Video content is popping up on the Internet like mushrooms after a hard rain. But when it comes to business models, companies that are trying to cash in on this video phenomenon are still largely feeling their way around in the dark.

While it can be amusing to watch a supporter of Britney Spears on YouTube vociferously defending the pop star’s most recent public performance, video on the Internet is looking for a more sophisticated, long-term relationship with viewers, whether it’s on PCs or on TV screens.

The problem for consumers is choosing among the crowded field of companies who wish to provide these video services, and their different approaches to the solution. Running down the roster of pure-play video providers, we have Joost, Vudu, Hulu, and Apple TV trying either to provide the video content, a device for the content, or both.

MovieBeam was scratched off the above list since it shuttered its doors in December, but it’s a good example of what not to do in this space. Disney sold MovieBeam to Movie Gallery for just under $10 million in March, but less than a year later MovieBeam went to the wall despite $100 million in funding.

First off, MovieBeam sent movies over the air to a set-top box with an antenna. As a result the service was limited to a market of 30 metropolitan areas in the United States. Next up was the cost of the set-top box, which was $250 along with a $30 activation fee. Lastly, movies cost from $1.99 to $3.99 with an additional charge of $1 for HD content. So in short, it’s hard to see exactly why a consumer would be compelled to use this service over a Video-on-Demand service from a cable or telco operator.

More boxes, more clutter

Set-top boxes that enable Internet videos to be played on TVs are another area that needs improving. Do customers really want one more device in their homes sitting next to DVRs, cable or telco set-top boxes and other devices? Not only is there more clutter, but some of the boxes have proven to be difficult for consumers to self-install.

And these boxes come with hefty price tags.

Apple rolled out its Apple TV box early last year at a cost of $299 with CEO Steve Jobs plugging the device’s ability to play movies from the Internet on large-screen TVs. To date, the Apple TV box combined with movies and TV shows for sale on iTunes, has been underwhelming. According to a study by Forrester Research released at the end of November, Apple TV sold 400,000 of its boxes since it hit the market in March. This is way below Forrester’s original forecast made in May predicting that one million units would be sold by the end of 2007.

Forrester recently said Apple would be lucky if they managed to sell another 400,000 of the devices during December’s shopping spree. But at least it is less pricey than Vudu’s movie box which also ports Internet movies and other content to TVs and sells for $399.

Despite the confusion over what the added value of these boxes is, ABI Research predicts shipments of 1.2 million Internet video set-top boxes this year.

There are cheaper alternatives, namely DVRs that can cost as low as $100. Amazon’s Unbox allows customers to download movies and TV shows, albeit mostly older ones, for viewing on a DVR.

Another obstacle for Internet-to-TV video providers such as Vudu and Apple TV is that their boxes don’t allow the content to be shared on a PC or moved to other DVRs within a house. Cable and telco operators are working on rolling out multi-room DVR solutions this year.

At last year’s TelcoTV conference in Atlanta in late October, Peter Hill, VP of Converged Services at AT&T Labs Research, said his company has multi-room DVRs on this year’s “to do” list while Comcast said it should have the same service available in select markets later this year.

As for PCs, CableLabs has been working on its OpenCable Unidirectional Receiver (OCUR) initiative that allows consumers to view digital and HD cable programming on their Microsoft Vista-enabled PCs, as well as other devices that are connected on their home networks.

Competing with VOD services

Cable’s obvious advantage here is its existing relationships with Hollywood studios and content providers. Comcast has its own Web portal, channels that include E!, Style Network and Versus, and a Video-on-Demand service that has racked up six billion on demand views in less than four years.

Internet video providers can carve out their own niches for long tail content or try to compete with the Comcasts and Verizons of the world, but the latter strategy will be difficult.

Verizon expects to have 1,000 HD VOD titles in place for customers to view by the end of this year. This includes a mix of newer movies from 2007 along with free content.

Even smaller telcos can get into the mix thanks to a new VOD solution soon to be launched by SES AMERICOM [using NDS technology]. SES AMERICOM hasn’t said exactly what content will be available on its VOD offering, other than revealing that it will include local and national content. But the service will get some telephone companies and broadband service providers into the VOD mix quicker than they would have done on their own.

And winners will be . . .

It’s not going to get any easier for Internet video providers. The cable industry is poised to trial set-top boxes that can connect to the Internet this year, but AT&T and Verizon will probably beat the cable business to the punch.

If I were to pick the companies destined for success in providing video over the Internet, I'd start with Vudu and Hulu. Hulu is a joint-venture between News Corp’s Fox and General Electric’s NBC Universal. This means that all of its viewers can watch the US version of The Office at their own convenience.

According to a review, Vudu has great picture quality, deals in place with more than 20 independent studios and distributors, and allows customers to pay by the movie instead of by the month. Vudu worked around the $399 cost of its set-top box during the holiday season by offering it for free to customers who purchased certain models of Sony HD TVs.

Vudu has also climbed up the movie distribution value chain. Once a movie passes through movie theaters, the usual distribution trajectory is as follows: hotels and airlines, DVD release, pay-per-view TV, premium movie channels, such as HBO, and then to the rest of the world. In December, The Bourne Ultimatum was released through Vudu’s online service the same day the DVD came out. Vudu is also offering HD content

In the end, content will be king. Will providing older TV shows and movies for free through an advertising model be enough to sustain a company?
Probably not.

The providers with the best partnerships for content will survive as long as they can provide value that is currently not being offered by telcos and cable operators.

The equipment needs to be priced reasonably and be easy to install by customers. Sites that can combine user-generated videos with professional video content will also have a leg up.

Let the viewing begin.

Michael Robuck, based in Colorado, has been reporting on the telecommunications industry since 1999.