YouTube looks for the money clip

March 25, 2008: 10:45 AM ET

By Yi-Wyn Yen

Google's acquisition of ad server DoubleClick is supposed to help the search giant make a splash in the display advertising market. But it's YouTube that Google is hoping will make it a big player on Madison Avenue.

"We're spending a lot of time on YouTube right now because that happens to be a clear objective and clear opportunity," said Tim Armstrong, Google's president of advertising at a recent Bear Stearns media conference.

What isn't clear is why Google (GOOG) hasn't figured out how to make a profit from YouTube yet.

Google built its multi-billion empire by delivering text-based ads that appeal to marketers looking for a direct response. Now the search engine's going after major brand advertisers who see video as an opportunity to connect with consumers on an emotional level.

For a company consumed by organizing the world's information, Madison Avenue is an unfamiliar turf. "They're starting to think about branding," said Matt Sanchez, CEO of video ad network VideoEgg. "There's a culture shift going on at Google."

While display marketing isn't Google's forte, the company has created an appealing branding opportunity with YouTube. The videosharing site has become the go-to site for short, snacky clips. But some advertisers worry that, unlike watching an episode of Lost on ABC.com or a Saturday Night Live clip on Hulu, most of YouTube's vast collection of campy, user-uploaded clips are unmarketable.

"This is a challenge for advertisers," said Chris Allen, the video innovation director for media agency Starcom. Roughly 10 to 20% of YouTube's content is professionally produced. That really starts to diminish the opportunities for brand advertisers."

One media buyer takes a glass-half full approach. "We're trying to figure out what is the value in brand association with content that's not premium," said Curt Hecht, chief digital officer for GM Planworks, which handles advertising for General Motors (GM). "The approach we take is, how can we package this in front of a ton of eyeballs."

YouTube is the King Kong of online videos, and what it lacks in marketable clips it makes up for with its massive and engaged audience. In January, nearly 79 million viewers, or a third of all online viewers in the U.S., watched more than three billion user-posted videos on YouTube, according to comScore's latest report.

However, delivering all those free video clips isn't cheap. YouTube sends a staggering 1,000 gigabytes of data every second, or nearly 300 billion GBs each month. Several industry insiders estimate that YouTube spends roughly $1 million a day just to pay for the bandwidth to host the videos. By that number, YouTube downloads would account for roughly 3% of Google's $11.5 billion operating costs for 2007.

YouTube, which makes the bulk of its revenue from selling display ads that run on the right-hand side of the site's homepage, has not been a moneymaker for Google. The company states YouTube's revenues last year were "not material" in a regulatory filing. The search giant paid $1.6 billion for the company in October 2006. "I'd be surprised if they broke $20 million in revenue in '07," said Anton Denissov, an online video analyst with the Yankee Group.

Part of the problem is that advertisers and companies like Google are still experimenting with what works in the web video market. Advertisers will spend $1.35 billion on online video advertising in the U.S. this year, according to eMarketer. That represents 1.5% of television advertising spending this year, and just 5% of all Internet advertising spending. The research firm forecasts that U.S. spending for web video ads will triple to $4.3 billion in 2011.

Wall Street is anxious for Google to turn the videosharing site into a cash cow. Last October during its earnings call with analysts, Google co-founder Sergey Brin said making money wasn't a top priority. The company has focused heavily on refining a user's experience and collecting data on how viewers find videos on YouTube. Dave Eun, who runs Google's content businesses, said the company would "turn up the dial on monetization" next year.

Last fall Google introduced several types of ad formats with moderate success. Its says viewers are responding favorably to its overlay ads, which run on the bottom of a screen like a sports ticker 10 seconds after a video starts. A viewer can choose to close the ad or click on it to expand the ad before returning to the original clip. The overlay ads only appear on YouTube's select premium content.

"We've been careful about testing different monetization approaches," Eun said at the Bear Stearns conference on March 10. "We've purposely not taken the easy money. And frankly, there was a lot of easy money out there. We could have taken cut-down TV ads and pushed them down our users' throats with pre-rolls."

Not everyone is convinced that just because Google flips a switch, the YouTube money will start pouring in. "All of Silicon Valley has a hard time understanding that it's not some spigot you turn on," said VideoEgg's Sanchez. "Maybe that's how direct marketers work, but media buyers on the brand side don't spend money that way."

"There's no silver bullet," he added. "Google's been testing and pushing and marketing its product, but it's not suddenly going to do a billion dollars in revenue off YouTube."

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