, which ends tomorrow. Specific Media, an online advertising network, is the new owner. I guess we can now call it AdSpace.

Two companies are reportedly leading the bidding to buy social media website Myspace. 

A source close to the matter told “The Wall Street Journal” any deal to sell the company will include a provision to cut more than half of the website’s 500-person staff.  The leading bidders are identified as ad firm Specific Media and private equity company Golden Gate Capital.  They are expected to pay substantially less than the 100-million dollars owner News Corp. wanted to get in the sale.  News Corp. paid 580-million dollars for Myspace in a 2005 acquisition.  The “Journal” reports that other groups are also considering bidding for Myspace.  Announcement of a deal could come as soon as today.

News Corp. is apparently in a rush to complete an acquisition deal by Thursday — its fiscal year-end. The media giant probably doesn’t want MySpace to blemish its 2012 financial records, especially given the lackluster revenue predictions.

Backing up earlier information, the report indicates that significant cuts in staff and operating costs will be made to Myspace depending on who the buyer is. News Corp. might also retain a small minority stake in the company, according to the report.

Specific Media and Golden Gate Capital are at the top of the list of companies that could acquire Myspace. Both companies would focus Myspace on music, sources told All Things Digital. However, it’s unclear if prior music licenses will transfer with the sale.

An investment group that includes Myspace co-founder Tom Anderson, another separate investment group that includes Myspace co-founder Chris DeWolfe and Criterion Capital Partners have also been rumored as showing interest in purchasing the company, according to the report.

News Corp. purchased the California-based social network in July 2005 for $580 million. The company’s revenue peaked at over $900 million in 2008.

Dispatches from the stealth marketing front:

U.S. Senate Goes Public on Privacy

Well, one U.S. Senator, anyway.

From Adweek:

Senate’s Privacy Hearing Draws Many Spectators, Few Lawmakers

Session turns into one-man show led by Sen. John Kerry

There was a packed house for the hearing that the Senate Commerce Committee held about online privacy Wednesday. At least, it was packed with spectators. Most senators, on the other hand, appeared not to care. Though 25 senators are members of the committee, only three showed, and by the end, only Sen. John Kerry, D-Mass., was left. Yet, make no mistake, it will be the Senate that leads online privacy legislation.

Maybe. Then again, it might be not legislation, but litigation that increases online privacy.

Flash: Cookies Under Siege in Court

The Cookies ‘n’ Milk Data crowd are up in legal arms over lawsuits claiming that they violate consumers’ privacy with all their Web tracking devices.

From MediaPost:

The ad network Specific Media says that a lawsuit accusing it of using Flash cookies to circumvent consumers’ privacy settings is nothing more than an attempt by “opportunistic plaintiffs’ lawyers to shake down a law-abiding company.”

“The court should not countenance such a lawsuit and should dismiss the complaint,” the company says in a motion asking the U.S. District Court in the Central District of California to dismiss a potential class-action privacy lawsuit brought last year by a group of consumers.

Specific Media says it doesn’t use Flash cookies, and even if it did, “the lawsuit should be dismissed because the consumers did not assert in the complaint that they were harmed economically by the alleged privacy violation.”

Google and Facebook, also the targets of privacy-violation lawsuits, are essentially using the same no harm-no foul defense. But the MediaPost piece says the plaintiffs in the Specific Media suit have countered that the information it gathered is intrinsically valuable, and “point to relatively new businesses — like personal.com and the UK site i-allow.com — that say they offer ways for users to receive compensation for their data.”

More legal wrangling to come, no doubt.

Can Ethics and Stealth Marketing Just Get Along?

The Institute for Advertising Ethics (yeah – who knew?) has released a set of guidelines for marketing disclosure. From Ad Age:

The advertising industry has a new ethics code, as the Institute for Advertising Ethics today released a set of eight principles on issues ranging from the blurry line between advertising, editorial and entertainment content to behavioral targeting and disclosure of compensation for social-media endorsements.

Why ethics all of a sudden? Maybe because of this:

Among the new guidelines (“these are not set in stone,” an Institute exec says) are:

• Advertisers should clearly distinguish advertising, public relations and corporate communications from news and editorial content and entertainment, both online and offline.
• Advertisers should clearly disclose all material conditions, such as payment or receipt of a free product, affecting endorsements in social and traditional channels, as well as the identity of endorsers, all in the interest of full disclosure and transparency.

Yeah, wake me when they enforce the kinds of restrictions the Brits have on product placement. That’s a set of principles with teeth.

With advertising a major theme at last week’s Mobile World Congress in Barcelona could this latest Tremor news set off the next round of capabilities expansion and provider consolidation amongst ad networks?

With online video projected to grow 55% annually through 2014, making it the fastest growing online ad format worldwide, it’s easy to see why there’s interest from both traditional display and pure play video ad networks in acquiring online video market share. Looking at recent industry trends and projections, mobile video might be poised to follow this same type of growth trajectory, creating a similar opportunity for ad networks looking to provide cross-platform digital ad solutions to agencies and advertisers.

• Devices: Worldwide smartphone shipments passed PCs in total volume for the first time in the 4^th quarter of last year while tablet shipments, led by Apple’s iPad, are expected to reach nearly 56 million this year and 172 million by 2014.
• Network Traffic: In Cisco’s Visual Networking Index Forecast, updated this month, the company predicted that, by 2015, two-thirds of all global mobile data traffic would be video.
• Advertising: Mobile ad spending is projected to exceed $18 billion worldwide by 2015, representing over 15% of digital advertising’s spend. While in the U.S. video is expected to continue growing faster than any other mobile segment through 2014.

Together, these data points confirm that the PC-based era of the web has been officially replaced by the mobile web, which consumers are already taking advantage of through the proliferation of mobile device types. According to The Nielsen Company, Americans, led by teens and young adults, watch an average of 3 ½ hours of video a month on their mobile devices. To understand just how quickly video consumption habits are evolving look at YouTube’s announcement last month that it has reached 200 million video views per day on mobile devices- an increase of 300% over the beginning of 2010.

Media companies and marketers are looking at ways to quantify this audience in aggregate in an effort to bring advertising economics to parity across all “three screens” (television, web and mobile). This represents a big opportunity for ad networks willing to put forth the technical and execution effort to target mobile audiences fragmented by app-type (mobile web versus native apps), device (smartphones versus tablets), operating system (Android, BlackBerry, iOS, etc.) and ad unit interactivity (passive versus touch-screen).

Because ad guidelines and standards for the mobile web are still maturing in comparison to display and online video, ad networks interested in entering the mobile video space would benefit from acquiring video delivery expertise and an embedded distribution network. Any M&A activity would involve one of these three types of acquisition strategies:

1. Buy capabilities and market share: This tact was used by Specific Media to enter the online video market by acquiring a top 10 video ad provider and instantly gaining reach. If leading online video advertising networks BrightRoll and YuMe, which launched their respective mobile advertising solutions last fall, don’t see adoption of their offerings, they might be forced to take this route in order to match Tremor Media’s cross-platform scale in video. From the display advertising perspective, only Microsoft and Yahoo as well as the largest ad networks will be able to afford this type of acquisition due to lofty valuations in mobile and video.
2. Buy capabilities, leverage market share in current business: Undertone took this route by leveraging its own scale on the display advertising side with its video technology purchase to become a top 10 online video ad provider of its own within a couple of months of the acquisition. This is the most capital efficient way for any ad networks to enter the mobile video business, though acting quickly will be the key to successfully executing this strategy due to the limited number of acquisition options and venture capital being invested in the segment.
3. Extend capabilities and market share: As for Tremor Media, already a leader in the online video advertising space, its deal allowed the company to add product expertise (video overlay ads) while growing its reach and video ad volume. Millennial Media, the largest independent mobile ad network which raised $27.5 million earlier this year, and has raised $65 million overall, is the best positioned mobile ad network to take advantage of this strategy due to its profitability, exit options and capital on hand.

While Google bought its way into a dominate position in the U.S. mobile advertising market (including interactive video ad capabilities) with its purchase of AdMob last year, the growth of YouTube’s mobile website has allowed Google to become a cross-platform provider of mobile video monetization solutions. Apple on the other hand used its acquisition of AdMob competitor Quattro Wireless to build the iAd Network solely for its own mobile operating system (iOS). With two of the largest ad networks having been acquired by the two leading mobile operating platforms what merger opportunities still exist in mobile video advertising?

• JumpTap: The company added video to its suite of mobile ad formats last year in an effort to broaden its appeal to clients. JumpTap, which delivers ads across all major smartphone platforms (Android, BlackBerry and iOS) as well as the iPad, is considered the largest independent mobile ad network in the U.S. after Millennial Media. As such, the company will most likely have to wait and see what happens with Millennial (which will either go public or get acquired) before drawing interest from the likes of Microsoft, Yahoo and potentially Research in Motion (maker of BlackBerry) who have all been rumored acquirers of a mobile ad network and the only companies large enough to digest JumpTap’s $69 million in capital raised.
• Mogreet: The company provides mobile video advertising solutions through SMS and MMS mobile messaging services, allowing Mogreet to address the feature phone audience as well. Considering the limitation of their offering, especially when you consider the growth of the smartphone and tablet markets, and the $7 million invested in the company thus far, an acquisition of this company would be a stretch for a U.S.-based ad network but maybe not for a network in a large developing market such as Brazil, India, Indonesia or Russia where feature phones dominate the market.
• Rhythm NewMedia: From a pure play mobile video ad network perspective, Rhythm NewMedia has built the most envious, cross-platform network out there of the remaining independent players. The company, which recently raised $10 million, only works with premium brand advertisers and publishers across Android and iOS mobile platforms covering both smartphones and iPads. Having raised $37 million in total funding makes Rhythm a pricey acquisition for anyone not named Microsoft or Yahoo at this point though.
• Vdopia: While the company is an online video ad network with extensive operations and market share in India, it also operates iVdopia, a mobile video ad network. Its mobile offering covers both Android and iOS platforms (including iPads) as well as mobile websites. Claiming it has reached profitability, and with only $4 million raised, Vdopia would be a prudent acquisition for an online global ad network.

Beyond these mobile video ad companies there are several other start-ups that focus on providing rich media advertising solutions for smartphones, tablets and the mobile web that could provide the framework for a video offering for ad networks interested in getting into mobile video. Greystripe which focuses on rich media banner ads primarily for the iPhone, while supporting Android  and Java feature phones as well, has raised the most venture capital of the group ($18 million), followed by Medialets ($10 million) and Crisp Media (at least $5 million). Greystripe’s strength is in its ability to transcode Flash ads into HTML5 in order to support Apple’s Flash-restriction on iOS devices. Both Crisp Media and Medialets, neither of which are an ad network but instead earn revenue from serving rich media ads to mobile devices, do provide video ad solutions for both smartphones and tablets. The biggest challenge facing these companies will be potentially pricing themselves out of the M&A market if they continue to raise capital. Based on this, Crisp Media might be an ideal technology pick-up for an ad network with a strong client-base and distribution network.

With the display inventory component of mobile advertising already being automated through demand side platforms like DataXu and real-time bidding exchanges like Mobclix, mobile video might be the last digital ad segment where ad networks can extract additional margin out of the industry through ad effectiveness and audience scale. Perfecting the online and app video experience will be important beyond just mobile as internet television, the next great digital ad opportunity, will leverage these advertising frameworks for its own platform monetization. As agencies begin to provide digital services at global scale to their advertising clients, ad networks that can deliver audiences across devices and digital formats, at scale, will garner the lion’s share of ad campaign dollars coming from these agencies going forward. To accomplish this ad network’s need to boldly go where most networks haven’t gone before.

Photo credit: fdecomite/Flickr

It’s a believable concept but one that is out of sync with the way the industry is heading. Although there is a lot of hype around ad exchanges and targeting / data opportunities, within an agency, exchange trading remains a line on a schedule, albeit a complicated one. The exchange space asks many questions of agencies but that is around change and adapting, once its all settled down, it will revert to being an important channel like search and crucially will be integrated into all the other channels.

Over the last few years clients have been on a journey where in the main they have consolidated channels, first digital overall and then they have dragged search in where specialists have held on for some time. It’s not only channels but they are integrating their media agencies both within countries and between countries with more and more international pitches. Anyone in a major agency will have lived that in the last few years. So after all of this integration I think it is unlikely they will want to start farming individual channels out again, especially when it may be big news in the exchange world but within agencies, it’s just another new channel. Time and time again through research, better coordination and integration has shown better results for the advertiser so there is no reason to split out exchange trading.

There is also some realistic areas to take into account. Clients spend 80% of their budgets on offline, 60% of their digital budgets on search, the rest is split all over. So its fine for an adnetwork to go direct but they will never fill the roll of an agency. The agency roll is more than buying and is across all media channels, its events, experiential, etc etc, it’s also highly people heavy and Ad networks have been used to high margins, low headcount.

So direct is fine but will struggle in the UK marketplace, however I think with time the agencies could start to deliver an ad network experience and product within the context of their huge global corporations. Of course there is middle ground, some chameleon organisations that act as an agency or a network, but their offer only goes so far to be a real threat.

I dont think we need to start a war between agency groups and ad networks, I am sure we will all find a way, but I know what side I would want to be on.

Editor’s note: Guest author Ashkan Karbasfrooshan is the founder and CEO of video site WatchMojo. In this post he examines looks back at the online video deals of 2010 and what deals could happen in 2011. You can find his previous guest posts about online video here.

With the recent rumor that Google’s YouTube unit was looking at acquiring video content company Next New Networks, it’s clear that anything can happen in the rapidly growing online video space.  While some are shocked to see that Google may cross over and own content, the rumor does sound plausible:

• Next New Networks generates the vast majority of its views on YouTube and if the companies were under one umbrella, it would remove some of the monetization obstacles and challenges Next New Networks probably faces when trying to sell their YouTube inventory.
• YouTube, meanwhile, has massive online video street credibility but totally lacks the human sensibility required in media and content in particular to take a rising star on the site and take them to the next level.  That is Next New Networks’ business.

The combination would allow YouTube to fold in Next New Networks and use it as a talent management platform, basically, and give the video aggregation site the ability to create videos if need be.

Loaded with nearly $25M in venture financing, it’s not quite the initial public offering that some of their investors were hoping for, but let’s face it, an exit to Google is nothing to be ashamed of.

Close, but no cigar: IPO Talk Will Increase

In fact, while you can blame Sarbanes Oxley or a lack of credible initial public offering (IPO) candidates, it is likely that 2011 will come and go with very few, if any, major liquidity events in the public markets for online video startups.  As such, the most likely path to liquidity for venture capitalists (VCs) remains mergers and acquisitions (M&A).  With VCs having invested in so many online video startups and industry revenues still not matching the lofty expectations that whet VCs appetites in the first place, a lot of boards will cash out in 2011 when buyers come knocking.

Only Certainty: Dealmaking Will Continue

After many years of expected consolidation, 2010 saw a wave of acquisitions:

• AOL acquired StudioNow and 5Min (as well as TechCrunch, of course)
• Specific Media acquired Broadband Enterprises
• Undertone acquired Jambo
• VideoEgg acquired SixApart
• Tremor acquired Scanscout

Apart from Video Egg’s merger with Six Apart which was largely based on the shared VCs doing some financial engineering, with these deals, we saw examples of both vertical and horizontal integration.

The terms horizontal integration and vertical integration are used in microeconomics and strategic management, whereby:

• horizontal integration describes a strategy used by a business that seeks to sell a type of product in numerous markets. Horizontal integration occurs between two firms which are in the same industry and in the same stage of production, ex: a car manufacturer merging with another car manufacturer.

Conversely:

• vertical integration combines companies in a supply chain by a common owner. Usually each member of the supply chain produces a different product or (market-specific) service, and the products combine to satisfy a common need.

Vertical Integration

AOL’s moves were examples of vertical integration:

• StudioNow gives it a platform to hire producers to create videos for its AOL properties and myriad brands.
• 5Min gives it the opportunity to distribute its own videos and those it has licensed to more places around the Web.

These deals have given AOL an end-to-end capability in video.

Horizontal Integration

Meanwhile, we saw display banner ad networks venture into online video:

• Specific Media acquiring Broadband Enterprises and Undertone acquiring Jambo enabled giant ad networks in the display banner arena to enter the video market rapidly.
• Tremor acquiring Scanscout is plain consolidation among two competitors who probably got tired of tussling in the marketplace and eating into each other’s margins.  The deal gives them a bigger footprint and a march towards an initial public offering.

In this context, horizontal integration occurred between potential or actual competitors.

2011 Storylines

There is nothing to suggest that 2011 will be less busy on the online video deal front.  Here are some of the trends I think will drive M&A activity in 2011.

Ad Networks

Ad networks are rife for consolidation and can be broken up into:

• The source of technology, Ad Servers: the software required to properly serve ads and offer the kind of targeting and reporting that advertisers and publishers expect these days.
• The source of media, Ad Networks: the matching and intermediating between advertisers and publishers

A few firms have footholds in both: Auditude (ad server) also runs Cross Point Media (the ad network), Tremor runs the Acudeo ad server; while some operate under the same moniker (Adap.tv).  Some focus just on one space: LiveRail doesn’t have buy or sell media, it only offers an ad server.

With Jambo in the hands of Undertone and Broadband Enterprises part of Specific Media, expect display banner ad networks (such as Specific Media, Undertone or Tribal Fusion) to acquire video networks or see consolidation within video ad networks and servers.  There are no shortage of remaining players: Adap.tv, Auditude/Cross Point Media, Brightroll, Freewheel, LiveRail, Overlay.tv, Panache, Spotxchange, Tidal TV, Video Egg, Yume . . .  to name a few, with Tremor becoming a leading IPO candidate.

Big Media: A state of inertia

We have yet to see traditional media companies with their large purse strings step into the ring.  It’s only a matter of time though, as Magna’s latest figures show that online advertising will overtake newspapers by 2013, though TV advertising will still command the lion’s share of all ad dollars through 2016, with an estimated 40 percent share at that point.  Although, by then online video will account for $11.4 billion in global ad spend.  Where online video trumps television advertising is in growth rates: online video will grow at an average rate of 19.6% through 2016 (with estimated 50% growth in 2011 alone), versus a 7.5% growth rate for TV advertising.

With large media companies hoarding more cash than ever, it’s fair to assume that those who attempted to “build” from within and failed will soon shift gears and look to “buy”.

But the reality is that big media, by and large, still doesn’t know what it wants to do in the arena.  With Rupert Murdoch divesting from the Web in general and shifting focus from paywalls to iPad publications, it’s unlikely that News Corp. will ante up much for online video.  How about CBS?  With changes at the very top of’ management, I also don’t see them making too many shifts back into online video. Disney is more focused on gaming than online video.  NBC Universal, now in the hands of Comcast, will probably be stuck in integration mode for most of the year.  Time Warner seems intent on continuing its TV Everywhere initiative to maintain its margins and offline revenues.

Newspaper companies stand the most to benefit from online video, but they will spend the first half of the year wading through the opportunities to understand what strategy and targets will most help their business: technology to serve ads or video content to sell ads against.

The Portals and Major Online Companies

AOL certainly put itself in an enviable position with a series of moves, though integrating the various moving parts as its dial-up business continues to shrink will remain a challenge.

It’s now Yahoo!’s turn at bat.  With Ross Levinsohn coming on board and being a content guy with a penchant for deal-making, Yahoo! will mimic AOL and get more serious about video, but what they actually do is anybody’s guess.  They just unveiled their local strategy.  Is video next?  Don’t hold your breath.

Microsoft shuttered its Soapbox property and it remains to be determined what it will do in online video.  With Redmond admitting it offered Facebook a $15 billion offer and Steve Ballmer courting Twitter’s CEO Dick Costolo, I suspect Microsoft has priorities other than video.

Meanwhile, with $25 billion in cash and equivalents, Apple can move in multiple directions, namely:

• mimicking its acquisition of mobile ad network Quattro Wireless with an acquisition of a video ad network that could enable its foray into advertising; iTunes is a cash cow, yes, but it could hedge itself by monetizing its booming Apps business via advertising and the iPad is the perfect video consumption device
• it bought Lala to enter the music streaming business.  By the same logic, it could buy a CDN company to stay one step ahead of the surging bandwidth needs of mobile video delivery and find a way to rely less on carriers (BitGravity, Edgecast, Limelight Networks or Panther Express are some targets)
• the acquisition of a major ad agency (or a parent holding company); this is one of the more unlikely of scenarios, but judging by some of the challenges Apple has had with its iAd initiative, it’s not crazy altogether
• a livestreaming platform such as Justin.tv, Kyte, Livestream/Mogulus, Qik, uStream
• a video search engine or discovery tool, to attack Microsoft and Google in the next area of search (it would be crazy to attack Google head on in traditional search) and it can find a plethora of companies looking to exit: Ramp (formerly Podzinger/Everyzing), Blinkx, Dabble, Pixsy, Cast TV, Clipblast, Mefeedia.

Amazon has its hands in storage (S3) and content delivery (Cloudfront).  It’s possible it will buy a video player technology to offer end-to-end solutions.  There won’t be any shortage of likely targets: Ooyala and Brightcove might be too expensive but the list of eager sellers includes bliptv, Kaltura, Feedroom and VMIX.

Ooyala and Brightcove will themselves look at tuck-in deals as they ramp up their own growth.

Facebook is a major player in online video, peaking at No. 2 in comScore’s August video rankings when it surpassed Yahoo! (though Yahoo! regained the No. 2 spot the next month in September).  Facebook has a tendency to acquire companies for its people, but like Apple, it could also acquire:

• an authentification system to differentiate the massive amounts of video it is hosting
• a CDN company to ensure stability and lower hosting costs as it continues to grow
• a livestreaming platform such as Justin.tv, Kyte, Livestream/Mogulus, Qik, uStream
• an ad network to make money from video.

InterActive Corp. (IAC) is sitting on a lot of cash and investing in content creation efforts via Electus and Notional.  It would be logical for them to now invest in some kind of distribution play to ensure that their programming is actually seen: potential targets include DailyMotion, Metacafe or Nabbr.  It does own Vimeo, but that doesn’t offer the kind of reach marketers need.  We saw Sony do this via their Grouper acquisition a few years ago, renaming the website Crackle and using it to showcase their programming.  While the jury’s out on the success of that deal, we might see IAC pull a similar move.

Will any of these deals actually happen?  Who knows.  Predicting this kind of thing is a recipe for failure, but there is an adage that says “buy on the rumor and sell on the news.”  With more hype and expectations surrounding online video, the buying will continue.

[crunchbase url="http://www.crunchbase.com/person/ashkan-karbasfrooshan" name="Ashkan Karbasfrooshan"]

Now it appears that Specific Media has put an end to cached ID storage (based on yesterday’s revision to their privacy policy). That’s good news, since now there can be no implication that the NAI would permit this kind of practice.

Assuming Specific Media has killed the use of the cache on the backend (we haven’t tested this, yet, but will), I’d like to think that this is an example of how transparency can work to bring individual company practices in line with industry norms. Even better would be if the NAI would be so bold as to report directly and publicly on these issues as they arise and are resolved.

Wired reported that Specific Media was sued in Federal court for violating users’ privacy by a) using flash cookies to reconstruct http cookies that had been deliberately deleted by users and b) having a deliberately misleading privacy policy.  If these claims prove to be true, they are a great example of the serious issues the industry faces with privacy.

Particularly interesting, though, was the perspective in a comment on Mediapost’s coverage here from an employee of FAN – Fox Audience Network.  The commenter made the point that while this was a privacy issue, it was also a data ownership issue.  He went on to state that there is a legitimate reason for a publisher to use flash cookies, (e.g., the Pandora  buffering example cited by Wired) and that publishers have legitimate claim to user data as part of the implicit deal struck by users in consuming free content.  A network like Specific Media seems to have no such legitimate reason or claim.  Flash cookies used by a network are there for one reason only:  not as many users know how to delete them.

I recently congratulated Krux digital on their plan to help address the lack of reporting and enforcement capabilities for property rights in data.  Based on this announcement last week it looks like Krux already has a new competitor.

I have written before that this second facet of the privacy debate is widely underestimated, but it looks like that’s changing and that’s a great thing for the industry.

The lawsuit cites violations of the Computer Fraud and Abuse Act, violations  of California computer, privacy, unfair competition, and legal remedies law as well as unjust enrichment (in this case, making money though unlawful means) and trespass to personal property. 

The claims are based on their being no consumer knowledge or choice in accepting the flash cookies,  there was intentional computer harm (loss of data in trying to remove the cookies and poor computer performance after the cookies were downloaded), knowingly accessing a computer without the owner’s knowledge, unjust enrichment in monetizing the acquiredcomputer users’ data which was acqired by unlawful means and trespassing on computers. 

It is interesting to note that the suit specifically excludes those Specific Media affiliated corporations and websites that do provide users with adequate notice and awareness of the information that would be collected.

Specific Media, like many flash cookie company websites, does provide information about its cookies, how and why they are used, as well links to sites that allow the user may opt out of the Specifc Media ookie collection or control how long the cookies persist.   

This suit may be the beginning of  the end for the use of flash cookies, or at least using the cookies without the user’s knowledge and consent, much in the way the actions against NebuAd (in the U.S.) and Phorm (in the U.K.) put an end to another means of clickstream data collection.

The rise of the flash cookie business even after the the dramatic backlash against NebuAd and Phorm demonstrates that there is a strong motivation for targeted advertising as a means to support free (as in not paid for by the user) content on the Web.  Even if flash cookies are sued out of existence it is likely another technology will rise in its place.

There are numerous browser plug-ins and websites that provide users a means to control the user of the flash cookies.  What is missing is the knoweldge and consent of the user.  It will be interesting to see how the  Internet advertising respond to the challenge of providing targeted advertising with clear disclsoure and user control — even if such disclosure and user control may harm targeted advertising (See previous post, “The Effects of Regulation on Online Advertising” August 22).

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The company just updated their privacy policy in two respects:

• Adopted a 12 month maximum retention period for user data (nice work!).
• Added a very interesting disclosure about the use of browser caching to store user IDs (more in this in a future post).

I can only speculate that these changes are related to the successful completion of Specific Media’s compliance review. The fact that we don’t really know is instructive — and disappointing — for the self-regulatory effort. The NAI should have been more clear about the nature of Specific Media’s issue, and should have published an update that clarifies the issue in detail and how it was remedied. If no issue was found, that should be clear as well.

Let’s face it: One reason self-regulation is failing to win more supporters is that many view it as an unnatural act for an organization of companies to police the behavior of its own members. Compliance failures will happen, and when they do they need to be visible and the oversight response needs to be completely transparent. Nothing would inspire more confidence in self-regulation than really putting a company in the doghouse from time to time — in a way that advertisers, partners and consumers can’t miss.

Based on staff interviews, the report concluded that none of the evaluated companies uses Flash cookies for online behavioral advertising (see footnote 46). Since our own panel found Flash cookies being written by several NAI members (including Specific Media and DoubleClick), the NAI must have been assured that these firms have implemented internal controls about how they use Flash cookies. But without an explanation of those assurances (or even why Flash cookies need to be used in the first place), the report is incomplete. The NAI should ask those firms to update their privacy policies to explain the use of Flash cookies and disavow their use for targeting. (See an earlier post on this as it relates to DoubleClick.)

The Flash cookie issue has rightly become a focus for privacy advocates, even though (at least as to the NAI membership), it looks like it shouldn’t be. A more unequivocal statement from the NAI members who use Flash cookies for other purposes will mean that networks abusing Flash cookies have nowhere to hide.

The top five online ad networks are AOL’s Platform-A , Yahoo! Network , Google Ad Network, ValueClick Networks and Specific Media.

The sixth largest network is the new Fox Ad Network.

Top 25 Online Advertising Networks

Jack Flanagan comments in the comScore Top 25 Online Advertising Networks press release “…that new ad networks are emerging every day, each aimed at helping advertisers achieve their campaign objectives, whether it’s to deliver reach and frequency or to target a specific audience segment.”

With the exception of Rupert Murdoch’s News Corp and Yahoo Ad Network’s joint venture with publishers. it appears the newspaper industry as a whole has missed possibly the only opportunity left remaining to extend its reach and audience targeting potential through ownership in or control of an online advertising network.

I guess that’s why Rupert Murdoch is Rupert Murdoch.