• by Mark Walsh  @markfwal, August 24, 2006

Gaining a foothold in the booming Web video field, Sony Corp.'s Sony Entertainment Pictures is acquiring video-sharing site Grouper Networks for $65 million, the companies announced Wednesday.

For Sony, the deal represents a big bet on the future of viral video, especially as Grouper has little revenue and modest traffic so far. "We see this as a huge growth opportunity for our company," said Sean Carey, a Sony Pictures executive who is replacing co-founder Josh Felser as Grouper CEO. Felser remains as co-president.

According to Hitwise, Grouper.com was the 10th-ranked online video search site as of last week, receiving less than 1 percent of all traffic for the category. The site had 542,000 visitors last month--compared to 16 million for high profile video-sharing site YouTube and 21 million for Yahoo Videos, according to comScore. Felser said that comScore doesn't accurately measure Grouper's audience, and put its traffic at eight million last month.

Numbers aside, Sony's move underscores how hot user-created content has become in the last year. The sector gained a new level of attention after News Corp. acquired popular social-networking site MySpace last year for $580 million. That investment appeared to pay off earlier this month when Google agreed to pay News Corp. $900 million over four years to provide paid search and ad listings on MySpace and other Fox Interactive Media properties.

The Grouper deal will only help to feed speculation about the possible acquisition of YouTube and other Web video and social-networking sites. At least one investment advisor expressed skepticism about the price paid for Grouper. "I think this one borders on the unreal," said Tolman Geffs, managing director at media industry investment bank The Jordan, Edmiston Group.

With under 1 million users, he said he didn't see how Grouper was worth $65 million. He pointed out that MySpace already amassed a large user base when News Corp. bought it for nearly 10 times that amount.

Grouper's Felser, however, said that the company had considered other venture investment and acquisition offers that were at similar valuations to the Sony deal.

He pointed out that the site's peer-to-peer technology, which allows for potentially unlimited sharing of videos and other media, is one of the factors that sets it apart from competitors. Grouper ranked seventh out of 45 video-sharing sites reviewed recently by telecom industry research firm Light Reading. Its report cited Grouper's service for offering "lots and lots of functionality."

To help boost Grouper's audience, Carey said Sony is exploring movie promotions on the site and making Sony content available for mash-ups, in which consumer-created material would be combined with Sony films or TV show clips to make video shorts.

Sony teamed up with YouTube over the summer to promote "Click," by sponsoring a contest in which users were invited to upload videos showing how they would control their universe if they found a magic remote control like the character played by Adam Sandler.

Sony is also looking at ways to further develop an ad-supported business model for Grouper. "We've certainly discussed how to insert video ads into the user-generated videos, without alienating the audience, and we've explored the paid sponsorship model," said Carey. The new ad platform unveiled by YouTube this week--feauring brand channels where companies create their own programming--represents another possible path for Grouper, he said.