Between a rock and YouTube, video execs see promise

SAN FRANCISCO--If the $1 billion Web video advertising market is to reach the level of television's estimated $50 billion, it ironically won't be thanks to YouTube, the Internet's most popular spot for watching clips.

That's at least the read from Internet video executives here Thursday at the RBC Capital conference. Executives from popular video search and ad companies said that so-called user-generated videos like those on YouTube aren't drawing any significant dollars from advertisers or agencies. Advertisers need to control their brand, and it's seen as too risky to give up that control on a network with home videos or potentially pirated broadcasts.

One executive went so far as to say that user-generated videos will never make money.

"It will be like instant messaging. It's ubiquitous but no one makes money on it," said Thomas Wilde, CEO of Everyzing, which hosts digital audio and video for major broadcasters such as Fox Sports and Cox Radio.

Of course, he has a stake in supporting professional content. But that's still a controversial idea, given that Google spent $1.6 billion to buy YouTube two years ago. Despite the site's enormous popularity--it's the no. 5 Web site--YouTube has yet to make money from the massive video inventory it produces. Industry insiders have even estimated that it costs Google as much as $1 million a day in bandwidth fees to serve hundreds of millions of videos, according to Fortune.

Suranga Chandratillake, CEO and founder of video search service Blinkx, speculated that Google didn't really care about the costs when it bought YouTube. The acquisition, he said, was likely about acquiring those millions of people who visit YouTube every day--the same rationale behind Microsoft's interest in Facebook. (That said, YouTube has sought to form partnerships for professional videos.)

He disagreed with Wolfe that user-generated content will never make money.

"It will have to be a very different kind of advertising. If someone does figure it out, then Google will be in a good position," he said.

So when and for whom will the money start rolling in? Video ad executives said that while YouTube has a lot of inventory that's hard to monetize, sites with professional content such as Hulu.com don't have enough inventory to serve demand from brand advertisers.

Jayant Kadambi, CEO of video ad network YUME, said that in February, a major auto manufacturer called him and asked to spend $2 million on online video broadcasts the day before the Super Bowl. "I couldn't take it," Kadambi said, clarifying that he didn't have enough inventory. (His company now runs a piece of Microsoft's video ad platform.)

He said only recently has there been enough video to start targeting ads to people's demographics, location and age. That has kept the cost of video ads relatively high--between $10 cost per thousand impressions and $20 cost per thousand.

Video executives also said that they're getting higher rates of response on video ads than typical online display ads, which can command as low as 0.1 percent click through rates. They said that the more popular pre-roll video ads--or ads that play before a broadcast--are getting anywhere from 2 percent to 6 percent response rates.

Still, Blinkx's Chandratillake said hosting and streaming video is expensive, particularly compared with a text page. "If you are a publisher you're paying for this expense and you're trying to figure out how ad revenue will offset that expense," he said.

"What we've found is that advertisers and agencies are only interested in professional media, so professional content providers are having a good time finding extremely high demand because they have a lack of video views," he said.

He said his company has had some success creating a program to place sponsored videos next to searched-for broadcasts.

As for getting to TV-like spending, advertising executives said that that likely won't happen soon, if ever.

"I don't think it's going to be a $50 billion business, but it's going to be a more efficient business, one that's targeted and relevant," said Brandon Berger, an executive at MDC Partners, a holding company for several digital advertising agencies.