Google May Lose Big on YouTube in 2009 (The Blog on Branding)

http://brandingbrand.com/blog/google-may-lose-big-on-youtube-in-2009/

Google May Lose Big on YouTube in 2009

April 5th, 2009 Posted in Advertising, Uncategorized
YouTube projects a grim future for 2009; Google could take the fall.

From your favorite Family guy clips to Obama’s inauguration speech, from promoting your new SoujaBoy dance moves to the May-Irwin first kiss ever recorded in 1986 – you can find it on YouTube! With a library of approximately 150 to 160 million videos, YouTube has become the most popular resource for your Internet video viewing and posting pleasures. But according to a recent research report issued by Credit Suisse, Google could lose up to a half a billion dollars due to YouTube’s operating expenses over the course of 2009.

“From Family Guy to Obama to SoujaBoy—it’s all on YouTube.”

“Monetization” and the lack thereof…

Credit Suisse analysts Spencer Wang and Ken Sena attribute this projected loss to low revenues due to low a monetization* rate against exceptionally high operating costs, ultimately yielding an unsuccessful 2009.

• *Note: Monetization is the process of converting or establishing something into anything that can be offered as payment, which extinguishes the debt owed. (Basically, producing profit.)

But, YouTube is only able to monetize about 3% of its video inventory! What does that mean? You guessed it, YouTube is only making a profit off of 3% of its videos. Its monetizing abilities are limited, because they lack a standardization of online video ad formats, and also, there are legal liabilities associated with placing ads against unlicensed copyrighted material.

A majority of the material placed on YouTube is user-generated content (UGC), so imagine if you posted a video, you go to view it and there is a shampoo ad before it opens. If it were me, I would either be upset that an ad is delaying the start of my video or want some royalties from using my video to place their ad. To minimize the complaints, YouTube doesn’t even take the risk.

How does YouTube MAKE money?

Credit Suisse analysts estimate $240 million in revenue, which is attributed to the following three advertising campaigns:

1. Homepage Placements Ads are ad spaces that marketers and advertisers purchase to be displayed on the YouTube homepage, which generates about $7 million a month ($86.7 million a year). YouTube is now trying new formats to promote this form of advertising.

“Ads can be purchased for display on YouTube’s homepage.”



2. In-video ads and banner adjacencies contribute $87 million a year.
   • In-video ads are placed in the first 15 seconds of the video, and YouTube users are given the option to close the ad; although, less then 10% of the YouTube users take advantage of it. The small arrow in the yellow box gives the opportunity to open the ad at any time during the video to view it again.

   “In-video ads are placed in the first 15 seconds of the video.”

   

   • A Banner adjacency is when a banner of related videos is placed next to the video advertisement to increase the Click-Through Rate (CTR) and likelihood that the search results are relevant.
3. Sponsored videos and links take “product placement” to the next level. By creating contracts with YouTube, businesses and retailers can actually sell their products through a video. See something you like, click and buy. This technique brings in about $67 million a year.

“Sponsored videos and links take it to the next level.”

How does YouTube SPEND money?

Unfortunately on the cost side, Credit Suisse estimates that Google spends $711 million in operating expenses related to YouTube. Those costs are attributed to bandwidth, content acquisition, partner revenue shares, site overhead and storage.

• The biggest expense for YouTube is the large amount of bandwidth they must purchase.
  • Bandwidth can been seen as the amount of space an Internet hosting site acquires to accommodate the traffic to its site, measured in MegaBits.
  • Basically, since the site has a lot of outside users and posters, YouTube needs to purchase a lot of bandwidth.
  • Although they pay half the lowest market rate, the cost of streaming 5 million videos a month comes to about $1 million a day or $360 a year!
• Content Acquisition is important, because it gives YouTube the rights and services to broadcast and produce new materials and content – but these hefty services are not cheap.
  • Credit Suisse estimates costs at approximately $260 million for 2009.
• By partnering with other companies or even users, YouTube can gain from revenue share deals, but unfortunately Credit Suisse estimates a $49 million loss in that area.
• Overhead expenses are those expenses that are involved in all production and non-production activities and keep a company functioning.
  • Sales, marketing, PR, research & development, and general & administrative expenses are all examples of overhead expenses, which will run YouTube about $24 million in 2009.
• How much do you think its costs to store up to 160 million videos? Almost $13 million a year!

“Google spends about $711 million in expenses related to YouTube.”

Hope for the future?

Even though YouTube’s operating expenses clearly exceed their expected revenue, and they are only generating that revenue from 3% of their videos, they still continued to stream videos and gain users.

Also, the videos that are being monetized are generally profitable. But does the above information mean that YouTube is on a downward spiral to bankruptcy and taking Google with them? Not exactly. What they need to do is increase the percentage of videos that are being monetized and they’ll have a chance.

Here are a few ways Google can help their YouTube partner:

1. Create more content deals with media companies.
2. Improve the detection of copyrighted material.
3. Increase the demand to advertise with YouTube by taking advantage of their revenue building campaigns.
   • Improve the effectiveness of their advertisements.

Robin MillerWant content written for your Brand that shows up #1 on Search Engines and brings you new customers? Contact us.

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