Q&A with Douglas McIntyre, President and CEO of On2.com

In what may be a sign of the times, content companies like Pixelon.com, LoadTV and (yes) DEN have stumbled recently. DEN filed for chapter 11 last week as it burned through a reported $60 million in two years and LOADtv laid off its original production staff.

Put down On2.com ( http://www.on2.com) as the latest company to leave the content space. Two weeks ago, On2.com cut jobs in its video production area, refocusing on video compression technology. Fortunately for On2.com that technology may be what ultimately saves the company. It had something to fall back on.

Douglas McIntyre was appointed President and CEO of On2.com in mid-April, replacing Dan Miller who is now CTO. McIntyre was previously from Switchboard.com.

I spoke with Douglas last week to talk about why he decided to stop original production and go back to its technology roots.

Q: You just started not too long ago, right?

A: I've been here about a month, we've already made some changes, which I think are for the better.

Q: Was it hard to come on board and make these tough decisions?

A: To be frank with you no, because I think they were decisions that were fairly obvious. For example the content decision was not a financially motivated decision. We will add probably as much if not more capacity on the software programming side. But the biggest issue was that the people we wanted to do business with, didn't want us competing with them in the content business. And the other thing, with a relatively small number of people, it's not easy to compete with guys that are spending tens if not hundreds of millions of dollars every year. And would like to see their stuff presented in a broadband format in our site or other sites and are willing to give it to you.

Q: Is this something you see happening in this industry, more people going away from content?

A: I think it's inevitable. How many companies make movies, music videos. If you start to go down the list, it is so hard right now to hard to go into the marketplace in any meaningful way compete with Viacom/CBS or Fox, record labels, movie studios, etc.

Q: Were you licensing the content or producing it on your own?

A: The stuff we are producing is being given to us by our partners in the encoding/hosting business. With a dual purpose; the first one is that they want it to be seen in a broadband format because it plays better, and the second reason is that, from our opportunity, it gives us the opportunity to show off our skills in the encoding/streaming area. So it ends up being symbiotic. It's mostly content like trailers and music videos—they're never going to monetize the movie trailer business. No one's going to pay for that. So they put it on our site, it helps to promote a movie and it helps us to showcase our technology.

If he's going to pay money a million dollars to produce a music video, why just run it on cable television if he can (through a very small amount of money) have it show up on a completely different medium.

Q: What about RealNetworks? They have a portal, have content partners and are also doing infrastructure work.

A: Well, yes I agree with that, but how much of the content are they supplying? Do they literally have what we have? Camera crews going out to locations, soundstage equipment, editing and show hosts—you have a host at MTV, well we employed people hosting shows at On2.com

Q: And with host salaries.

A: I think--I don't want people to understand. That wasn't the real issue. Not that it cost you money, it was that you were competing with people spending a thousand times that much money. Look, the cost of producing a year's worth of video for us is probably the cost of doing the Jay Leno show for two weeks. So the first thing, that's tough. And secondly, if NBC wants to put Jay Leno on a second medium and wants to stream the show in broadband, do they really want to come to me and do the encoding and streaming, if I've got shows with my own hosts? I think the answer to that is: I don't think so.This company was not started as a content company. It was basically a compression company from the day it started eight years ago. That's the company's core competence.

Q: So you're saying the company's not in trouble financially?

A: Oh no, not at all. We announced in our 10Q that we've done our financing. So no, this isn't an issue of trouble. We're a public company, we disclosed over a week ago that we've done another round and it takes us 12 months. Beyond that, if you take that as an issue and put it on the side, this is a technology company. It was a technology company eight years ago, when it got into the content business and as we move out of the content business, we remain a technology company. The people that made the thing work are experts at compression.

Q: So what exactly will you be doing? Hosting, encoding?

A: The single most important thing the company does is compression and streaming. Which are both technologically very complicated to do if you're trying to get the resolution of video to look the same as a movie or TV. It involves mathematical algorithms that I don't even begin to understand. It involves the ability to compress and track the streaming as it goes out so if there are bandwidth fluctuations, then the streaming adjusts itself so it doesn't drop frames.

Q: Will you sell a server or player like RealNetworks or Microsoft are doing or will you be a technology provider?

A: We will fundamentally focus on being a technology provider. And to some extent, a resource to those companies in putting together end-to-end solutions. Something that will be a big thing in a another year or so is taking TV commercials and turn around and stream that on broadband. Because you already spent a huge amount of money on a TV commercial, and the additional costs to encode and stream it as opposed to what it costs to put it on TV is a fraction. But the ad agencies and clients what them to look as good as they do on TV when someone sees it on the Internet.When I first got into this business at Switchboard.com, there was no banner advertising.

Q: You were in early. I can remember not having banner ads. Those were the good ol' days.

A: And that was not long ago. I'm just saying, you don't have to be an old person to remember that Internet advertising was small. That wasn't that long ago. The ad agencies and the clients are very anxious (as broadband gets built out), to take assets like TV commercials and put them in another medium. They're making a huge investment and if you can run it in two places instead of one and pick up some additional reach and frequency why wouldn't you do it?

Q: What is your focus now?

A: Right now the issue for us is going to the marketplace with technology and fundamentally introducing it to as the Mercedes Benz in streaming video business and selling people on the value proposition of not having a crummy video experience. Something that looks like television—not a postage stamp but a full-screen—

Q: Broadband, essentially.

A: Yes, what everyone hopes broadband should be. It's what people believe is the eventual potential of broadband. With broadband growing at 50 to 60% quarter over quarter and already being in 4 million households, you don't have to think years out to know that this is going to be a fairly important market.