Veoh Networks, the online video sharing service, is to file for Chapter 7 bankruptcy protection. The company claims it is a result of the distraction of damaging legal battles, in which Veoh eventually prevailed, together with broader economic challenges. Despite $70 million in backing from high profile investors, Veoh could not sustain a business from online video and was unable to sell or refinance the venture. Veoh joins Joost in the long list of startups that failed to make it, although the volume of online video viewing continues to rise.

As first reported by informitv in August 2005, Veoh aimed to allow anyone to share television quality video online. While others, notably YouTube, were helping people to share short video clips, Veoh enabled them to share high quality full-length videos using a secure peer-to-peer distribution network.

Veoh attracted backers including Adobe and Time Warner as well as venture capital firms and several leading industry names as private investors. It signed distribution deals with major media companies. The Veoh web portal featured videos from networks including CBS and ABC as well as independent distributors. It claimed a global audience of 28 million unique users.

As with YouTube, users were able to upload material, leading to litigation from Vivendi’s Universal Music Group, the largest music company in the world, alleging copyright infringement. After a two-year lawsuit, a federal judge ruled that Veoh was protected by the provisions of the Digital Millenium Copyright Act as long as they complied with the takedown process. That is still subject to appeal but that could be a moot point if Veoh is no longer in business.

“While we made every effort to convince them that we were not their enemy and had not infringed on their content, they pursued a relentless war of attrition against us in federal court. We eventually prevailed in a decisive summary judgment that has set an important precedent for the entire industry,” wrote Dmitry Shapiro. “Unfortunately, great vision, a passionate team, tens of millions of users, millions in revenues and victory in court were not enough. The distraction of the legal battles and the challenges of the broader macro-economic climate have led to our Chapter 7 bankruptcy.”

The founder of Veoh promised that “a bright new chapter will soon begin,” hinting that “you will hear from us again!”

The cost of the case was considerable and the threat of litigation may have scared off potential partners and investors, but the reality was that Veoh was spending the money of its investors faster than it could earn revenues. Reports suggest it was spending up to $4 million a month at one point, although it only generated $12 million revenue over its lifetime.

Part of the problem was that Veoh required a downloadable application, later a browser plugin, to deliver video using peer-to-peer distribution. As with Joost, that may have limited adoption when other sites were simply streaming video using software that most people already had installed, such as Adobe Flash. This also allowed players to be embedded easily on other sites, creating a mass syndication market. Meanwhile, the cost of streaming has continued to fall, reducing the theoretical advantage of peer network distribution.

Through its acquisition of YouTube, Google has succeeded in dominating the online video space, while major media companies launched their own services, such as the joint venture Hulu.

The volume of online video viewing has doubled in the United States over the last year. In December 2009 comScore reports that 33 billion videos were viewed, compared to 14 billion for the month a year previously. There were 178 million unique viewers, compared to 150 million a year before, but the number of videos they viewed almost doubled to just under 187 videos each a month. The YouTube site alone accounts for over a quarter of all online video viewing in America and with syndicated viewing it has around 40% market share.