We Should Care About YouTube's Core Business, Not Its Market Share

With all the back and forth on the blogs this week from those trying to predict exactly how much money YouTube is losing, personally, I think many are still missing the bigger picture when it comes to YouTube and how we value companies in this space. Maybe some of us simply want to see different things for the industry or judge the success of the industry on different metrics. For me, I want to see companies in the space last for ten years with a sustainable business model that actually generates revenue. To me, that is the only real way any company should be judged in any industry, Internet related or not.

But these days, especially with YouTube, many simply want to only focus on their "market share" or the number of videos being consumed as somehow equaling success for the company. That seems to be the same metric that was used in early 2000 when the vast majority of content portals said that all they needed was a lot of eyeballs to be successful and that the number of eyeballs was all that mattered. How well did that work out?

I've seen a few blog posts this week that say it really does not matter how much money YouTube is losing since they maintain such a dominant share of the number of hours of videos viewed each month. While that's a nice stat, for me, it means nothing if you can't generate revenue around it. Would you rather run a business that can't sustain itself, but has a lot of market share, or run a company that is profitable, but has less of a market share?

The fact that it's so hard to name a lot of companies that are still in business today, from just five years ago, shows that this industry has to be more than just about who has the most "market share" at any one given time. This has to be about creating a sustainable business and that is all that should matter. How many companies really care about their "market share" anymore when their company goes out of business? So when people say things like YouTube has "strategic value" to Google or is "part of the bigger picture", that's all just marketing terms. Try defining them.

The other problem with this whole "market share" idea is that in any other segment of our industry, market share is usually determined by revenue and not by some metric like number of streams. When you hear companies talk about market share, even for something as simple as content delivery, these companies are talking about revenue, not the number of streams delivered. Most other segments of our industry define the success of a company and base the market share percentage off of revenue and not some other metric that is not tied directly to revenue. The industry's metric for determining the success of YouTube should be no different and should not be determined based on the number of hours of video that are consumed.

The other argument I keep hearing is who cares how much YouTube is losing, Google can afford it. As far as I am concerned, anyone who says that is not a business person. They don't get it and they have probably never run a business before. The point is not whether or not a company can afford to lose the money; the point is how the company is going to show a profit. Even Google (GOOG) needs to show value to its shareholders and is not immune to the basic principles of P&L that any business strives for.

Yes, the fact Google has deep pockets does buy them time and allows them to take a bigger chance in the market since they can last longer trying to monetize YouTube. But how many years is Google willing to lose money with YouTube before it's deemed a success? It's been almost 3 years now. So what's acceptable? Four years? Five years? No company has an open window of time to just lose money forever. So for all the people who say, we're in the early stages of this, Google has the money and is betting on the future, I ask you when the future is? How many years of Google losing money on YouTube is acceptable?

And what would have happened to YouTube if Google had not acquire them? Three years later YouTube would be in so much debt it would be silly. The amount of money they would have had to raise by now to support the business three years later would have been insane. For all the people who say it's YouTube's market share that matters, would you be willing to work at YouTube if the company didn't have the backing of Google? Probably not. Because it would be very hard for you to keep your job at a company that loses money year after year, even with the "market share" that it has.

I know I am going to hear from some who say- why am I always down on the industry? Why do I come across as being so negative about companies in the industry like YouTube? Again, maybe we want different things for this industry. But for the past fourteen years I have enjoyed working in this industry, trying to help educate people, help the industry grow and the industry has taken very good care of me. I love what I do and I don't know anything else. I want to see companies in the industry be self-sustaining, create real value and have longevity.

Like many, I've seen what has happened in the past when we've had a false sense of security, when we have valued companies incorrectly and when the "industry" places more value on number of streams or eyeballs as opposed to profitability. That's not the kind of flash in the pan growth I want to see again and it's not good for any of us who work in the Internet space, as it's not sustainable in the long run.

The mentality of how we judge success in this industry needs to change and YouTube is just one example of many. Just look at the debates going on about the "value" of Twitter simply due to their traffic growth. I don't know why, but the Internet space seems to be the one industry where many don't care about business rules that define whether or not a company makes it. In other industries, it would not even be a debate. But in the Internet space, the importance of the lack of profitability with companies like YouTube seems to want to be debated. That is just bad business.

Disclosure: No position

Comments

[Tim Hiteshew:]

I agree that measuring user base is not criteria for a successful business model (Yahoo! anyone)? However, I believe that Google will be able to monetize YouTube successfully using an Adsense type of approach. Ads have already been selected to run on a select number of videos, but only the ones uploaded by users who have a high degree of viewership.

Jun 19 04:28 PM

[iPcc:]

In my humblest opinion, I think Google did the right thing when it acquired YouTube. Its part of Strategic Management similar to things like establishing a R&D department or investor relations department - that although it would lose some money in the short term, it supports the main business and holds strategic position in the future. In Google's case, as more users spends more time enjoying the internet, the more clicks it gets and as such, more revenues flows to its pockets. People need to understand, that without YouTube, people would actually spend more time watching TV and thus, less surfing the internet. Google is trying to take revenue away from the offline entertainment industry (whose income is sustained by the same businesses Google generates its income - from the same limited marketing budget of large businesses) and into the online entertainment industry, This is also the same reason why Google is pushing for cloud desktop - with them establishing Google Docs and other more mobile and flexible form of computing.

Jun 19 09:48 PM