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Bang for the buck

I thought a little bit about the suddenly ubiquitous YouTube and its strange business model. The whole thing is quite paradoxical in that this company currently adds a tremendous amount of value to the Internet, and many people, including me, would miss and mourn its disappearance. Despite their enormous added value, I don't see how they could possibly convert it to revenue and am thus very skeptical about the future of this hot young upstart. In fact, let me predict that the company will collapse within a year, tops. So enjoy it while it lasts.

First of all, there is the classic dotcom conundrum of how is YouTube supposed to make any money to cover its server and bandwidth costs, which have to be pretty immense at this point. Since they don't charge for uploading or showing the videos and unlike IFilm, don't even force you to watch ads before the video, the only possibility is placing advertisements next to the actual videos. But such Internet advertising, with the possible exception of Google, just doesn't work. I can't remember the last time I clicked on some ad on purpose. And I kind of doubt that any of my readers can remember that either.

Worse, even if we generously assume that advertising would be profitable, YouTube allows the videos that it serves to be embedded on any web page, at the discretion of the uploader of the video. This is an important part of why YouTube is so very useful and convenient, but it doesn't help them in generating any revenue. If you can embed, why would you ever link? YouTube would happily end up paying for the bandwidth while others get to collect the profits by running some kind of "best of" video site or by running videos in addition to its original content that draws eyeballs.

Unlike EBay that is pretty much the only game in town in its field these days since everybody is there and thus everybody has to go there if they want to find buyers or sellers, YouTube won't similarly benefit from being the first or the biggest kid on the block. The service that YouTube provides is essentially invisible infrastructure so that I can put a video on my webpage and YouTube quietly serves it on the background, and the visitors just see the video playing smoothly. If some other company started to compete in providing the same service, I could just as well use them, even if the majority of other users were still using YouTube. It would be just as easy to create a link to any other video service as it is to link to a video stored in YouTube. How difficult would it be to duplicate the user experience of YouTube?

And let's not forget that with only a handful of real exceptions, pretty much all worthwhile content in YouTube consists of unauthorized copyrighted material. Watching college kids lipsynching to hit songs (which, by the way, are also copyrighted) is amusing only for so long. As long as the boobies don't come out, nobody is going to pay for the privilege of watching that. Once you start enforcing restrictions on copyrighted material with real penalties for violations, that's that about that for YouTube.

6 comments


Despite their enormous added value, I don't see how they could possibly convert it to revenue

I'll note that Technical Video Rental is - at this moment - negotiating an ad buy with YouTube.

If they can target the ads by the topic of the associated video, and if their price is right, we'll definately jump.

I'm sure that they will inline the ads into the video at some point. It's the obvious thing to do - wouldn't you do it, if you were them?

Did you notice that when you play the YouTube embedded videos, the whole video image container is a big link to the youTube video page that is in question. Also there is the YouTube logo at the lower right corner. I suppose many, if not most people click the video image on purpose or by accident, I know I have clicked. So the embedded videos do generate traffic to YouTube.

Also, you can never underestimate the average internet user. Don't be fooled by the fallacy of thinking about you as the average internet user, or your readers, as they are likely to be above average. The googleads at YouTube seem to be camouflaged quite nicely so that they seem part of the content, and are thus generating lots of clicks.

Tjic: I'm sure that they will inline the ads into the video at some point. It's the obvious thing to do - wouldn't you do it, if you were them?

They will have to, if they want to be profitable. YouTube may be able to survive in some form, but that form will be completely different from what YouTube is today.

I bet that there are some venture capitalists who are currently financing YouTube and they have slowly realized that it doesn't produce anything and never will, but they don't want to give it up because of the sunk costs, and because the YouTube name is so hot that they are afraid that by some magic it becomes profitable and then everyone will laugh at them for giving up YouTube. Dude, what were you thinking?

Anonymous: I suppose many, if not most people click the video image on purpose or by accident, I know I have clicked. So the embedded videos do generate traffic to YouTube.

And how much did YouTube earn from your accidental clicks?

Right, it is Napster with video. Tons of content that is in violation of copyright, absolutely no way to become profitable as is, and of insufficient interest (most of it is time-wasting diversions) to its audience to justify a subscription. It is just about ready for putting a fork in it. It is, like so many dot-com operations of yesteryear, surviving wholly on hype and misspent venture capital.

The average googleads clicks by conservative estimates, is 1 per 100 visitors. The earnings per one googleads click is 10 cents. YouTube is now number 17 in the most viewed webpages in the world, and it makes about 3 million visitors per day. With these, the earnings are about 3000$ per day. That does not sound so good, but it could be improved by having greater advertisement clickthrough rate, or better earnings per click, which might make perhaps tenfold earnings compared to that estimate.

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