Universal Music Group Didn’t Help Veoh, but It Didn’t Kill It

Who killed Veoh? It’s convenient to blame Universal Music Group, which wrestled with the video start-up in court for years. But it’s wrong.

The music label’s suit made it very difficult for Veoh to climb out of the deep hole it found itself in last year. But it was the Web video start-up, not Universal, that dug that pit.

First, some housekeeping. CEO Dmitry Shapiro now confirms his company’s impending shutdown and Chapter 7 bankruptcy filing.

Plans to either sell or refinance the company came “close, in both cases,” he told me late this afternoon. “But we were unable to secure either option.”

Shapiro didn’t offer any details about the future of the Web site or the videos users have uploaded there over the years. I gather that’s because he doesn’t know himself.

He did, however, sketch out a brief picture of the company’s demise. Like others, Shapiro points out the problems caused by Universal’s copyright suit, which is broadly similar to the one Viacom (VIA) is still fighting with Google’s (GOOG) YouTube.

“Clearly the UMG lawsuit was a tremendous weight on the company. It was both financially draining and distracting, and it choked off the ability for any significant strategic deals, because everybody we talked to was terrified of getting sued immediately,” he said. “And we know that potential investors were thinking that, too.”

But the UMG lawsuit didn’t burn through $70 million of investors’ money. At most, sources say, the company spent something in the $6 million to $8 million range on legal fees.

Where did the rest of the money to go?

To fund Veoh’s YouTube-sized ambitions, apparently. Sources familiar with the company tell me that during its go-go days, it was spending as much as $4 million a month on a bloated staff and infrastructure.

But Veoh only generated something like $12 million in sales over its five-year life, and most of that was in the past couple years, sources said.

Veoh’s burn rate was cut back significantly after the economy crashed. And it shrank even more last April, when Shapiro returned to the company he founded and replaced then-CEO Steve Mitgang.

Could Veoh have raised more money at that point? It’s hard to see how, even if the Universal lawsuit wasn’t hanging over it. It was difficult to raise money for any online advertising venture in the spring of 2009, let alone a money-burning Web video site.

And it’s worth noting that Joost, another well-funded Web video start-up, more or less shut down a few months after Veoh’s restructuring.

On the other hand, France’s DailyMotion managed to raise another $25 million last October. So there are still people out there betting on Web video, and Shapiro says they’re right. But his company was too early, and it grew too fast–and ultimately, not fast enough.

“We were pioneers, and we were there in the first few years when there was no advertising market to speak of,” he says. “Over the next couple years, do I think that more and more brand advertisers are going to move into online video? Absolutely. Online video is going to be a success.”