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YouTube Has Been a Home Run for Google and the Online Video Industry

June 7, 2011

By Will Richmond

Back in October, 2006, when Google announced its intention to acquire YouTube, the fledgling, but already-dominant video upload/sharing site, for $1.65 billion, many observers thought it was a wild swing by Google, and further evidence of its profligate ways. Critics cited YouTube's thin UGC-based business model, its minimal revenues and its skyrocketing hosting/delivery costs caused by surging usage. Even though the deal was all in stock, it indeed looked like a rich price, and an unjustifiably huge short-term reward to YouTube's founders and investors.

Yet yesterday's news from YouTube, that a staggering 48 hours of video are now uploaded to the site each minute, and that it hit a recent peak of 3 billion video views in a single day, both underscore how YouTube has been a home run for both Google and for the larger online video industry. YouTube's ongoing viewership dominance is a rare "winner take all" situation in which second place video upload/sharing competitors are practically off the radar screen. Google now owns the dominant asset in one of the fastest-growing sectors of the Internet, which has huge revenue potential as consumer adoption of online video and devices soars. That $1.65 billion looks cheap now, all the more so given the durability of Google's own robust ad business.

From my perspective, it was practically inevitable that the clever team at Google would eventually figure out how to monetize YouTube's massive viewership, and indeed, there's plenty of evidence that this is happening, albeit not as quickly or as transparently as many of us would have preferred. The encouraging indicators have continued to trickle in: $375K a day for its "masthead" ad, $1.3 billion in revenue forecast in 2011, continued innovation in ad formats and creativity, plans to invest $100 million or more for stakes in online-only video producers and more. Even though Google executives have been famously opaque when addressing YouTube's profitability, the company has begun articulating some clear views about how it wants online video advertising to evolve.

One key priority having 50% of online video ads include a cost-per-view component. While the goal is ambitious, its direction is consistent with Google's search ad business, which is market-based and ROI-centric. Moving the world's TV ad buyers to this approach is no trivial matter, but if successful, it would help streamline the huge wastefulness in traditional TV ad buying and usher in Internet-style economics. This in turn would unlock more video ad buying, just as Google has unlocked billions of new search ad spending.

Meanwhile, as I've often said, Google's YouTube acquisition has been a hugely positive force for the online video industry in general. YouTube has introduced tens of millions of people to online video through easy sharing and uploading, thereby laying the foundation for newer services (e.g. Netflix, Hulu, etc.) to address audiences already familiar with online video's benefits.

As a result, these companies' success has been accelerated, in turn benefiting others in the ecosystem. Indeed, it's interesting to speculate on how the online video market would have developed had YouTube never existed (or not have had its annual losses sustained by its wealthy acquirer). Maybe another company would have played the same role as YouTube has, or maybe not. There's no way to know.

There is still a lot of work ahead for YouTube in developing its business model, acquiring premium content and deepening its offerings. But all of this appears to be happening to one extent or another. Six short years after its founding, YouTube is thoroughly ingrained in every aspect of the online - and frequently, even offline - experience. Our culture, politics, entertainment, education and expectations have been transformed by YouTube's free, open and flexible platform. All of this puts YouTube in pretty exclusive company.

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