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August 8, 2008 / Toby Dayton

Google’s Revenue Model For YouTube

There has been a ton of press recently about the growing pressure on Google to monetize its billion+ acquisition of YouTube, and monetizing video on the web in general. Even the New York Times has weighed in with a critique of Google’s ‘gaudy’ advertising on its Youtube video player. Having begun investing significant amounts of time on Youtube recently with the addition of music from Youtube to this blog (any feedback on that, by the way, would be welcomed), I have formed a few thoughts about Youtube and possible revenue models that might work.

First of all, Youtube has become, without question, my favorite site on the web. I am somewhat addicted to music and the site is a phenomenal place to find unbelievable amounts of live and previously undiscovered (by me) music. So for me, the site literally provides me with endless hours of content and entertainment. But given the site’s breadth and depth, I cannot imagine that there is an interest someone has that couldn’t be met by thousands of hours of meaningful content.

Secondly, Youtube has become one of the most important sites on the web. Missed Barrack’s racism speech? watch it there. Didn’t see the NYC cop hip check the ‘Critical Mass’ bicyclist off the street? See it here. And on and on with endless examples of video footage that shapes the way we are informed about, understand, and think about our world. The amount of content is mind-boggling and I have come to the conclusion that if something exists in video form, it is on YouTube. Immediately. Unfiltered by Mainstream media. No else gets to decide if it’s important to show on the 6 o’clock nightly news or even 24 hours of CNN. You decide. If you want to see it, it’s there. And that makes YouTube a vitally important site in the drastically shifting media landscape, especially given the disturbing disappearance of real news organizations and investigative journalism.

In terms of a revenue model, the idea of pre-roll ads is a non-starter. It will kill Youtube. Even if it’s technically/cost-effectively feasible (which it is/will be), there is standardization among all video players on the web (painful and slow but it will be there eventually) and seamlessly integrated into the ad agency/advertising world (which it could be), it will never work. I don’t want to see ads in Youtube videos. Period. Even if they’re engaging and only 3 seconds long. Post-roll ads don’t work either because no one will watch them which means no one will pay for them. And placing ads on the lower 25% of bottom 33% of the screen during the video is also horrendous. People will not tolerate it for long and it entirely detracts from the video viewing experience.

Generating revenue from text and display ads on the Youtube site playing around the video player, or even playing on the border of the video player works. I have no idea what type of revenue it could generate, but my guess is that the number would be substantial. YouTube has already and will continue to capture ungodly amounts of hours of the average person’s weekly media consumption. If you don’t watch it yourself, ask around the office, and especially ask your kids if they’re between the ages of 10 and 25. Those ads will get enormous exposure and advertisers will pay for that exposure. The targeting possibilities that leverage the content of the video being played are phenomenal too, making the appeal of the ad space even higher. Despite what the New York Times says, the ubiquity of advertising in America today has obliterated any possible objections to ads plastered on the border of an online video player.

But even more so than ads playing around the site and around the player, I think Google can and must begin tackling a much more significant opportunity on the web today (and one that would also help with Youtube revenue) – micropayments. The micropayment dream/dilema has vexed the web since its inception, and while Paypal and others have progressed the issue, the possibilities opened up by economically feasible transactions for nickels and pennies and fractions of pennies are enormous. If anyone can tackle the issue, it’s Google. They can, should, and probably are working on it, and they’ll figure it out. Once it’s out there and widely adopted (which it will be instantly if it really works), the revenue model for Youtube and millions of other sites will develop in both predictable and unpredictable ways.

For Youtube, Google could start charging viewers to watch individual videos or a certain quantity of video content (somewhat akin to a mobile calling plan). The argument that all content should/must be free is obliterated when YouTube can seamlessly, unobtrusively, behind the scenes but with total transparency, charge 1/10th of a penny to watch the current viral video phenomena sweeping the web. The site could develop a tiered system with free and paid content if they want to pursue a slightly modified model. And think about how many content providers would start creating and uploading content if there was a revenue model that worked for them. Google could share some percentage of the revenue with content providers, just like cable companies do today. And blogs/sites like this one would have to pay to embed videos. Because it adds value to my site (hopefully) and draws traffic and engages my readers (again, hopefully), I will pay some flat or variable fee, as long as it’s reasonable, to embed the content on my site. And if I can cover my costs or even make some margin by sharing in some cut from the traffic I generate for Youtube, I will certainly sign up for the new model.

The revenue that Google could generate by offering the micropayment service/functionality to the web as a whole is beyond calculation. People could and certainly have crunched the numbers, but what cannot be predicted or accurately modeled is the unpredictable ways in which micropayments would infiltrate, upend, and fundamentally transform the hundreds of various economic models, not to mention the unforeseen ways in which micropayments would open up revolutionary new economic models on the web.

So that’s my revenue model for Youtube. Google just needs to perfect micropayments. It should be done by Monday, right?