Should YouTube Charge for User Generated Videos?

May.31.09 | About: Alphabet Inc. (GOOG)

In an eye-opening essay, Bernstien Research analyst Jeffrey Lindsay proposes a radical idea on how Google (NASDAQ:GOOG) might address the business model problem that now afflicts YouTube: charge people listing fees for uploading video to the site.

ytLindsay writes in a note to clients Friday that YouTube in 2009 should generate revenue of $200 million to $250 million, but with costs in the $400 million to $700 million range. I would note that Google doesn’t provide any financial data on YouTube, but the numbers are consistent with what other analysts have estimated: back in April, Credit Suisse analyst Spencer Wang calculated that Google will lose $470 million on YouTube this year.

True, the company is pushing harder lately at collecting more monetizable - i.e., professionally produced - video content. But Lindsay contends that “unless Google can pull something unexpected out of the hat,” it is unlikely that advertisers will favor YouTube over Hulu or the Web properties of the broadcasters. Meanwhile, he notes that the service as currently structured effectively has nearly unlimited costs.

“Is it really a good idea to allow users to upload video of anything?” he asks. “One or our colleagues regularly uploads video of his pet mouse. Some members use YouTube as a way to share family videos with relatives. Hosting these videos forever has real cost. Is the community really enriched by this service?”

He thinks it might make sense to consider levying low but non-zero listing fees so people “stop listing rubbish and cover at least some of the hosting cost.” Lindsay proposes that videos that score well in user metrics could get a break on their fees which could go to zero for popular and advertising-friendly clips. Ad revenue could be split with content providers, but a hosting fee would apply if if revenue fell below specified levels.

Lindsay notes that people are uploading clips at the rate of 15 hours of video every minute, and that many are being watched overseas where ad revenues are meager if they exist at all. He notes that the service is highly popular in Eastern Europe, the Middle East, Turkey and North Africa. He doubts that major brand advertisers would pay to stream ads in, say, Uzbekistan. He also notes that very few Uzbek videos will likely have large viewership, “eliminating the value of any edge-serving strategy and so destroying any economies of streaming at scale. Can Google ever make any money in these markets with YouTube?”

“Yes, usage would plummet, but this would stop the irrational uses of the service and it would quickly make clear what people really valued,” he writes. “If altruism and community service is a goal, Google could continue to allow educational and public service videos to be uploaded and watched for free - and maybe even be able to claim a tax break or two for doing so.”

Meanwhile, Lindsay thinks Google needs to do “everything possible” to lock up professionally produced content. (Not that they are entirely lacking in that category. Just ask the zombies.) He says the company should use whatever means are necessary - joint ventures, partnerships, even cash - to secure the rights to content. Lindsay thinks the company ought to go after the online rights to Premier League soccer matches, noting that “soccer fanatics will pay any reasonable amount to watch them.”

The bottom line, Lindsay writes, is that Google needs to act more like a media company. “This may run counter to the grain of the Internet management team,” he writes, but the media companies have been successful for a reason - they have established their business models over the last 50 years, and they work.”

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