A coming of age for YouTube

Admit it: You can't build a business on showcasing home movies. YouTube finally realized that, and now it's getting serious about making money.

To some YouTube fans, the Web's iconic video-sharing site may appear to be losing its soul.

Two years ago, YouTube executives disdained anything but the most unobtrusive forms of advertising (no prerolls for them), and even promised to pioneer new ad formats. At the same time, YouTube refused to license rights to TV shows and feature films. Instead, the company bet big on the creative force of the masses to draw huge audiences and eventually advertising dollars. But things didn't turn out that way.

Greg Sandoval/CNET Networks

In the past week YouTube has announced it will auction off search terms as part of an ad program, called Sponsored Videos, designed to enable anyone to expand the viewership of their videos. YouTube also said last week it obtained rights to post full-length movies produced by a large film studio, Metro-Goldwyn-Mayer . What this means is that YouTube has given up on the idea that user-generated content can be a successful standalone business. It's about time.

Despite all the new found political influence and the kudos for enabling individuals to become their own broadcast networks, YouTube--and rivals--have failed to prove that there's significant revenue in showcasing home movies. A YouTube representative declined to comment.

What's happening now is YouTube is moving out of the T-shirt and sandals phase of the company's evolution and adopting a more buttoned-down approach. Sure, Google should have rolled out a AdWords approach at YouTube a long time ago but the company deserves credit for finally pushing the site to pay its way.

By adding professional content to the site's service and auctioning off search terms, the same strategy that has made Google billions, YouTube hopes it can generate profits, avoid alienating its audience, and remain a free-of-charge video hosting service.

"YouTube is the king of user-generated video and it probably will be for the indefinite future," said Greg Sterling, an advertising analyst with Sterling Market Intelligence. "But I think it's wise for them to bring this professional content in and give people a mix of reasons to come to the site. I would say the introduction of the Sponsored Videos is very important and smart part of their monetization strategy and may be the one that drives the most revenue over time."

The truth is the ability of user-generated content to generate lots of cash has been in doubt for a long time. Most of the video-sharing companies that challenged YouTube two years ago have been restructured or switched business models . The most recent evidence came Saturday when TechCrunch reported that AOL will shutter the company's lightly trafficked video-sharing service, AOL Video Uploads.

Two years ago, there were people who eyed YouTube's success with skepticism, including Barry Diller, IAC's chairman and CEO and one of brains behind Fox Broadcasting. Josh Martin, an industry analyst now with the Yankee Group, was heavily criticized by YouTube after publishing a June 2006 report that predicted YouTube would struggle to squeeze profits out of video sharing because fans would refuse to accept advertising.

But that's exactly what happened.

"Companies are realizing it's nearly impossible to raise money from user-generated video," Martin said Thursday. "I do think both (amateur and professional made) content will continue to coexist at YouTube. They still get significant viewership on the user-generated side but they also need to start making some money."

YouTube paying its way
In the two and half years since Martin wrote his report, YouTube has tried a host of different ad platforms, including overlays, which briefly appear at the bottom of the video player, and ads that appear after the conclusion of a video. YouTube also offered space on its front door where companies could post video ads.

Compare YouTube's approach to an ad-heavy site like MySpace. YouTube may make $250 million. MySpace is on pace to see $1 billion.

They weren't enough to help YouTube deliver the kind of money that Google expected, CEO Eric Schmidt has said several times this year.

Some analysts estimate YouTube will generate between $200 million to $250 million this year. That kind of money barely registers at Google, which could see revenue of $20 billion this year.

Some of YouTube's troubles generating ad dollars can be traced to the company's reluctance to annoy visitors. The company has always refused to show prerolls, ads that appear prior to the start of a video. YouTube argues that while prerolls make it likelier that an entire ad will be watched, it's also more likely to frustrate viewers.

YouTube's Sponsored Videos has all the hallmarks of the company's attempt to advertise to audiences while not disrupting their viewing experience. When someone bids on a search term, each time a user keys in that term, they will see the most popular videos attached to the term in one column. In a second column, the searcher will see videos offered by the person or company that bought the search terms.

Compare YouTube's approach to a site like MySpace, the nation's largest social network. One of the biggest complaints about MySpace is that there's too many ads on the site, and this may be one reason why rival Facebook is growing faster. Yeah? Well, MySpace said last month that it's on pace to make $1 billion in revenue this year.

Film industry sources told me that YouTube is insisting on a certain ad format for the long-form films found on the site. Some of the studios interested in posting their full-length movies at YouTube want to have the final say on how to advertise to viewers.

Perhaps the time has come for YouTube to be a tad more aggressive.

Fans will understand and grow to accept more ads, predicted Martin in his report two years ago. "Eventually, the paradigm will shift, where viewers accept watching advertisements to support their free video."

 

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