While YouTube continues its dominance of online video, away from the popular site are seeing more unfilled demand than ever for quality video inventory. If you didn’t know any better, you’d think that YouTube was the 1% of online video, while the rest of the world represented the 99%.
Welcome to the 1%: YouTube
YouTube is reaping the dividends of a lot of smart and lucky moves early on, and Google deserves a lot of credit for taking a long-term approach when it bought the site. At a time when Eric Schmidt is trying to convince anyone who will listen that Google isn’t a monopoly, YouTube greets 80% of U.S. Internet users and accounts for 47% of video views each month, according to comScore.
Cynics have long argued that while YouTube was popular, it was a money pit. Not so, I argued even before the sale to Google -- and increasingly, analysts are coming out with bullish revenue estimates. Barclays Capital’s Anthony DiClemente pegs 2011 revenue at $1.6 billion; considering that total video advertising is forecast to weigh in at $2 billion, then that would mean that YouTube accounts for 80% of the pie.
While I find this figure a tad bullish -- especially considering that the majority of YouTube’s audience is non-English-speaking – still given that YouTube generates 3 billion streams each day and has managed to find one advertiser or another willing to run on most pages, then simple math suggests that YouTube should be generating over $1 billion this year with ease (YouTube’s main page ads probably generate $200 million per year alone).
Then Why Bother Spending $100 Million on New Content?
YouTube is so killing it, that it has decided to take $100 million from Google’s balance sheet and invest in new programming. While many question the wisdom behind this move, I think it’s smart: considering Google generated $29 billion in 2010 annual revenues, $9 billion in Q3 2011 alone and is sitting on over $40 billion in cash and short-term securities, then the $100 million is a rounding error and the initiative will produce a few hits and some misses. Most importantly, it sends a message to Traditional Media Companies (TMCs) that the “Algorithm from Mountain View” is willing to speak the language of Hollywood: paying cold, hard cash for content, regardless of whether it’s a hit or a dud.
The Content Wars
In fact, it’s entirely possible that during negotiations to buy Hulu, Google made it clear to Disney, News Corp. and Comcast (Hulu’s media owners) that it was spending all of this money on content and willing to spend more over time. I had argued that the one-time, extraordinary capital gain from the sale of Hulu was far less interesting to TMCs than the recurring licensing fees that represent an annuity and could have a material impact on their income statements for years to come.
As such, with Google clearly willing to spend big on content (without actually buying it outright), Netflix needing to maintain its momentum, and Amazon willing to lose money as it launches the Kindle Fire, i’s no surprise that Yahoo is entertaining the sale of Asian assets. Given Yahoo’s aspirations in video and its position as the premier digital media company in the world, it will need a lot of resources to keep up.
While the aggregators have certainly trounced content creators, paradoxically, the value of content has soared this year alone and will continue to do so in the years to come. The problem, frankly, is finding investors who understand and can add value -- but that’s a separate article.
Now meet the 99%
Ironically, against this backdrop of YouTube’s dominance, you also see, well, the “other” world of online video.
On one side, you have YouTube, who represents the so-called 1%, with such an abundance of inventory (both good, bad and ugly) that it is now offering advertisers the option to pay if, and only if, the user watches the whole advertisement. Meanwhile, YouTube allows the viewer to skip the ad altogether within seconds of starting. This is genius for Google/YouTube, for it encourages advertisers to bypass other peddlers of advertising, allowing YouTube to duplicate AdWords’ success, though content owners probably don’t share the euphoria around the concept.
Meanwhile, the other so-called 99% of online video can’t find any meaningful, true-quality video inventory at scale, so it relies on massive resyndication of ads and in-banner delivery.
What does this mean?
While Schmidt is expected to talk about Google’s lack of monopoly power, the fact remains that YouTube is well on its way to become the most dominant unit in all of Google’s portfolio of brands, more so than Google’s search or mobile divisions.