YouTube looks beyond advertising revenues

OVUM COMMENT - Eden Zoller, principal analyst at Ovum

Google-owned YouTube is tapping into e-commerce revenues with the launch of a new service in the US that allows YouTube viewers to buy music and games from selected partners featured on YouTube videos. This is a good move as Google has struggled to monetise YouTube despite experiments with a range of advertising models.

YouTube is the dominant player for online video and is a hugely popular user-generated content site enhanced with social networking features. It had 330 million visitors in August 2008, according to Comscore. The problem is that while YouTube continues to show strong growth in usage and users, it is struggling to find a strong, underpinning business model to match. And this is a big problem when you consider that Google spent $1.65 billion to acquire YouTube (2006) and has been investing in it ever since. Google does not provide financials for YouTube but it is not yet profitable and its contribution to Googleís revenues is minimal – Googleís second-quarter 2008 revenues stood at $5.37 billion; YouTube revenues are estimated to come in at around $100 million for full-year 2008.

Complementary, mixed models are the way forward
Google has taken pains to find advertising formats that sit comfortably on YouTube, and to be fair this is particularly challenging in the context of user-generated video content. Social networks are attractive to advertisers because of the opportunities for deeper targeting and interactivity, but embedding advertising in a way that sits comfortably with users and does not backfire on brands is very difficult. Advertising revenues in this context are not the sure thing that many in the industry have presumed. It seems that Google agrees and recognises the need to look more seriously at diversifying revenues beyond advertising. It has chosen an e-commerce platform to do this. This makes sense as e-commerce is a natural complement to online advertising and ideally a ëclick to buyí is what the advertising should encourage. We think Google has made the right move and we have advocated mixed revenue streams for social networks as a means to strengthen the business model. This is the approach adopted by LinkedIn, one of the few social networks that has managed to break even. Advertising will be the mainstay, but smart companies will look at a more diversified model.

The call of ëclick to buyí
The YouTube e-commerce platform is based on a simple concept, which in our book is always a good thing. YouTube viewers who want to buy, for example, a song featured in a music video can click on an icon that takes them to selected commerce partners including Amazon.com and Appleís iTunes store. YouTube gets a share of the revenues from every transaction. The current content partner line-up is modest in terms of numbers if not names, and comprises content from EMI and Universal Music Group, and EAís Spore video game. Google is of course hoping to bring other content partners on board going forward and also diversify the content and services on offer. Another attractive aspect to the proposition is that YouTube is creating an environment where viewers pay for third-party content rather than pirate it and infringe copyrights.

The search for advertising models continues
Google is meanwhile still experimenting with different approaches to video advertising and has acknowledged this will take time to get right. It has tried pre- and post-roll ads, which typically have limited success because viewers are annoyed by having to sit through the first ads and then typically skip the post-roll video ads. Another format being tried on YouTube is in-video advertising, which basically means running ads along the bottom of videos as they play. The danger here is that ads appear annoying and intrude on the viewing experience. A more recent and interesting initiative is Googleís video ID system, which enables content owners to know when copies of their video clips are uploaded to YouTube by users. The idea is that content owners can then share in any revenues generated around that copied clip. Googleís approach might look scatter gun but it has to find a formula that works. YouTube is more than a test bed – it is the lionís share of Googleís online video business.