Will Advertisers Buy What YouTube Is Selling?

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Includes: DIS, F, GE, GOOG
by: Diane Mermigas

YouTube's latest effort to generate and share advertising revenues from more grassroots videos hinges on Madison Avenue's willingness to take a giant leap of faith.

If successful, corporate parent Google (NASDAQ:GOOG) will make another sizable contribution to creating an economic backbone for the viral Web that reaches beyond the professional content model forged by Hulu. YouTube's recently expanded partnership program opens its existing ad-revenue sharing option to all registered contributors in order to grow the portion of hosted videos monetized using Google's AdSense.

Depending on which estimates you believe, YouTube has monetized anywhere from about 4% to more than 10% of its videos. None of it fully offsets hosting, uploading and other operating costs.

The new plan is more complicated and risky than YouTube suggests.

Nurturing marketers' trust and support requires diligent tracking and monitoring of posted videos as they are matched with stockpiled ads, even before page views or controversy peak. YouTube provides details online about how audio and video ID, and other measures, facilitate and safeguard the process.

The economic dynamics involved are similar to Hulu.com and television's long-form video: the greater number of viewers, the higher the unit price and profit potential. For instance, "David after Dentist," which has been seen nearly 28 million times, is now accompanied by online ads for dentists. The father of David, the subject of the video, told The Wall Street Journal he has made more than $10,000 in ad revenue-sharing proceeds so far.

It all comes down to how well YouTube can leverage and hedge against user-generated content, which can be dangerously unpredictable and surprisingly entertaining. One bad or controversial experience can negate a lot of goodwill.

But it is a risk Google is willing to take, given the vast number of widely viewed and harmless YouTube videos not generating any revenues. YouTube points to the recent Jill and Kevin Wedding Entrance Dance video viewed more than 12 million times as a monetization case study.

YouTube went through a tedious process of making sure all the right copyright participants were paid, from Sony Music to the saxophonist in the video playing the Chris Brown song "Forever." YouTube clearly has learned from its tangles with disgruntled, litigious music and film studios.

Google also is banking on advertisers' apparent increased willingness to mine social media. While the recession raged and the automotive industry collapsed this past year, Ford (NYSE:F) has staked 2010 U.S. sales of its new Fiesta compact on blog comments and images being shared by 100 select advance owners. Such tightly controlled grassroots marketing is a step removed from marketers' stockpiled messages being spontaneously matched with user-generated video as it gains traction (or not) on the Web.

As always, Google has its share of detractors. Some say this will be another test of the "uselessness" of the Web's niche long-tail content. The effort could push YouTube toward owning, rather than just licensing, some content in an effort to achieve improved economics. Much of the content recycled on Hulu comes from the nearly 80% of all prime-time series owned by the major broadcast networks, which allows for more profit.

Still other experts insist that what YouTube and Google are trying to accomplish will require more radical change in content production and distribution through creative destruction, or the process of creating new paradigms through the innovative transformation of old ones. That could bring more end-to-end iTunes platforms, more video streaming on sites such as Hulu, and players like YouTube licensing more longer-form content that might otherwise be pirated.

In an in-depth research report last April, Credit Suisse analyst Spencer Wang concluded that the 3% to 4% of videos YouTube monetized at that time was "theoretically profitable with a profit margin of around 38%." The bulk of video not being monetized but still supporting bandwidth, storage and other related costs (which should decline over time) are generating a collective operating loss of nearly half a billion in 2009, Wang said.

He outlined some of the measures Google's YouTube should take in order to increase the percentage of videos it can monetize:

*Strike more pacts with entertainment companies to stream more professional video, such as it has with Walt Disney (NYSE:DIS) and General Electric's (NYSE:GE) NBCUniversal

*Improve detection of copyrighted material so content owners become more comfortable licensing their material to YouTube

*Increase advertiser demand for YouTube inventory by standardizing advertising formats and increasing marketers' comfort level with user-generated content

*Improve ad effectiveness and click-through rates on sponsored videos and links, and in-video ads to drive higher revenues.

In other words, nearly three years after acquiring YouTube for $1.65 billion, Google has yet to crack the code on making the leading online video site profitable. Clearly, it will require more than a Google association to make that happen.

Disclosure: The author does not directly own media or internet stocks.

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