Streaming Media Ventures: online video ads

Image representing hulu as depicted in CrunchBase

Image via CrunchBase

The Financial Times yesterday (11/17) had two very interesting, though highly predictable articles on the state of the YouTube business model in recent months (yes, that is business model, not pageviews) which I thought I would share this morning...

First, the British newspaper profiled the rise of rival video portal Hulu, a joint venture between NBC and News Corp ("Rival forecast to catch YouTube") which serves only professionally produced content as opposed to the user-generated content (UGC) that made YouTube famous and earned its founders their $1.65B exit when the site was acquired by Google two years ago. Arash Amel is quoted in the FT as forecasting Hulu to match YouTube dollar-for-dollar in ad revenues during 2009. “YouTube is in a very tough place right now,” said Mr Amel. “Most of that user-generated content is worthless or illegal. The next 18 months will determine whether or not it was just an expensive mistake for Google.”

This would be particularly significant considering the massive advantage YouTube has in total user traffic, with 83m unique viewers in the US during September alone, compared to merely 6m unique views for Hulu, according to market researcher Nielsen. Google has taken a very gradual approach to scaling, monetizing and enhancing the content base of its very expensive social network, which is what YouTube has basically grown to become since it was launched in 2005. Google has taken the community-driven development approach in their streaming media endevors to-date, with little concern evident (at least on the face of things) over the exorbitant loses YouTube has generated day-after-day as millions of people continue to upload and share their experiences using the free hosting space that each registered YouTube user is alloted.

The paper follows this bold industry analysis with a complimentary evaluation of YouTube's core business model ("YouTube's popularity fails to sway advertisers") and prospects for improving on its dismal record of convincing ad buyers to take a gamble on its almost universally amateur and wholly unpredictable library of home movies and pirated Tivo recordings. Tracey Scheppach, video innovations director at Starcom, a media agency is quoted in the article asserting, “YouTube hasn’t done a great job justifying why advertisers should migrate online.” Clearly there was little thought among Google management dedicated to how YouTube would eventually return its investment to the company prior to gobbling the site up for 10-figures in 2007. Without a really great thought soon, the million-dollar per-day cash burn and they swelling database of worthless content to manage may be too much for even Google to bear in these tough times.

YouTube has been the biggest thing in online video since coming on the scene in 2006, with a current market share hovering between 75-85% month-to-month. It isn't that hard to become the biggest thing in any web-based market when you have the full financial power of Google behind you, which is the fourth largest company on the planet and entirely liquid, but the YouTube team deserves credit considering the hundreds of competitors it has left in dust as the market grows.

One might assume that YouTube is raking in cash, especially considering the $1.65 Billion Google paid to acquire it in 2007.

However, despite all of the advantages any Internet company could ever ask for, YouTube hasn't the foggiest idea how to make money off of their product. Of even greater concern, everyone seems to think that they need to burn cash on a crappy product to keep pace with a market monopolized by a cash cow. YouTube could never exist without Google behind it, but does that prevent anyone from rising to challenge Google in the online video space?

Ever since launching in 2006, YouTube has inspired many to speculate on its potential as a revenue generating business. Many have given the video platform high marks for potential, but all seem to arrive at the same dead end conclusion- no profitable model has yet been validated.

According to estimates from industry experts, YouTube distribution costs are at least $1 Million/day and growing as the demand for online video grows. Financial reports from Google last year listed the company's revenues as "not material", which is significant considering the website consumes 3% of Google's $11.2 Billion in annual operating costs. This is not something that Google's shareholders will like to read, but it is about the only bad news coming out of the search giant so I doubt their share price will suffer too badly.

So what is Google to do with the most successful money-pit in history? If the words of Eric Schmidt, Google CEO, are any indication of what the company's YouTube strategy is, things don't look very good in Mountain View. "We have enough leverage that we have the leverage of time. We can invest for scale and not have to make money right now, he said. Hopefully our system and judgment is good enough if something is not going to pay out, we can change it."

In other words, "WE DON'T HAVE A GODDAMN CLUE WHAT TO DO!!" Trust me, these are the most coherent comments from Dr. Schmidt I could find anywhere on how YouTube is going to monetize its massive video collection.

In another odd exchange on YouTube's strategy for generating revenue came on CNBC's Closing Bell between Schmidt and Maria Bartiromo;

BARTIROMO: Which is a huge priority, clearly. A lot of people feel like this is an amazing opportunity for you. So, as far as monetizing that business on YouTube, do you think that takes a year? Does it take the next five years? What's your time frame on that?

Dr. SCHMIDT: We believe the best products are coming out this year. And they're new products. They're not announced. They're not just putting in-line ads in the things that people are trying. But we have a number--and, of course, Google is an innovative place. The Yahoo! team are trying various new forms of advertising, ones which are much more participative, much more creative, much more--much more interesting in and of themselves. Google believes that advertising itself has value. The ads literally are valuable to consumers. Not just to the advertisers, but the consumers.

Google has another huge loss generator created by its poorly considered acquisition of YouTube- litigation. A long-running legal dispute with Viacom has potential to run Google in excess of $100m in legal fees, and this is not the first nor the last copyright infringement case Google's flawed online video strategy will create.

No matter how hard you look, nobody at Google can answer the $1.65B question!! Shashi Seth, fomerly head of YouTube monetization, quit recently for a position with startup Cooliris, and even Founder Sergey Brin admits that the idea at this point in Google's video strategy, all that matters is the community, content is presumably going to fall in line eventually. Sadly, Google seems convinced that "YouTube + Ads = Holy Grail". Who are they kidding?

Streaming Media Ventures

FT.com: Hulu will equal YouTube's earnings by year-end 2009...

YouTube: most successful money-pit in history...

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