Through The Fly's Eyes: Internet video

from Larry Ramer of Theflyonthewall.com

Internet Video Boom Should Boost Shares of Infrastructure Providers

Stocks of companies that facilitate Internet video may boom as the medium continue to proliferate at rapid rates. While tight competition and excess bandwidth have pushed down these shares recently, Internet video is growing and maturing so quickly that the companies in this sector, including Akamai (AKAM), Big Band Networks (BBND), LimeLight (LLNW), and On2 Technologies (ONT), seem likely to rebound in a big way soon.

How quickly is consumption of Internet video growing? According to research company comScore, nearly 75% of American Internet users watched Internet video in July, up from 71% in March. While an increase of 4% may not seem like much on the surface, each percentage point represents about 1.3 million people. And, despite the 75% figure, Internet video still has a great deal of room to grow, because each user only spent an average of 3 hours per month watching Internet video. (And summer is probably not the most popular time of year to sit home and watch Internet videos).

As more content providers, including everyone from the largest TV networks to Major League Baseball to Apple (AAPL), begin to make video content easily accessible on the Internet, we can expect that Internet video viewing will explode. Meanwhile, content providers will be ready to spend more money in order to improve the Internet video experience, as Internet video advertising proliferates and makes the entire enterprise much more lucrative. Google's (GOOG) move this summer to introduce advertising on YouTube should accelerate the transition towards more Internet video advertising.

It will then be up to the Internet video enablers to find ways to more meaningfully differentiate themselves and their products from the competition. There are already signs that companies in the industry are moving in that direction. For example, Akamai announced on August 27 that it was enabling the delivery of high definition video over the Internet. According to the research company Frost & Sullivan, On2 Technologies has developed a product that enhances video quality for mobile Internet users. BigBand Networks last month announced new technology enabling the delivery of Internet video advertising to individual users.

There is no doubt more competition is coming to the sector. Level 3 (LVLT), along with some smaller companies, are getting into the Internet video business and pushing down prices. But the Internet video market is growing so rapidly that this may be a rising tide that really could lift all boats. Also, as the industry becomes more lucrative, content providers may be willing to pay a high premium for important innovations.