YouTube Fact vs. Fiction

YouTube has taken exception to some of the many assumptions commonly made by those in the media referring to their business model or lack thereof and has fired back in a blog post detailing “top 5 YouTube myths.”

Dan Rayburn does a pretty good job of ripping them apart in the Streaming Media Blog, and frankly I’ll buy their arguments on several points, but seeing as on a few of these points they are “mythbusting” without backing it up, I can’t help but add my two cents here as well.

Before digging in, here are YouTube’s top 5 myths:

1. Myth 1: YouTube is limited to short-form user-generated content.
   
2. Myth 2: YouTube videos are grainy and of poor quality.
3. Myth 3: Traffic, growth, and uploads are bad for YouTube’s bottom line.
4. Myth 4: Advertisers are afraid of YouTube
5. Myth 5: YouTube is only monetizing 3-5% of the site.

I will concede points one and two and five, while these may not be myths quite yet, YouTube is moving in the right direction here. Moving forward YouTube will be offer more and more high quality, longer form content and will monetize more of it. That said, they have an uphill battle earing revenue on all that long-tail content and acquiring high value content when the rights holders are building their own portals.

They are arguably monetizing the majority of the site because they have ads on most pages if not in-video ads. Scale is a major benefit in this area though we will need to wait and see if they can actually turn a profit on it, those CPMs are still incredibly low as a whole and without more high value content they’re going to continue running big deficits.

Points 3 and 4 are far more difficult to counter, and YouTube really doesn’t do this in their post. Let’s look at these in more depth:

Myth 3: Traffic, growth, and uploads are bad for YouTube’s bottom line. There’s been a lot of speculation lately about how much it costs to run YouTube. With revenue estimates ranging from $120 million to $500 million, and costs on an equally large spectrum, it seems people can pick any number to fit any theory they have about our business. The truth is that all our infrastructure is built from scratch, which means models that use standard industry pricing are too high when it comes to bandwidth and similar costs. We are at a point where growth is definitely good for our bottom line, not bad.

OK, so we don’t know how much revenue YouTube earns or what they’re paying for infrastructure, but we do know that infrastructure costs money to expand and maintain. And they haven’t countered what has been the most valid challenge to the free business model yet; In a recent column, Malcolm Gladwell pointed out a loophole in Chris Anderson’s notion of the free business model:

The only problem is that in the middle of laying out what he sees as the new business model of the digital age Anderson is forced to admit that one of his main case studies, YouTube, “has so far failed to make any money for Google.” Why is that? Because of the very principles of Free that Anderson so energetically celebrates. When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number.

No matter how low the cost of delivery gets it isn’t free. YouTube still spends millions a dollars a month on bandwidth, and with videos being uploaded at a rate of more than 20 hours of content per minute and increasing, that number isn’t going down. Further, while YouTube’s greatest strength is its scale, most of YouTube’s inventory isn’t very valuable.

Which brings us to:

Myth 4: Advertisers are afraid of YouTube. Over 70% of Ad Age Top 100 marketers ran campaigns on YouTube in 2008. They’re buying our home page, Promoted Videos, overlays, and in-stream ads. Many are organizing contests that encourage the uploading of user videos to their brand channels, or running advertising exclusively on popular user partner content (see Carl’s Jr.). Advertisers just want control, so we’re continuing to develop tools and targeting products that give advertisers more control over where their ads appear on the site. We’ll announce more on that front soon.

When a brand places a clip on YouTube there is a very small percentage of video it can run against where the advertiser knows what it is getting, that’s the 3.5% or so YouTube references in its myth.

It’s easy to say advertisers just want more control and that you’re giving them that, it’s more difficult to actually follow through when you’re getting 20 hours of new content every minute, which eliminates any ability to catalogue and sell it to advertisers. What this means is the vast majority of content will continue to be unappealing to brand advertisers, and while targeting will undoubtedly improve – Google’s great at that – the risk to brands that they could run ads against content they don’t want to be associated with is too great compared to the reward.

I’m bullish on YouTube’s future, eventually (if they can accept losing money for a while) I think attitudes will change, brands will be more willing to risk placing ads on longer tail content, and Google’s ability to monetize the site as a whole will improve. But right now they face some major challenges, and the’re going to have to offer up some real hard facts if they’re going to say otherwise..