$1.65 Billion, but No Way to Make Money

Editor's Note: This article is part of our special series on Google's acquisition of YouTube, with commentary and analysis from practitioners and thought leaders throughout the industry. These include: 

A roundup of news from around the net
Criticism of mainstream coverage by columnist Mark Naples
Briefings of the deal's implications from top online marketers
Perspective on where YouTube will fit into Google's growth
A look at potential new marketing opportunities
How AdSense may be integrated within YouTube

Ranging from the 30,000 foot perspective to the deeply practical, our contributors will help you make sense of the latest shift in the media landscape.

The race for video market share ownership is on. Google's bid for the number one video destination on the web was made public Monday. The 1.6 billion dollar stock transaction announcement came after the rumor mill had been spinning about it for days.

Early announcements about the deal have stated that both Google and YouTube will remain independent for the time being while the details get sorted out. This is not the first time Google has sought to make a giant step forward through acquisition, but, as always, there are lingering questions.

How will YouTube's young and free-spirited audience react to being part of the Google machine? Another big question on everyone's mind is how Google and YouTube plan to turn 100 million video views a day into a positive cash flow, and -- perhaps more importantly -- how will marketers cash in?

The market stack
comScore reported that visits to YouTube increased 2,500 percent from August 2005 to August 2006 in uses over and including 15 years of age.

Hitwise on the other hand, shed some light on the young audience by reviewing the top 100 videos on both sites. Supporting data indicated that the Google audience showed a higher older male concentration while the YouTube content appeared to target the younger audience. 

Furthermore, Google is YouTube's second most important source of traffic (MySpace is the number one source). Last month, just over 10 percent of YouTube's visitors arrived from Google, while MySpace delivered just over 16.2 percent of visitors.

Hitwise data also suggests that Google is still primary an internet content search engine with nearly 80 percent of visitors using the directive search utility and just under two percent searching for video. YouTube visitors also spend twice as much time on the site: 18 minutes 33 seconds versus nine minutes nine seconds for Google Video.

Older users spend less time watching video, and YouTube has to be banking on younger audiences continuing to fuel growth, but how soon will anyone be making real money with ad revenue?

Dot comedy exuberance
$1.65 billion for some site real estate that has yet to show anyone the money?

Sure, a lot of people are watching funny home movies, and the digital rights people are a little concerned about some of the content, but where is the cash going to come from?

Perhaps the litigious digital rights constituency was waiting for deep pockets before the inevitable legal smack down. Certainly, the idea of owning the number one video destination -- thereby creating the number one video network on the web -- is appealing, but Hollywood's needs will have to be satisfied.

It seems the biggest digital rights concerns were tied to the unauthorized use of music. The recent agreements between Universal Music Group, Warner and Sony that included access to video archives, ad revenue sharing and permission to use protected content in home movies showed promise for YouTube.

YouTube has avoided litigation for now-- but will the commercialization be perceived as repugnant by its young and shifty audience?

Barriers to bankroll
One hundred million viewers a day does not a successful platform make, but it is a good start.

Four years after search became the next big thing for marketers we are now only beginning to question click traffic and organize as an industry after a flurry of lawsuits.

The recent announcement detailing the Interactive Advertising Bureau's effort to set standards for defining a click -- the very foundation of how Google and other paid search sites generate revenue -- leads us to believe there might just be a very large fly in the revenue-projection ointment.

Will advertisers be as quick to jump back in to an untested medium? If it took five years to establish terms and conditions, four years to wake up to the fact that problems exist with the auction / click performance-based media model, then advertisers might just take their time and wait for an accountable GRP system before investing heavily in the new platform. 

And how long do think that might take?

$1.65 billion for an untested, non-cash-flow generating content destination with a temperamental, trend-following audience is starting to sound like an awful lot of money. 

Kevin Ryan is the chief executive officer of Kinetic Results. Read full bio.

Meet Kevin Ryan at ad:tech New York and Shanghai.

 

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