Joost's decision to abandon plans to become an ad-supported Web TV channel reflects the difficulty many online video startups are having in trying to build a business at a time of falling advertising prices.

The company announced Tuesday that it was shifting its business to become a seller of video-serving technology. Rather than stream high-quality video from media companies such as CBS and Viacom, Joost planned to offer cable and satellite TV providers, broadcasters, and video aggregators white-label online video platforms.

As a result of the reorganization, Matt Zelesko, senior VP of engineering, replaced Mike Volpi as chief executive. Volpi remained with the company as chairman. Joost planned to keep its New York and London offices, but would wind down its operations in Leiden, Netherlands.

While no details were disclosed, layoffs were likely as a result of the business shift. "Unfortunately, as part of this change, we will say goodbye to many of our colleagues and friends," Volpi said in the company's blog.

Volpi said the company's failure as an online video site was a result of the economic recession. "In these tough economic times, it's been increasingly challenging to operate as an independent, ad-supported online video platform," he said.

But also contributing to Joost's failure was its inability to attract enough visitors in a highly competitive market. In May, Joost had 643,365 visitors, where Google's YouTube, the largest video site, had 76.5 million and Hulu.com, which is backed by major TV studios, had 8.2 million, according to numbers from Compete, a Web analytics company.

Nevertheless, falling advertising prices as a result of an oversupply of publishers on the Web is a major problem for Joost and other startups trying to build an ad-supported business. "As a business model, it's a bit of a loser," Carl Howe, analyst for the Yankee Group, told InformationWeek.

As an example of the problems video sites face, Howe said a half-hour program on television includes an average of about nine minutes of advertising versus 40 to 50 seconds on Hulu.com. As a result, even though millions of people may watch a show on Hulu.com, the distributor and content provider don't make nearly as much money as they do on regular television.

"That's the crux of the problem," Howe said.

While making it difficult for startups to survive, such an environment is also affecting the offline TV business, which is seeing advertising prices fall overall, as advertisers split their spending between TV and the Web.

"Just look at what happened to newspapers," Howe said. "The Internet can drive down your prices."

In entering the online video platform business, Joost will face competition from several other major companies, including Adobe, Akamai, and Brightcove. However, Joost has talent in its engineering ranks. The company was launched by the developers of the Skype Internet telephony application, which was acquired by online auctioneer eBay.

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