Is YouTube Destined for the Dot-Com Graveyard?

YouTubeMoneyIn a post we published a few weeks ago called “How Long Will Your Free Content Ride Last,” we commented on blogger John Falls’ position that free content on the Internet can only last so long.

It seems that Falls was on to something with his post entitled “The Economy of Free is Stupid,” posted on his blog, Social Media Explorer.

In an article published the same day as our own post, Britain’s The Independent took aim at YouTube, the video juggernaut acquired by Google in 2006. The theory that this article, “How Can YouTube Survive?”, presents is that the video service is losing money – and fast. And if it weren’t for its parent company, Google, YouTube would have been dead in the water a few years ago.

Some key points The Independent sheds light on:

  • It’s broadly accepted that YouTube will receive around $240 million in revenue from advertising this year, but that sum doesn’t even cover their general overheads and the cost of acquiring premium video content (such as TV shows) from copyright holders.
  • In addition, there are the huge fixed costs from the supply side – data centers, hardware, software and bandwidth – that have to cope with the 20 hours of video clips that we upload to YouTube every minute of every day.
  • With Google’s overall profits reaching some $1.42 billion for the first quarter of this year alone, the king of online search is certainly a position to support a loss-making venture that also happens to be the third-most-popular Web site on the internet. (Google, naturally, is the first.) But Keith McMahon, senior analyst for the Telco 2.0 Initiative, a research group that studies business models in the digital economy, believes that YouTube is not the albatross around Google’s neck that it’s widely imagined to be.
  • The traditional way to generate revenue and offset losses has been to sell some form of advertising space on the Web site. But an increasing number of industry commentators believe that the internet advertising model is broken – and what better proof than YouTube itself, whose advertising revenues don’t even cover their overheads, and who might be dead in the water if it wasn’t for their multinational sugar daddy?
  • In a piece this year for the insider’s technology blog, TechCrunch, entitled “Why Advertising Is Failing On The Internet,” Eric Clemons, Professor of Operations and Information Management at the University of Pennsylvania, argued that the way that we’re using the internet has shattered the whole concept of advertising. We need no encouragement to share our opinions online regarding products and services and offer them star ratings; as a result, we’re much more likely to look for personal recommendations from other customers than wait for a gaudy advert to beckon us wildly in the direction of a company website or online store. He claims we don’t trust online advertising, we don’t need online advertising, but above all we don’t want online advertising.
  • There’s certainly a huge weight of evidence to support the latter theory; extensions for web browsers that block advertisements from displaying on the screen have proved to be incredibly popular, and we seem increasingly resentful of attempts by companies to compromise our free online experience by pushing marketing messages in our direction.
  • While Google continues to finesse its YouTube model, with click-to-buy links and sponsored competitions, it’s contended by Professor Clemons that no matter how innovative the advertising industry might become, “commercial messages, pushed through whatever medium, in order to reach a potential customer who is in the middle of doing something else, will fail.”
  • If this is true, it obviously has implications for Google, even though they’re sitting very pretty at the moment as the overwhelmingly dominant force in online advertising. But other companies dependent on ad revenue aren’t so fortunate.
  • Joost, another ad-funded online video service, announced last week that it would be reinventing itself as a provider of white-label – generic – video for other businesses, and would be cutting jobs in the process. “In these tough economic times,” said its chairman Mike Volpi, “it’s been increasingly challenging to operate as an independent, ad-supported online video platform.”


The Independent furthers its argument with commentary on how we, as a community of Internet consumers, are now spoiled by free content, saying “We are uninterested, verging on contemptuous, of the marketing strategies that were supposed to pay for us to enjoy online services for free. We’ve become totally unwilling to pay for them directly, either; we simply figure that someone, somehow, will pick up the tab.”

If we’re unwilling to pay for these services – and advertising is indeed failing on the Internet – what will happen? How can companies get themselves out of this conundrum? Will we be forced to pay, or will big business give in and search for more sustainable business models?

Either way, something’s gotta give – right?


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