VentureBeat

User generated video sites are proving a major disappointment, as ad revenue goes.

Crackle, a Sausalito company once known as Grouper, ditched user generated video when it was acquired by Sony last year — saying that YouTube had won the user-generated video showdown.

The story of Crackle is instructive. It began signing deals with content creators, paying them to produce quality shows, and negotiated distribution rights. This created legal clarity, and advertisers like it. However, even here, there are challenges; more on that in a sec.

For now, advertisers are pouring in, says Josh Felser. “It’s like night and day.” He won’t say exactly how much money is coming in, but he’s making well into the millions of dollars a year. He’s still not profitable, given the investments he’s made in artists at the outset, but getting there.

Traffic is booming. Crackle has 20 million unique visitors, compared to 7 million monthly uniques in September of last year, when Sony purchased Grouper.

Meanwhile, placing ads on user-generated sites, even on leader YouTube, has been extremely difficult to do – with analyst Mary Meeker estimating that YouTube would get a mere $720,000 in additional revenue by adding such ads – a paltry sum when you consider Google paid $1.6 billion acquisition of that company (indeed, the number was so low that Meeker later changed her assumptions in an embarrassing correction). Other user-generated companies have fallen by the wayside, unable to contain costs.  Tod Sacerdoti, who runs an online advertising company Brightroll, recently gave up on advertising on user-generated sites, because of the danger posed to brands by raucous images like the ones he blogs about here (scroll down, only if you can handle quasi porn).

Meanwhile, at Crackle, Felser shows what is like to be free of the messy user-generated stuff. He is cutting deals with independent studios, promising them distribution through Sony’s massive pipeline. Usually, Felser negotiates exclusive distribution rights for a time. He’s bought rights to productions by National Banana (Felser assures us the studio is much more impressive than the National Banana web site would have you believe), which features producer Jerry Zucker, the guy behind Airplane! and Naked Gun.  He’s also bought rights to 30-Second Bunnies, and Brian Dalton’s comedy series Mr. Diety, about God and the Universe. It’s all running in a channel called Moving Targets which launched a few days ago.

[However, we should note that in watching the very first video on the site, we found the material pretty disgusting. It features a National Banana video of young kids talking about nothing other than ditching panties, rehab, drinking, throwing up, tits, sex and breast implants; amusing for some, but hardly fare that would please advertisers. Crackle, in our view, holds promise, but we'd recommend it look closely at the sort of video it's featuring. National Banana continues to disappoint; it's hard to believe it raised venture backing from US Venture Partners.]

The online video site formerly known as Grouper — the one purchased by Sony for $65 million last August — has a new name and a new direction.

Now Crackle, it will be a Sony Pictures-backed online talent studio (our previous coverage here).

The hope is that in between Hollywood and YouTube, there is an opportunity to bring together nascent actors and film-makers and turn them into tomorrow’s silver-screen stars. A “pathway to Hollywood,” according to Crackle/Grouper co-founder Josh Felser.

If Crackle goes according to plan — if production quality starts to drive more traffic — it could turn into an online version of TV contest shows like American Idol, where stars are born out of a combination of judges’ decisions and popular vote. Its site is live as of Monday morning. Check out Handshake, a somewhat disturbing video on the front-page, for example (screenshot below).

YouTube, though, appears to be growing faster and at a larger scale than any of its competitors. In fact, stars are already being born out of it, just like what Crackle is trying to do now. Just about everyone else is doing something similar from Metacafe to 60 Frames.

Crackle has been evolving steadily over the last three and a half years. Now, it will keep its existing features, such as sharing and viewing video clips online. Helped with Sony backing, Crackle will also fund production, sign deals with promising artists, and market videos across the web.

For example, Sony’s Imageworks studio will work with animators creating videos for Crackle. Every three months, the best animated video — as selected by users and Crackle editors — will receive a cash prize and fly to LA to pitch Sony executives on a theatrical release. Under Sony’s umbrella, the best animations will also be eligible for an academy award in the category (among thousands of others, of course).

Crackle editors and selected “cultural tastemakers” will also help decide what videos get featured most prominently. Still, a “people’s choice” award will also help new videos get featured — but based on how many times the video gets emailed, streamed, favored on user profiles, not just on pageviews on the site.

As part of the re-launch, Crackle is introducing 12 branded channels with unique foci; four, including the one for animation, will be “pathways.” Every channel will be open for user submissions. Another question: Will more top Hollywood stars move into open, online video distribution, like what Will Ferrell is already doing? Will they want to work with Sony/Crackle, or go their own way?

Besides funneling talent to other Sony (and Hollywood) properties, the channels are also open for sponsorship by advertisers.

Crackle will also try to distinguish itself by a better user experience: displaying videos in a larger format, where users can keep one video playing while searching through others on the site.

These days, it’s hard to build an online video-sharing property with compelling content, and even harder to monetize with advertising, Felser said. The site has grown to 25 million unique visitors in June from 7 million last August, he says, but notes that its ad-based revenue model isn’t a big business.

Other partners include Sony’s Television and Imageworks studios, Columbia Pictures and IMPROV Comedy Lab. Videos will be distributed across the web and Sony devices (including the PSP, VAIO and BRAVIA).

Is Google a threat here? Would it try to buy its way into Hollywood, taking YouTube upmarket? Felser thinks that it would be hard even for Google to buy its way in. We’ve also covering how private equity, venture capitalists — and really, anyone with money — are buying in.

The bigger question: Can talented, aspiring actors, animators and producers get more out of a site like Crackle than out of Hollywood and YouTube today? And, will users care about Crackle’s higher-quality video technology?

Bonus: Varying VC thoughts on the Sony purchase of Grouper.