Can Google find the pot of gold?
Google's purchase of YouTube last fall seemed like a no-brainer to the search engine's executives. Online video had exploded and YouTube...
San Jose Mercury News
Google's purchase of YouTube last fall seemed like a no-brainer to the search engine's executives.
Online video had exploded and YouTube, the most popular video-sharing site, was streaming more than 100 million clips a day featuring everything from pet tricks to pirated TV.
"We bought YouTube because of the traffic and because of the community," Google Chief Executive Eric Schmidt told investors at a San Francisco conference earlier this month.
The site was losing gobs of money, but that didn't bother Google. Traffic was climbing, and still is. Since the deal, YouTube's audience has grown 40 percent. According to comScore Media Metrics, YouTube's 136 million monthly visitors made up 18 percent of the global Internet audience in January.
One definition of an Internet URL is "Ubiquity first Revenue Later," Schmidt joked at the Bear, Stearns conference.
But the joke could end up being on Google, which paid $1.7 billion for YouTube's URL on the bet that it could turn reruns into revenue.
Viacom, the New York-based entertainment conglomerate, recently filed a billion-dollar suit against Google for "massive copyright infringement." Then, last week, NBC and News Corp. announced a partnership in which they would distribute television shows, video clips and movies through large portals such as Yahoo!, MSN and AOL — an effort that would compete to some extent with Google.
Between lawsuits, drawn-out licensing negotiations and other developments, YouTube has become an increasingly expensive distraction for Schmidt and other top executives.
Meanwhile, YouTube is still groping for an effective business model. User-generated content may be popular, but it is not easy to make money off of. And professional content is finding audiences elsewhere on the Internet. Just before it filed the lawsuit against YouTube, Viacom announced a deal with Joost, which promises closer control of copyrighted material.
"This was a very, very speculative bet," said Paul Kedrosky, a venture capitalist who writes the blog Infectious Greed.
While assuring investors that the size of YouTube's business is "very large," Schmidt conceded that "it's unclear what the monetization looks like because it's too early." And he's right; the deal is still only four months old. But adding YouTube to Google has certainly had a rocky start.
YouTube in 2006 sold less than $15 million in ads, according to a recent filing with the Securities and Exchange Commission — not enough to cover the site's bandwidth costs, as calculated by outside experts. By comparison, targeted links have been a gold mine for Google, which had a $3.1 billion profit last year.
Contrary to early assumptions, common forms of Internet advertising, such as targeted links, do not work well on the freewheeling site. YouTube's video content is not so easily matched with relevant ads; it's hard to know what an audience drawn to a free video of someone's cat drinking from a toilet bowl might also want to buy.
While the user-generated content can be tasteless, the professionally produced content is often posted without permission. That's not an attractive environment for major brands concerned about their image.
Ben Crain, vice president of media at Rapt, whose software is used to determine pricing for online ads, compared placing advertising links alongside YouTube's user-generated videos to buying unsold "remnant" inventory on other sites. It is, he said, "high volume, low value, distress inventory."
YouTube stopped featuring advertising links a few months ago and has been concentrating on offering home-page video ads, along with channels focused on specific brands and special promotions. These have been embraced by advertisers ranging from Coca-Cola to Cadillac, but it's unclear how much money the ads are making for YouTube.
The way brand channels work is that an advertiser who spends a certain amount of money on YouTube is given a page on the site, where it can upload clips at no cost and control the appearance of the area.
Promotions vary. One example is a New Year's Eve special that was designed to create interest in Chevrolet's Silverado truck. The event was put together by Campbell-Ewald, a Detroit-area advertising agency.
To draw attention, Chevrolet sponsored a New Year's Eve countdown featuring Warner Bros. Artists like Crime Mob, Johnny Hallyday, Kid Rock, Lil Scrappy and My Chemical Romance. Users were encouraged to upload their own video resolutions.
Meanwhile, Chevrolet posted an informational video about the Silverado. This was the test, recalled Ed Dilworth, chief contact officer of Campbell-Ewald.
The result: hundreds of thousands of views of the Silverado video. "It was like, holy cow!" Dilworth said.
The benefit of YouTube, Dilworth said, is that unlike traditional forms of advertising, YouTube provides users with interactive experiences that can help them make big decisions, in this case buying a $40,000 vehicle.
Dilworth said he also has been using YouTube to show what life is like in the U.S. Navy, another client. Real sailors are encouraged to post videos on YouTube, ranging from the humorous and goofy to the serious and sincere.
About 3,000 videos on YouTube now chronicle a range of service experiences, potentially drawing in recruits. "We can't do this anywhere else," Dilworth said.
Dilworth said the Navy gets data from YouTube that lets it measure the success of its brand channel, including how many people view a video, e-mail it to a friend or post it on a blog. The Navy can also determine if someone watches a video on YouTube then visits the Navy's own site.
This is great for the Navy's recruiting efforts, but it's also another example of how Google's battle with major copyright owners could muck up its efforts to make money. That's because sailors, like other YouTube users, often mix copyrighted content, especially music, into their videos. In most cases that is illegal without permission from copyright holders.
Google and YouTube have agreed to install filters that can flag copyrighted material as part of deals with several major record companies. The filters, however, haven't been turned on.
This illustrates yet another challenge for Google: Will users stay around after the site goes legit?
"I think Google may have underestimated the amount of challenge all this copyright problem was going to cause," said Josh Bernoff, a vice president of Forrester Research.
Google is holding 12.5 percent of YouTube's purchase price — around $200 million — in escrow to cover legal liabilities.
If the court finds Google liable for infringement, would it be enough? Brian Pitz, an analyst with Bank of America Equity Research, calculated that advertising revenue for the 1.5 billion copies of Viacom clips streamed by YouTube would have amounted to just $30 million.
But a guilty verdict could lead to other lawsuits. Already there are several copyright suits pending against Google in addition to Viacom. "Copyright damages could really start adding up," warned Randy Broberg, a copyright attorney at Allen Matkins in San Diego.
YouTube has tried to manage its risk by signing agreements with 1,000 media partners, but the agreements don't cover the broad array of content that users post on the site.
There is also the question of millions of dollars in bandwidth expenses. While experts such as Dave Burstein, editor of DSL Prime, say Google's network is efficient, Joost, BitTorrent and others that use peer-to-peer technology to deliver movies and videos can do so at far lower cost.
All the complications aside, some analysts say Google is rich enough to afford to have YouTube fail. What the company can't afford, they say, is a prolonged period of YouTube-induced distraction.
"The biggest risk related to YouTube, in our view, may actually be whether it is keeping Google management from focusing on the core search business," Lehman Bros. analyst Doug Anmuth wrote recently.
Then there is the competing view. "If anyone can monetize online video well, it should be Google," Anmuth concluded.
Material from the Seattle Times business staff was added to this story.