YouTube May Be Solving Its Ad Problem–Slowly
by Peter Kafka
Posted on May 8, 2009 at 5:52 AM PT
YouTube is the world’s biggest video destination. But it has yet to generate a penny of profit for Google, which paid more than $1.6 billion for the site in 2006.
That’s because the site is very expensive to run–YouTube served up 5.5 billion videos to U.S. viewers alone in March–and a very hard sell to advertisers, who are scared off by its more-or-less-anything-goes collection of clips. The site doesn’t even bother to try sell ads on more then a small percentage of its videos.
But the latter part of that equation may be changing, argues Bernstein Research’s Jeffrey Lindsay. He thinks YouTube has the ability to sell ads against nine percent of its inventory. That alone represents progress–last year, that number was around three to four percent.
But Lindsay thinks that Google (GOOG) is getting better at putting more advertiser-friendly stuff up on the site, via projects like the TV and movie hub it rolled out last month.
That site doesn’t have anything like the breadth that Hulu boasts, but it’s a big improvement over what used to be there. Lindsay figures that it will get better and that next year YouTube will be able to sell ads on 15 percent of its inventory. His note:
We also note the large increase in advertising on YouTube, which we estimate currently has approximately 9% ad coverage and which we believe could rise to 15% within the next 12 months as more professionally-produced content and movies are added to the Web property. We understand that Google is currently exploring new payment mechanisms–micro-payments and subscriptions to expand YouTube’s business model. Although YouTube revenues are likely to be small through the end of 2009 (we estimate $123 million), we think the increased ad coverage will place YouTube in a favorable position when CPMs eventually start to recover in 2010 and beyond. Our 2010 forecast for YouTube revenues of $222 million represents 81% growth over 2009.
Then again, YouTube still has a very long way to go. Look at the most popular clips on the site today and you’ll find a whole lot of video from this week’s Barcelona-Chelsea Champions League match, all of which seem to be copyright violations, which makes them toxic to advertisers.
Here are four examples from the same game. Note that all of them seem to have been up on the site for at least a day:
Comments
YouTube should have focused on developing a value-added content delivery network revenue model, instead of advertising.
Posted by Jonathan Marcus at May 8th, 2009 at 10:44 amNice article Peter. One of YouTube’s many problems is they don’t follow up on leads!!
As an Internet marketing consultant who runs ad campaigns for couple dozen clients, I have filled out YouTube’s advertising information request form multiple times and have never received a response. A colleague in NYC has had the same experience.
If Google is going to monetize their $1.6 billion investment in YouTube, following up on sales leads would be a good idea, don’t you think?
Posted by Rob Bunting at May 8th, 2009 at 12:08 pmJonathan, please explain how that would work.
Posted by Peter Kafka at May 8th, 2009 at 6:13 pmThe staggering amount of video YouTube processes confers serious infrastructure advantages. Achieving that level of scale provides critical technology operations insight.
By the time everyone realized that video needed to become a core content offering, YouTube’s penetration and brand presence was insurmountably large. Their embed player, ugly as it was (and is), was (and remains) ubiquitous.
Had YouTube rolled out a commercial video platform with
rich on-demand encoding services, a fully customizable embed player, HD or at least higher quality playback all sitting on a developer friendly App Engine-type infrastructure, they would have obviated the need for at least half a dozen related services from On2, Brightcove, thePlatform, Limelight and Akamai. They could have created the Amazon AWS equivalent in video overnight.
It costs real money to serve video, and it ain’t easy, particularly when it’s done well. Video consumes orders of magnitude more bandwidth than other content types. As such, it presents a significant infrastructure business opportunity. However, most good companies opt to ‘monetize’ simply by marking up their costs, rather than playing shell games with loss-leaders and hoping to make up the difference with advertising.
No amount of advertising can feasibly subsidize the cost of serving video both on-site and off-site, particularly at healthy operating margin levels.
Posted by Jonathan Marcus at May 10th, 2009 at 11:42 am