Will YouTube ever make money?

It's been over a year since Google announced that it was buying the online video site, YouTube, for some $1.65 billion. 

At the time, the media industry was sanguine about YouTube's prospects; the site had been one of the fastest growing, most popular destinations on the web. Google CEO Eric Schmidt said of the deal, "This is the next step in the evolution of the internet." The price that Google shelled out for YouTube validated the industry's positive perception of it and other media properties like it. One could say that the purchase of YouTube was responsible for the last go-round of exuberant acquisitions. 

The question now is whether or not that acquisition was irrationally exuberant.

A few weeks ago, Mr. Schmidt gave an interview on CNBC in which he said that a top priority this year is to make money off YouTube. "I don't think we've quite figured out the perfect solution of how to make money, and we're working on that. That's our highest priority this year."

YouTube gets some 100 million video views a day. Reported in London's Daily Telegraph, as well as many other UK newspapers, in 2007, YouTube alone used as much bandwidth as the entire internet in 2000. Now, I can't find the original source for this nugget of datum, but it sure sounds impressive. And its implication is that YouTube has enormous -- and growing -- infrastructure costs that are not supported by its own income. Some reports have it that it costs YouTube one million dollars a day to support just its own bandwidth costs.

Just how much revenue YouTube generates is hard to determine, though I wonder if someone out there has combed meticulously through a Google earnings report to try and extrapolate it. 

The other question is can YouTube be monetized?

If Google is good at anything, it is taking a single idea and making oodles of money off it. The problem is that Google hasn't managed to make money off YouTube. Google is relying on the automation of advertising across all vehicles and platforms (including YouTube) to be the answer to its future realization of revenues upon which current shareholder value is priced. 

YouTube is excellent at automating the posting of video content, and Google has automatically associated text links with that video content. Advertisers can put their commercials up and have those ads come up when a search is done on a keyword with which they've been associated. Or YouTube may serve a banner in a video. And finally, there's the "featured unit," where an advertiser's video is placed on the home page for a day. This might be the best unit offered, only in so far as it isn't associated with any content. However, it is also untargeted (I recently got a video for Playtex: "I'm gonna teach young Summer here how to get her hooters into this bra."). But Google will need to sell over half a billion dollars in advertising on YouTube every year for the next ten years and experience NO company growth costs in order to recoup its $1.65 billion investment.

Difficulties
The difficulty in monetizing YouTube lies in the essence of its own existence, that is, as a video content repository. Monetizing YouTube with advertising is like selling advertising to "run" in your kitchen junk drawer or in your shoebox full of photos. Everyone's got a junk drawer and a shoebox full of photos. 

The junk drawer has in it serving utensils and potato peelers and a cheese knife and a screwdriver and a Ziploc bag of rubber bands. These are all useful things, but unified only by the virtue of their utility and the location in which they are stored. 

The shoebox full of photos has as its unifying state the format of the content and the place that content is kept. But little else.

The content on YouTube is similar in that most of it is a) of the same format and utility, and b) exists in the same place. It is a kind of Vonnegut-ian "granfalloon," outwardly a claim to have a shared identity or purpose, but whose mutual association is actually meaningless. This breaks the content itself into such small, snack-sized pieces that it is difficult to offer that content up to an advertiser in any meaningful form of scale necessary to make or move a business objective.

Social tagging can help loosely collate the video content, but it is only as good as those doing the tagging. The wisdom of crowds can be relied on to result in the correct versus incorrect associations ultimately being made, but it is still a fuzzy method at best for collecting categories of content that can then be packaged and sold. Darwin Award Dimwits and old clips of Bill O'Reilly going nuts over something (an old clip of him from "Inside Edition" is particularly harrowing) might be mildly popular. And the Numa Numa guy might have over 13 million views. But what kind of inventory is that? Who does that get sold to?

Another thing to realize about YouTube is that it is something that is now taken with you. What I mean by that is, given the rise of social networking as a preferred means of communication and self-expression, a lot of people bring YouTube with them to their places of preference -- for instance, embedding video on their blog pages. YouTube is becoming more and more a repository, not a place to hang out.

And finally, most advertisers of any heft are still very wary of an environment where no one controls the content. As is true for blogs, corporate entities are still uneasy about uncertainty. While in most instances a brand has a lot to gain from being associated with content that an individual or group of individuals finds entertaining and authentic, the implied endorsement of one form of content that might lift a brand in one person's eyes might cause another person to vilify that brand.

So, can there be monetization?
Yes, there can be. But whether or not it is enough to ever bring YouTube to a place where it can pay for its own cost is hard to say. Here are some places to start:

  1. Cleaner pages and more banners. I know that banners aren't the most imaginative format for online advertising, but they are still the lingua franca, if you will, of online advertising creative. This is what gets produced; this is what folks are buying. Make them available on the page, not just in-video as a bottom-of-screen billboard.
  2. AdSense. Hey, it's made Google zillions everywhere else. Given the portability of video content, with so many people posting videos from YouTube to their MySpace or Facebook sites, if Google could figure out a way to marry a kind of video AdSense to the video content being picked up and scattered around, they could make a few bucks.
  3. Buy ScanScout. ScanScout is pretty darn cool. One of the things that ScanScout can do is "listen" to video content and insert an ad, skinning it with a bottom-of-screen banner. So, if you're watching a video that has the words "fast food" mentioned in it… The King could rise from the bottom of the screen, creeping everyone out. But it is well-targeted to the content and an innovative, attractive marketing unit.

None of the above will likely yield the kind of revenue necessary to justify the expense of acquiring YouTube, but these steps could help. YouTube has likely reached a state of maximum density, where it could get away with starting to charge for certain services.

But whatever Google has planned for YouTube, so long as the stock price stays high and the search revenue keeps coming in, YouTube can take a long, long time executing it.

Media Strategies Editor Jim Meskauskas is vice president and director of online media for ICON International, Inc.an Omnicom Company.

 

Comments

Frame Ghost
Frame Ghost May 13, 2008 at 9:09 AM

That was a really interested reading. I'd like to hear any opinions on what Google's CEO was thinking when buying YouTube a-year-and-a-bit ago. Maybe they've miscalculated how popular youtube would become?