YouTube May Have Met Its Match

(page 2 of 2)

A big revenue driver for YouTube in the future will be video ads. Research firm eMarketer estimates that nearly $3 billion will go to online video advertising by 2010, up from $775 million this year. Of that amount, roughly 75% will go to advertising on content created by media companies such as the major networks.

User-Generated Anxiety

Without significant network content, YouTube would be limited to selling advertising on its user-generated content. That stuff—home movies, humorous commentary, Webcam confessionals, and the like—has attracted attention from users, but not so much from advertisers. The reason? Advertisers often want better control of the content with which their brands are associated. "Right now, user-generated content still makes enough advertisers nervous that it is not performing as well," says Andrew Frank, research director at Gartner.

To be sure, there's a market for it—perhaps enough of one to make Google a considerable amount of money. Barry Parr, a media analyst at Jupiter Research, says advertisers will have to pay more attention to user-generated content because it is growing faster, as a category, than professionally produced content. "In the long run, the big advertisers have got to acknowledge that their advertising is going to be appearing next to user-generated content wherever they go," says Parr. "I don't think they are going to have any other choice."

What about the near term? To make considerable video advertising dollars now, Google needs to offer advertisers safe, reviewable content that they'll be happy to associate with advertising. That means working with the content providers. Certainly, Google has said it is willing to do this. YouTube spokesman Julie Supan reiterated Google's commitment to the networks in a statement following the NBC-News Corp. announcement: "We value our relationships with NBC and Fox as they continue to upload content to promote their signature programming and look forward to working with them in the future."

Rivals Sense an Opening

There's another big reason for Google to play nice with the networks: If it doesn't, users could go to MySpace, AOL, Microsoft's MSN network, or, worst of all, Yahoo. Google at least has a stake in MySpace's popularity thanks to a $900 million advertising deal inked in August (see BusinessWeek.com, 8/8/06, "Google Gets Back into MySpace"). And it serves ads on AOL. However, it can only lose if its audience begins to go to MSN or Yahoo, the No. 3 player in video streaming and second-largest search engine after Google.

Google's rivals are aware of the opportunity afforded by a content partnership YouTube doesn't share. Each has been vying to be something of a TV Guide for Internet audiences. "A lot of portals are striving to be that one-stop online resource to find and watch and share the millions of videos on the Web," says AOL spokeswoman Anne Bentley. "We really fashion ourselves as this mega-destination, one-stop shop to get videos."

Of course, so do Yahoo and Microsoft, which has its own original content on its video site and partnerships with 40 content creators. "The notion is, come to MSN video and you don't have to run around the Web looking at all these different sites for content," says Adam Sohn, director in the online services group in Microsoft.

Media's Fast Flirts

Luckily for Google, many media companies are treating the Internet like speed dating. They are trying to make connections as fast as possible and don't seem to have any desire to be exclusive. Take CBS, for example. In a statement, the network said that it will partner "on an open, nonexclusive basis with best-in-class, next-generation platforms in order to reach and learn about its audience and get paid for its content worldwide." Others, such as Disney, don't seem to be too eager to work through any entity that could dilute their brand—this includes rival networks, according to industry observers with knowledge of the situation.

Who knows? Some networks may become even more willing to work with Google after they get into the details of revenue sharing with the NBC-News Corp. group. A partnership led by two of the most popular networks on TV won't be a pushover in negotiations.

Still, Google can't rest on its traffic laurels if it wants to be the place for online video. Without content providers, it risks giving up the premium market to the established, traditional media companies and their partners. That's clearly what the new service is after. NBC Chief Executive Jeff Zucker said as much on a conference call concerning the deal: "There will be user-generated material, but really the focus here is on the premium content, and we think that is the value proposition here."

Holahan is a writer for BusinessWeek.com in New York .