Reading more and more about Yahoo!’s latest foray in video, I could not help but think about Google’s challenges at its YouTube unit.
I attended YouTube’s Videocracy shindig this week. Entering Terminal 5, I had no idea what to expect. I’ll spare all of the details; walking away from the event, however, I wondered:
Will YouTube ever generate $1.65B in revenues for Google?
I don’t doubt Google’s ability to generate sales, but scaling video revenues have been quite different from scaling search revenues and I am not sure if Google will be able to pull it off. Allow me to explain:
- Google did nearly $17B in sales in 2007.
- In 2006, the year Google bought YouTube, YouTube sold $15M worth of ads. All of video advertising did about $500M (with the US getting some $439M). Its inventory should have allowed YouTube to sell $15M per month, but YouTube did not.
- In 2007, US video advertising did $750M, assume global video advertising altogether was $1B.
- In 2008, US video advertising will do over $1B, assume global video advertising altogether will be $2B.
This year, Google is expected to do $20B.
If you continue, you will see that by 2012, online ads in the US will be $7.1B, global video ads will be over $10B.
The problem, basically, is that Google - who has seen its market cap fall from $230B to $165B - needs home runs now. Seeing how Google will do $20B in annual revenues in 2008, even if YouTube commanded every single penny in 2008, or $1B, it would add less than 5% to its top line.
Realistically, considering that YouTube did $15M out of $500M or 4% of online video advertising revenue in 2006, I suspect that at most, YouTube would get 10% of all video ads this year (so roughly $100M) despite owning 50% market share because YouTube has yet to win over advertisers in droves as it has done so in search. I am not saying anything new here, I suspect the bulk of video ads goes to places like Yahoo! Video, MSN, MSNBC, CNET, WSJ.com, TheStreet.com, etc. that have premium video content and existing and experiences sales forces who sell to branded advertisers and ad agencies.
If YouTube does $100M, that is about half of Google’s mammoth Search Licensing business. What business is that? Exactly our point. The licensing business did $25M in 2002 and $189M in 2007. Those numbers justify a stand alone business, but next to Google’s much larger advertising business, they get lost in the shuffle. Yes, I know, the growth in front of YouTube is much larger than the growth in enterprise search licensing, but the point is, Google faces many hurdles with monetizing YouTube.
YouTube - No Grand Slam
Much like MySpace before it, YouTube has become a mainstream social and cultural phenomenon (Facebook has the potential and is at a tipping point, though I am starting to have my doubts with them - more on why later).
YouTube commands such a commanding lead in the video ecosystem that the risk to tinker with its success is considerable.
In other words, by trying to flood the site with advertising, the upside is uncertain (due to YouTube’s 3 risks) while the downside is clear.
YouTube is the 800-pound gorilla in online video, potentially forever. Two wild cards remain:
- Hulu, due to its superior content, unparalleled reach to Microsoft, AOL, MySpace, Yahoo! and Comcast, and the amazing team Jason Kilar seems to have assembled at the NBC-News Corp. joint venture, starting from the very top (suck-up watch and disclaimer: WatchMojo.com is a content provider on Hulu, yes, we’re quite proud of that).
- I remain bullish on MySpace TV for a few reasons, mainly due to the site’s awesome traffic, their entertainment skew to start off with, their outreach to media organizations, and, well, because Rupert Murdoch should never be bet against (disclaimer #2: Mr. Murdoch was my indirect, brief boss from September 2005 to December 2005; in March 2006, News Corp. sued me, though that was settled amicably last year; today, all is well as we provide content to MySpace TV. Just thought I should disclose that).
Anyway, while Hulu and MySpace TV remain wild cards, I wonder if anyone will ever come close to even putting some pressure on YouTube from a traffic and mindshare perspective. But, when it comes to revenue, I am not sold yet.
This is why Google rolled out the red carpet, literally and figuratively, for advertisers and ad agencies at Videocracy.
Indeed, while users make videos viral, advertisers keep the lights on.
Due to this reality, Google will not want to mess with YouTube, messing with YouTube, whose success to become an actual business involves three risks:
- Legal Risk: This is something that Google is slowly but surely addressing, but mainly, the market is overcoming in the sense that it’s way too late to fight YouTube. It’s there, use it or be sideswiped by it. With Google managing it, I think that ultimately most content owners will seek to partner with YouTube than fight it. Yes, I am well aware that Viacom continues to litigate against YouTube seeking $1B in damages.
- Business Risk: involves turning YouTube into too much of a commercial property. Even Rupert Murdoch understood that monetizing MySpace too much initially was a danger. This, in fact, is why Facebook might lose in the long run because that $15B paper valuation will put undue pressure on the user experience.
- Content Risk: YouTube remains a catch-22. For YouTube to become a successful business, it needs to radically change its content portfolio. Don’t get me wrong, there’s nothing wrong with UGC and pirated content, but advertisers don’t any any part of it, and while new companies try to spin ways to convince us that yes, marketers do want to advertise alongside UGC, they don’t, won’t and can’t.
Mobile Calling?
Google now has 15,000 employees. A lot of them work in video and at YouTube, many don’t. One area that CEO Eric Schmidt is betting on is mobile. I came across the following data from Financial Times, via Paul Kedrosky’s blog:
Google on Wednesday said it had seen 50 times more searches on Apple’s iPhone than any other mobile handset, adding weight to the group’s confidence at being able to generate significant revenues from the mobile internet.
“We thought it was a mistake and made our engineers check the logs again,” Vic Gundotra, head of Google’s mobile operations told the Financial Times at the Mobile World Congress in Barcelona.
If the trend continues and other handset manufacturers follow Apple’s lead in making web access easy, the number of mobile searches will overtake fixed internet searches “within the next several years”, Mr Gundotra said.
Then again, iPhone has 10% of the market. So even if that is the case, it does not make a big dent in Google’s business. But the fact of the matter is that if Google can tap into the success of more searches on the iPhone and share that know-how with Nokia - who commands 40% market share in the cell phone market - then it is possible for Google to essentially throw in the towel in video revenue and focus on adding search revenues in mobile, something that few (if anyone) have hitherto managed to do.
Google’s bread and butter remains search advertising. Extending search onto wireless seems like a more plausible thing to do for Google than building a dominant online video advertising franchise.
Hmm… seems to be like a typical case of innovator’s dilemma. What exasperates this, I think, is Google needs to bring on a Vice President in charge of sales strictly for YouTube. I am sure, I presume, that such a person exists. But much the same way that David Eu, VP of Content Partnerships has emerged as a visible executive who attends panels and talks about how great YouTube is for content owners (and as a content provider, I assure you, we love Google and YouTube and want them to succeed, because their success entails ours and vice versa)…
YouTube needs to have one person lead YouTube’s revenue generating efforts. Judging by the Videocracy shindig, I suspect that person is none other than VP Tim Armstrong… but if Armstrong is also responsible for Google’s Ad Sense and Ad Words programs, then I do not think, respectfully, that he can devote the time, energy and brainpower to address the biggest question facing the online advertising and online video advertising industry:
How do you monetize YouTube?
It sounds blasphemous, but it should be the only question on Googlers’ minds, or at least one Googler’s mind.
I think ultimately, the answer to that (due to Google’s own innovator’s dilemma) is to simply acquire a company like tremor Media, Broadband Enterprises, Video Egg, or Bright Roll. But, time will tell if I am right.
Note: of the companies mentioned above: I own shares in YHOO, WatchMojo.com provides content to YouTube, MySpace TV, Hulu and I sure would like an iPhone.
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