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User Generated Web Video: FAIL
Written by Hank Williams - March 3, 2008
I never thought buying YouTube was a good idea for Google. First of all there’s all that legal liability for all that pirated content that I believe has a good chance of coming home to roost. But that is not really the biggest issue.
The problem is it can't make money.
The economics of user generated video will not work for the foreseeable future. There are numerous reasons for this. I have outlined them below.
- Hosting is expensive because, unlike TV, every incremental viewer costs money, so you have to generate a lot in advertising to support it. Right now the actual user generated video revenue number is just a whisker above zero.
- Producing a video ad is expensive which leaves out search advertisers who would prefer to buy keywords and to spend the *zero* dollars it costs to produce a keyword ad.
- Mainstream advertisers that actually can afford to create good video ads won’t advertise on user generated video because they don’t want their ads stuck in front of some sad looking kid swinging a broom stick around and pretending to be Darth Vader – or worse.
- It’s not clear that pre or post roll advertising works anyway – either for the viewer or the advertiser.
- The real moneymaker for Internet advertising is keyword based search advertising. At no time in the near future will keyword advertising work for web video because there is no accessible text.
And so, for all you startups that have as a business model becoming the next YouTube, look out. Because YouTube, by any measure other than having found a gluttonous money-is-no-object benefactor, was a FAIL.
Unlike traditional business, getting profitable and then selling does not appear to be an option. Your only exit will be, after having lost a boatload of investor money, to sell your sinking ship to a big web player who is not Google, since they already have their own video fail. The key acquisition criteria will be that the acquirer is in desperate need of help flushing its money down the toilet.
This article was authored by Hank Williams who is a New York-based entrepreneur who recently launched a new blog: Why Does Everything Suck? exploring the tech marketplace from 10,000 feet.
Our Partners
We must agree with your blog and say that YouTube is a revenue-making failure. It succeeded in other ways but certainly not the way they could have.
Ok, so maybe you are right and 99% of online video is unmonetizable. There is still the pro-amateur content that is extremely high quality and picking up viewers every day. Going forward this audience will only get bigger. Google gets the chance to monetize this growing audience and also has control over the juggernaut of online video. This will crucial for integrating online video with television, which will happen.
Dear Hank Williams,
I find your opinion on YouTube to be myopic. At best YouTube is a revolutionary service that allows individuals and corporations to compete and collaborate on a level field; at worst YouTube has yet to prove it can generate money. Either way, claiming that YouTube has failed is erroneous.
Greg Schnese
Hey Hank
It sounds plausible but where are the numbers to back up what you are saying?
Also...I am not sure you can say it's a fail not knowing Google's short-term and long-term strategy...
I'm fairly sure YouTube has opted to go for inline text ads. This makes your points about cost, quality of video ads fairly irrelevant, as those wishing to buy text ads can still do so - except this time they're embedded over a related video.
I'm with Greg - it's a bit early to claim YouTube has failed.
You kidding me? In less than three years, YouTube has gone from nothing to the third most visited site on the Internet. Absolutely amazing growth.
Have they made money yet? Nope. Can they? I'd put my money on Google figuring a way out to make money with it.
Way, way, way, way, WAY too early to make such a judgment.
@Andy,
Come on dude. The cost of broadcast infrastructure *does not* get paid for on a per viewer basis. Even to the extent there are incremental costs, they are associated with physical area, not number of listeners. And once you have covered the physical area, you are done. Forever. Even in the case of cable, which does have a one time per household cost, once that cost is done it is done. Paying for every video every time someone sees it is a totally different proposition
@Andrew,
I am well aware of speech to text technology. But it's not exactly burning up the internet yet is it. And if its so great why does a company with billions of dollars in the bank just fire it up! Just because some technology exists somewhere does not mean that it solves a business problem in a useful way. By virtue of the fact that Google hasn't yet followed you "insight" about speech to text, I would suspect they are not as sanguine about it as you.
@Jollyjo,
You are correct that Google may have a long term strategy to extract value out of YouTube. But if they do, at the rate they are going, its very far away.
@ Josh,
YouTube has not "decided" to go with inline text ads, they are experimenting with it. But how can inline text ads be of any value (in the way they are for search and ad sense) without the context of the video via text. And how many of the videos are content specific enough to make a text ad actually worthwhile. Right now video ads are not working. And there is no indication that Google has any magic up their sleeves here.
@Steve
Yes amazing growth... at amazing cost. In the old world of economics you cant loose money on every customer and make it up in volume.
-------------------------
By the way, what all of you miss is what I think is the most important aspect of all of this which is not retrospective but forward looking. And that is that no startup should be looking to be the next YouTube. Even if Google can at some point justify the purchase on a strategic basis, there are few, if any, other profitable exit opportunities for startups in this space.
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