Cracking the YouTube Enigma

Latest figures peg Apple’s (AAPL) revenues off the App ecosystem at a "whopping" $20-45M.

Back in March 2008, when Facebook hype was at current “Twitteresque” levels and FB (and iPhone) app funds were popping up right and left, I asked where’s the YouTube fund. [Disclosure I: YouTube is one of our largest distribution partners.]

The rationale then was:

In my opinion, monetizing YouTube is the single greatest business opportunity online right now:

- YouTube streams 1 out of 3 videos;

- YouTube is part of the most profitable online media company, Google;

- Online video advertising is the next high growth area;

- YouTube has hitherto not generated any meaningful revenue, so the upside is far more considerable;

Nothing has really changed my point of view.

In fact, the case for a YT-focused fund is stronger.

You can’t, after all, tell me that Google’s (GOOG) rules of engagement are any harder to overcome than Facebook’s or Apple’s, after all.

• Much as Google has become the dominant navigation platform, the iPhone will be a dominant ecosystem in wireless,
• Facebook is the dominant “directory” platform, and
• Google’s YouTube is the dominant entertainment platform right now (no disrespect to Hulu, of course, though Hulu knows its role: to serve traditional media’s interest). [Disclosure II: Hulu, too, is a distribution partner.]

Biggest Opportunity in Business Today: Cracking the YouTube Enigma

Online video is big in terms of consumer activity right now: there are more video streams generated than search queries.

Over time, it will be huge in terms of advertising (it will also be huge in terms of e-commerce, and some companies are playing in that field.)

I don’t think - despite my evident bias as the CEO of a content production, distribution, syndication company - that online video advertising will totally usurp television advertising’s size ($1B vs. $75B right now, after all)… but I do think that since online advertising/publishing/media in general will shrink traditional advertising/publishing/media, over time, online video could be larger than a smaller television ad market.

The economic meltdown is shrinking media companies faster, but even without the meltdown, I have news for you: CBS (CBS), News Corp. (NWS), Disney (DIS), Viacom (VIA) etc. will have shrunk anyway. To quote Chris Rock, no one [in media] is above an ass-kicking [because of the Internet]. Ok, so that was a quasi Chris Rock quote.

It might sounds crazy now, but basic math suggests eventually online video will be larger than search and online ads (by 2018) in general will be bigger than television ads (by 2021).

This is why it baffles me to see both Facebook, Apple and yes, “even” Twitter app funds get all of this hype. I think it’s cute, frankly.

Media vs. Technology

So why are investors not rushing to fund YouTube related companies?

Well, for one: VCs (for the most part) are irrelevant after the meltdown. Their limited partners are broke, the VCs have nothing to show for it… and this is why apart from follow-up investments in portfolio companies that have a shot of succeeding (ie. not dying, forget the cliche 100 or 1,000x returns some of the more ballsy VCs sought), you will see very few new investments.

But more importantly, all video-related investments - even the tech oriented ones such as CDNs, players, platforms, etc. - are really media businesses and not technology ones. In other words, the technology nuts and bolts is an afterthought, a detail. By now, the truth is out: VCs understood technology so they successfully helped build the backbone of the Web. But when it comes to anything touching media and entertainment, they are clueless.

These two reasons explain why despite YouTube’s massive business opportunity, you won’t be seeing any YouTube funds.