M&A Alert—November 28, 2011
Microsoft Acquires VideoSurf
Transaction Size: Undisclosed
VideoSurf develops software that enables users to search and discover video through real-time visual/audio recognition technology that scans videos to identify and tag content. VideoSurf also has a mobile app that enables users to perform video search and discovery either through text based search or by using its technology to identify visual/audio patterns as video is viewed through a device’s camera – think Shazam but for video. Through the VideoSurf website, users can search video by keyword and categorize their searches by slideshows, Web series, full television episodes and full movies. As of April 2011, more than 20 million users view video clips on VideoSurf each month. The company indexes over 250 million videos from 60 sources such as YouTube, Hulu, DailyMotion, CNN, ESPN, Comedy Central and Facebook. VideoSurf has analyzed and categorized more than 12 billion visual moments on the Web to understand who the most important characters and scenes are in a video, and uses this knowledge to sort clips according to relevancy. Competitors include Akiira, DigitalSmiths, Tribune Media, Qwiki, ReelSurfer, Shazam, IntoNow (acquired by Yahoo! for $20 million) and Truveo (acquired by AOL in December 2005 for $50mm). Founded in 2006, the company is based in San Mateo, CA. VideoSurf has raised $28mm in total funding from Verizon Ventures, Israeli investment fund Pitango, former U.S. Vice President Al Gore, Facebook COO Sheryl Sandberg and SurveyMonkey CEO David Goldberg.
Microsoft is best known for its Windows Operating System and Microsoft Office-based software product line for PCs, notebooks, laptops and handheld devices. Microsoft also owns the Bing Search Engine and develops electronic devices including Xbox 360 and Xbox Live (game console and online entertainment service) and Windows-based smartphones. Recently, Microsoft began offering online content including TV shows, games and music via Xbox LIVE. Microsoft announced that in the coming months, they will bring nearly 40 TV and entertainment providers to Xbox LIVE, including Bravo, Comcast, HBO GO, Verizon FiOS and Syfy in the U.S., among others. Microsoft launched Kinect, an add-on device that will let users control Xbox games with their bodies. Recent Microsoft acquisitions include: Canesta (gesture recognition technology) and Vivaty (social games platform) in October 2010 and 3DV systems (3D video imaging and motion sensing) in March 2009. Microsoft acquired Skype in May 2011, which will be integrated to Xbox devices. Alex Garden, Director of Xbox LIVE for Microsoft’s Interactive Entertainment Business, was a key executive sponsor of the VideoSurf acquisition.
While the transaction value was not disclosed, industry rumors place the value at $70mm. VideoSurf generates revenues from licensing its technology to enterprises (which is the main source of revenue) and video advertising revenues from direct viewers. Industry sources estimate VideoSurf revenues at <$10 million, which translates to a transaction multiple of >7.0x revenues. Other comparable transactions include Yahoo!’s acquisition of IntoNow for $20 million in April 2011, CBS’ acquisition of Clicker.com for $50mm-$100mm in March 2011, Google’s acquisitions of Like.com in August 2010 for $100mm and Plink Search in April 2010, and AOL’s acquisition of Truveo for $50 million in December 2005.
VideoSurf and its technology are important components to Microsoft’s strategy around entertainment services (games, video, music, etc.) on its Xbox LIVE platform where its technology will be applied to enhance the cross media search and discovery functionality of the platform. Plenty of competition from Google TV, Apple TV, Roku and other game devices such as Sony PlayStation and Nintendo requires that these home entertainment platforms differentiate not only though the availability of entertainment services but also by keeping users engaged with the platform through the discovery of new relevant content.
VideoSurf can also be expected to be integrated into Microsoft’s Bing search engine in order to enhance the search and discovery experience around online video and compete with Google Search.
Architect Partners’ Observations
Online TV and video consumption are now mainstream and represent a rapidly growing market opportunity that presents many challenges around content search and discovery (not to mention the related surge in mobile bandwidth usage driving infrastructure investment).
Unlike broadcast and cable TV where content channels are limited and categorized – online video is nearly unlimited and much of it is “non-premium” or “scripted” content and therefore uncategorized (think user generated content, clips of premium video, etc.). As noted by comScore in their 2009 U.S. Digital Year in Review, 52 percent of all time spent watching videos on the Internet the previous year was on ‘long tail’ video sites beyond the top 25.
What that means is that the search and discovery process for online video must not only filter through a lot of noise but also effectively tag and index this ‘non-premium’ content. A process important for the search and discovery experience, but also necessary when determining appropriate video content for advertising placement.